<PAGE> 1
DRAFT OF: OCTOBER 10, 1997
THE INFORMATION CONTAINED
IN THIS DOCUMENT IS
------------------------------------------------------------------
CONFIDENTIAL
------------------------------------------------------------------
(LOGO)
Bowne of Phoenix (602) 223-4455
FAX (602) 223-4456
<PAGE> 2
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-30793
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNISON HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8050 86-0684011
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
AND ITS GUARANTOR SUBSIDIARIES:
<TABLE>
<S> <C> <C>
ARIZONA SUNQUEST SPC, INC. 86-0686301
DELAWARE BRITWILL HEALTHCARE COMPANY 52-1788276
DELAWARE BRITWILL INVESTMENTS - I, INC. 52-1797108
DELAWARE BRITWILL INVESTMENTS - II, INC. 52-1797107
DELAWARE BRITWILL FUNDING CORPORATION 75-2569735
TEXAS EMORY CARE CENTER, INC. 75-2497463
TENNESSEE MEMPHIS CLINICAL LABORATORY, INC. 62-1308835
UTAH AMERICAN PROFESSIONAL HOLDING, INC. 87-0421087
TEXAS AMPRO MEDICAL SERVICES, INC. 75-2409091
MISSOURI GAMMA LABORATORIES, INC. 43-1247740
DELAWARE SIGNATURE HEALTH CARE CORPORATION 84-1093732
COLORADO BROOKSHIRE HOUSE, INC. 84-1123466
COLORADO CHRISTOPHER NURSING CENTER, INC. 84-1124242
COLORADO AMBERWOOD COURT, INC. 84-1123461
ARIZONA THE ARBORS HEALTH CARE CENTER, INC. 86-0668106
COLORADO LOS ARCOS, INC. 84-1123464
COLORADO PUEBLO NORTE, INC. 84-1109376
INDIANA CEDAR CARE, INC. 35-1833292
INDIANA SHERWOOD HEALTHCARE CORP. 35-1816034
ARIZONA BRITWILL INDIANA PARTNERSHIP 86-0846998
COLORADO RIO VERDE NURSING CENTER, INC. 84-1195626
COLORADO SIGNATURE MANAGEMENT GROUP, INC. 84-1188485
COLORADO CORNERSTONE CARE, INC. 84-1305948
COLORADO ARKANSAS, INC. 84-1305949
COLORADO DOUGLAS MANOR, INC. 84-1305945
COLORADO SAFFORD CARE, INC. 84-1305944
COLORADO REHABWEST, INC. 84-1250141
ARIZONA QUEST PHARMACIES, INC. 86-0801362
ARIZONA SUNBELT THERAPY MANAGEMENT SERVICES, INC. 86-0843762
ALABAMA DECATUR SPORTSFIT & WELLNESS CENTER, INC. 63-1090003
MISSISSIPPI THERAPY HEALTH SYSTEMS, INC. 64-0743156
ALABAMA HENDERSON & ASSOCIATES REHABILITATION, INC. 63-1090002
ALABAMA SUNBELT THERAPY MANAGEMENT SERVICES, INC. 63-0897514
(STATE OR (EXACT NAME OF GUARANTOR (I.R.S. EMPLOYER
OTHER AS SPECIFIED IN ITS CHARTER) IDENTIFICATION
JURISDICTION NUMBER)
OF INCORPORATION
OR ORGANIZATION)
8800 NORTH GAINEY CENTER DRIVE, SUITE 245 JAMES A. RICE
SCOTTSDALE, ARIZONA 85258 UNISON HEALTHCARE CORPORATION
(602) 423-1954 8800 NORTH GAINEY CENTER DRIVE, SUITE 245
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, SCOTTSDALE, ARIZONA 85258
INCLUDING (602) 423-1954
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPY TO:
P. ROBERT MOYA, ESQ.
QUARLES & BRADY
ONE EAST CAMELBACK ROAD
SUITE 400
PHOENIX, ARIZONA 85012-1649
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$100,000,000
12 1/4% Senior Notes, Due 2006......... principal amount $1,000 $100,000,000 $30,300(1)
- ---------------------------------------------------------------------------------------------------------------
Guarantees of each of the Guarantor
Subsidiaries......................... (2) (3) (3) None(3)
===============================================================================================================
</TABLE>
(1) Includes the base registration fee of $200 for each $1 million registered
plus the offsetting collection fee of $103 for each $1 million registered.
(2) The 12 1/4% Senior Notes Due 2006 will be guaranteed by each of the
Guarantor Subsidiaries.
(3) No additional consideration will be paid by the recipients of the 12 1/4%
Senior Notes Due 2006 for the Guarantees. Pursuant to Rule 457(n), no
separate fee is payable for the Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1997
PROSPECTUS
[LOGO]
$100,000,000
UNISON HEALTHCARE CORPORATION
OFFER TO EXCHANGE UP TO $100,000,000 OF ITS 12 1/4% SENIOR NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING
12 1/4% SENIOR NOTES DUE 2006
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
The 12 1/4% Senior Notes due 2006 offered hereby (the "Exchange Notes") are
being offered by Unison HealthCare Corporation, a Delaware corporation ("Unison"
or the "Company"). Unison hereby offers to exchange (the "Exchange Offer") up to
$100.0 million in aggregate principal amount of Exchange Notes for $100.0
million in aggregate principal amount of Unison's outstanding 12 1/4% Senior
Notes due 2006 (the "Original Notes"). The Original Notes and the Exchange Notes
are sometimes referred to herein collectively as the "Senior Notes."
The Terms of the Exchange Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Exchange Notes will be freely transferable by holders thereof
(other than as described herein) and issued free of any covenant restricting
transfer absent registration. The Exchange Notes will evidence the same debt as
the Original Notes and contain terms which are substantially identical to the
terms of the Original Notes for which they are to be exchanged. All of the
Senior Notes (i.e., whether Original Notes or Exchange Notes) will be treated as
a single class for all purposes under the Indenture. For a description of the
terms of the Senior Notes, see "Description of the Senior Notes." There will be
no cash proceeds to the Company from the Exchange Offer.
The Exchange Notes will bear interest from the most recent date to which
interest has been paid on the Original Notes. Interest has been paid through
April 30, 1997, and is next due on November 1, 1997 for interest through October
31, 1997. Holders whose Original Notes are accepted for exchange will not
receive any payment in respect of interest on such Original Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer. See "The Exchange Offer -- Terms of
the Exchange Offer."
The Senior Notes are redeemable at the option of the Company, in whole or in
part, on or after November 1, 2001, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. Prior to November 1,
1999, Unison may redeem up to 25% of the original principal amount of the Senior
Notes at 110% of the aggregate principal amount so redeemed, plus accrued and
unpaid interest to the redemption date, with the proceeds of one or more Public
Equity Offerings (as defined herein); provided, however, that at least $75.0
million principal amount of the Senior Notes remain outstanding and that such
redemption occurs within 60 days following the closing of any such Public Equity
Offering. See "Description of the Senior Notes -- Optional Redemption."
The Original Notes were sold on October 31, 1996, in a transaction not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in reliance upon the exemption provided in Section 4(2) of the Securities Act
(the "Private Offering"). Accordingly, the Original Notes may not be offered,
resold or otherwise pledged, hypothecated or transferred in the United States
unless registered under the Securities Act or unless an applicable exemption
from the registration requirements of the Securities Act is available. The
Exchange Notes are being offered to satisfy the obligations of the Company under
a Registration Rights Agreement relating to the Original Notes. See "The
Exchange Offer -- Purposes and Effects of the Exchange Offer" and "The
Registration Rights Agreement." Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Original Notes may be offered for resale, resold or
otherwise transferred by the holders thereof (other than any holder which is an
affiliate of the Company within the meaning of Rule 405 under the Securities Act
and other than any broker-dealer that receives Exchange Notes for its own
account in exchange for Original Notes that were acquired as a result of
market-making activities or other trading activities) without compliance with
the registration and prospectus delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged and do not intend to engage,
and have no arrangement or understanding with any person to engage, in the
distribution of such Exchange Notes. See "The Exchange Offer -- Purposes and
Effects of the Exchange Offer."
The Senior Notes are general unsecured senior obligations of Unison and rank
pari passu with all existing and future indebtedness of Unison and senior in
right of payment to all existing and future subordinated indebtedness of Unison.
Unison is a holding company and has no material assets or operations other than
its investment in its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured and joint and several basis
(the "Guarantees") by all of Unison's present subsidiaries and will generally be
guaranteed by any future subsidiaries (collectively, the "Guarantors"). The
Guarantees rank senior to all subordinated indebtedness of the Guarantors and
rank pari passu in right of payment with all other indebtedness of the
Guarantors. The indenture governing the Senior Notes (the "Indenture") provides
that Unison may from time to time incur additional Indebtedness (as defined)
secured by Unison's assets, subject to certain limitations. As of June 30, 1997,
Unison had approximately $155.0 million of senior indebtedness outstanding
(including the Senior Notes) of which approximately $33.1 million is secured
indebtedness that effectively ranks senior to the Senior Notes. See "Description
of the Senior Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DESCRIPTION OF CERTAIN RISKS
RELATING TO UNISON AND AN INVESTMENT IN ITS SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE> 4
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by so delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of up to 180 days after consummation of the Exchange Offer
(approximately 210 days after the date hereof) (or longer in the event of a stop
order or similar order with respect to the Registration Statement or the
occurrence of a material event that requires an amendment of or supplement to
the disclosures herein) it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Senior Notes constitute securities for which there is no established
trading market. Any Original Notes not tendered and accepted in the Exchange
Offer will remain outstanding. The Company does not currently intend to list
either the Original Notes or the Exchange Notes on any securities exchange. To
the extent that any Original Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Original Notes could be adversely
affected. No assurances can be given as to the liquidity of the trading market
for either the Original Notes or the Exchange Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange. The Exchange Offer will
expire at midnight, New York City time, on , 1997 unless extended
(the "Expiration Date"). The date of acceptance for exchange of the Original
Notes will be the first business day following the Expiration Date. Original
Notes tendered pursuant to the Exchange Offer may be withdrawn at anytime prior
to the Expiration Date; otherwise, such tenders are irrevocable. The Company
will pay all expenses incident to the Exchange Offer.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES TO ANY PERSON IN ANY JURISDICTION WHERE IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by reference
to, and should be read in conjunction with, the more detailed information
appearing elsewhere in this Prospectus and the documents referred to herein. As
used herein (i) the "Completed Acquisitions" means acquisitions completed from
January 1, 1995 through December 31, 1996 including (among others) the Signature
Acquisition and the Ampro Acquisition on October 31, 1996; and (ii) the
"Dispositions" means the disposition of four nursing facilities that were
subleased to an unrelated party on March 1, 1997 and the planned disposition of
four additional nursing centers, one of which is not currently in operation.
THE COMPANY
Unison is a leading provider of comprehensive long-term and specialty
healthcare services. As of September 30, 1997, after giving effect to the
Dispositions, Unison ranks as one of the 25 largest long-term care operators in
the United States, operating facilities in 11 states clustered in the Midwest,
Southwest and Southeast. These facilities include 46 long-term and specialty
care facilities with 4,572 licensed beds and eight independent or assisted
living facilities with 315 units. Unison seeks to operate its businesses as an
interrelated network of services to provide a full continuum of cost-effective
long-term and specialty healthcare. Unison's pro forma total revenues and net
loss for the twelve months ended December 31, 1996 amounted to $182.1 million
and $18.5 million, respectively.
Unison's healthcare services include both traditional long-term care and
higher margin specialized healthcare services, such as rehabilitation, infusion
and respiratory therapy. Unison also has recently expanded its role as a medical
supplier, both to its facilities and to non-affiliated facilities, of
pharmaceutical services, rehabilitation services, medical supplies and
laboratory testing. Unison's range of services includes the following:
- Long-Term Care Services. Unison's facilities provide residents with
routine long-term care services, including room and board, daily dietary
services, social and recreational therapy, housekeeping, laundry and
nursing services.
- Ancillary Services. Unison provides ancillary services including
physical, speech, and occupational therapies, pharmaceuticals, parenteral
and enteral nutrition, infusion and respiratory therapies and laboratory
services. Unison has expanded its healthcare expertise in ancillary
services and now directly provides some of these services in
substantially all of its facilities.
- Subacute and Specialty Care Services. Unison provides care to patients
with specialized healthcare needs, including those suffering from
Alzheimer's disease, AIDS, wound injuries and other ailments. Specialty
units are located in designated sections within selected facilities and
are staffed by specially trained personnel. As of September 30, 1997,
Unison operated more than 480 beds in such units.
- Assisted and Independent Living Services. Unison's independent and
assisted living centers provide central dining, limited nursing services,
recreational areas, social programs, housekeeping, laundry and
maintenance services. Such facilities are designed to accommodate
individuals with more modest healthcare needs.
Unison's quality mix (defined as percentage of revenues derived from all
payors excluding Medicaid) has improved from approximately 41.5% in 1994 to
approximately 46.5% for the year ended December 31, 1996 and, after giving
effect to the Completed Acquisitions and the Dispositions, 48.3% for the year
ended December 31, 1996. Over the same period and on a same facility basis,
average occupancy improved from 72.2% to 78.6%. On an overall basis, average
occupancy was 77.0% for the year ended December 31, 1996 and, after giving
effect to the Completed Acquisitions and the Dispositions, average occupancy for
the same period was 78.9%. Average occupancy for the six months ended June 30,
1997 was 81.4%.
Unison's focus on long-term and specialty healthcare responds to general
demographic trends and the healthcare cost containment initiatives of
third-party payors. As the number of people over the age of 65 grows faster than
the overall population and advances in medicine and technology increase life
expectancies, Unison expects that the need for long-term care facilities will
continue to increase. Unison's subacute care responds to
1
<PAGE> 6
cost containment initiatives of third-party payors by providing a lower cost
alternative for patients who continue to require medical and nursing care, but
whose condition permits discharge from an acute care hospital. Long-term care
facilities generally have lower capital requirements and operating costs than
acute care hospitals and are able to offer complex long-term and specialty
healthcare services to patients generally at a lower cost than acute care
hospitals.
BUSINESS STRATEGY
Unison's business strategy is to become a preferred provider of long-term
and specialty healthcare services in each of its markets by offering a full
range of high quality, cost competitive, long-term healthcare services. Unison
seeks to offer these services across the entire continuum of care, from
independent and assisted living to traditional long-term, specialty and subacute
care. The key elements of this business strategy are as follows:
- Provide a Continuum of Care. Unison operates both skilled nursing and
assisted living facilities and provides a wide variety of medical,
rehabilitative and pharmaceutical treatments. This strategy provides an
opportunity for entry at each point in the continuum of care. As
patients' needs change, they may be served by different elements of
Unison's care continuum. The primary benefit of offering a continuum of
care is that it offers patients an appropriate level of cost-effective
care which the Company believes is attractive to third-party payors.
- Improve Payor Quality Mix, Occupancy Levels and Operating
Margins. Unison is focused on improving its payor quality mix and
occupancy levels. The profitability of caring for private-pay and
Medicare patients is generally higher than that of Medicaid patients.
Unison has implemented marketing systems that are designed to improve
quality mix and occupancy and operating systems that are designed to
enable Unison to compete effectively for higher acuity patients.
- Increase Contribution from Ancillary Services. Unison believes that
opportunities exist to capture ancillary service revenue and operating
profits, both from its own facilities and from non-affiliated facilities.
Unison's ancillary service revenues have grown from $10,000 in 1993 to
$33.1 million in 1996. In 1993 only 0.5% of revenues were from ancillary
services, whereas on a pro forma basis for the year ended December 31,
1996, 29.1% of total revenues were from ancillary services. During 1996,
Unison acquired several rehabilitation therapy companies, which provide
physical, occupational, and speech therapy, two institutional pharmacy
businesses and a Medicare Part B billing and supply company that
specializes in wound management and enteral/parenteral feeding services.
Through completion of the Ampro Acquisition in a pooling transaction on
October 31, 1996, Unison also provides medical laboratory services.
- Concentrate Healthcare Facilities in Geographic "Clusters." Although
Unison's acquisition program has been substantially curtailed for the
indefinite future, Unison has in the past sought to acquire facilities
which fit within existing geographic regions or "clusters," and to enter
new markets through clustered acquisitions. Clustering is intended to
attempt to capture local economies of scale by providing ancillary
services, purchasing, marketing, information systems, risk management,
accounting, reimbursement and quality control to geographically
concentrated facilities.
- Provide High Quality Care on an Economic Basis. Unison seeks to position
each of its facilities as a high quality provider in its respective
market, but to do so on a cost-effective basis. Upon acquiring a
facility, Unison typically implements extensive management and
operational changes designed to improve quality of service and
appearance, enhance operating cash flow and reduce overhead. For example,
Unison continues to register strong levels of regulatory compliance, as
illustrated by the reduction in the number of deficiencies cited in
governmental reviews conducted from August 1995 through July 1996 of the
28 operating facilities Unison acquired in the BritWill Acquisition.
Under Unison management these 28 facilities averaged a 43% reduction in
the number of deficiencies cited after the first review, a 75% reduction
as of October 1, 1996 and a 93% reduction as of May 20, 1997 as compared
with the number of deficiencies cited prior to the BritWill Acquisition.
2
<PAGE> 7
RECENT ACQUISITIONS
Simultaneous with the completion of the Private Offering of the Original
Notes on October 31, 1996, Unison acquired Signature Health Care Corporation and
certain related companies (collectively, "Signature") (the "Signature
Acquisition"). As of September 30, 1997, Signature operated 11 long-term care
facilities with 1,043 licensed beds in Arizona and Colorado, provided
rehabilitation services through RehabWest, Inc. ("RehabWest") and operated two
assisted living facilities with 124 units. Signature's long-term care facilities
generally offer the same types of services as are provided by Unison's other
facilities.
On October 31, 1996, Unison also acquired American Professional Holding,
Inc. and Memphis Clinical Laboratory, Inc. (together, "Ampro") (the "Ampro
Acquisition"). As of September 30, 1997, Ampro provided medical laboratory
services (primarily the testing of body fluids and tissues for disease or
chemical concentrations) to 275 nursing homes and other long-term care
facilities in Texas, Missouri and Tennessee.
COMPANY INFORMATION
In late 1995 and in 1996, the Company pursued an aggressive expansion
program, and the financial reporting and management information systems were not
adequate for the larger and more complex needs of the Company. In early 1997 the
Company announced that a negative restatement of its financial results for the
nine months ended September 30, 1996 would be necessary, and that it was
investigating those matters. It was ultimately determined that the pretax loss
for the nine months ended September 30, 1996 was approximately $15 million.
Unison's Chief Executive Officer, Chief Financial Officer and Executive Vice
President of Acquisitions and Development, resigned in April 1997. Its Chief
Operating Officer resigned in October 1997. The Company hired a CEO in September
1997 and expects to name a new CFO before the end of 1997.
The Company and certain of its current and former directors and officers
(among others) are named as defendants in several class action lawsuits. The
complaints generally assert that the defendants knew, or were reckless in not
knowing, that Unison's results for the first nine months of 1996 were materially
overstated, or misrepresented the capability of Unison's internal accounting
system to reliably record and reflect its financial condition, among other
things. See "Risk Factors -- Significant Leverage; Limited Capital Resources,"
"-- Pending Securities Litigation" and "-- Management Resignations and
Dependence on Skilled Personnel."
Unison completed its initial public offering on December 18, 1995. Its
common stock traded on the Nasdaq Stock Market's National Market System under
the symbol "UNHC" from December 19, 1995 to August 21, 1997. Effective August
22, 1997, pursuant to a waiver of the $3.00 per share initial inclusion bid
requirement, Nasdaq moved the stock to its SmallCap Market because the Company
does not currently satisfy the minimum tangible net asset requirement for the
listing of its stock on the National Market System.
Unison's principal executive office is located at 8800 North Gainey Center
Drive, Suite 245, Scottsdale, Arizona 85258, and its telephone number is (602)
423-1954.
3
<PAGE> 8
THE EXCHANGE OFFER
Purpose of Exchange........ The Original Notes were sold in the Private
Offering by Unison to certain accredited
institutions through CIBC Wood Gundy Securities
Corp., Cruttenden Roth Incorporated and Wheat,
First Securities, Inc., who acted as the initial
purchasers (the "Initial Purchasers"). In
connection therewith, Unison executed and
delivered, for the benefit of the holders of the
Original Notes, a Registration Rights Agreement
dated October 31, 1996 (the "Registration Rights
Agreement"), which is filed as an exhibit to the
Registration Statement of which this Prospectus is
a part, providing for, among other things, the
Exchange Offer. Because of the registration of the
Exchange Offer, Unison believes that the Exchange
Notes will be freely transferable by the holders
thereof without any further registration or any
prospectus delivery requirements under the
Securities Act, except that a "dealer" or any
"affiliates" of a "dealer" (as such terms are
defined under the Securities Act) who exchanges
Original Notes held for its own account (a
"Restricted Holder") will be required to deliver
copies of this Prospectus in connection with any
resale of the Exchange Notes issued in exchange for
such Original Notes. See "Risk
Factors -- Consequences of Failure to Exchange,"
"The Exchange Offer--Purposes and Effects of the
Exchange Offer," "The Registration Rights
Agreement" and "Plan of Distribution."
The Exchange Offer......... Unison is offering to exchange pursuant to the
Exchange Offer up to $100.0 million aggregate
principal amount of Unison's new 12 1/4% Senior
Notes due 2006 (the "Exchange Notes") for $100.0
million aggregate principal amount of Unison's
outstanding 12 1/4% Senior Notes due 2006 (the
"Original Notes"). The Original Notes and the
Exchange Notes are sometimes collectively referred
to herein as the "Senior Notes." The terms of the
Exchange Notes are substantially identical in all
respects (including principal amount, interest rate
and maturity) to the terms of the Original Notes
for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes will
be freely transferable by holders thereof (other
than as provided herein) and are not subject to any
covenant regarding registration under the
Securities Act. See "The Exchange Offer -- Terms of
the Exchange Offer" and "The Exchange
Offer -- Procedures for Tendering." The Exchange
Offer is not conditioned upon any minimum aggregate
principal amount of Original Notes being tendered
for exchange.
Expiration Date............ The Exchange Offer will expire at midnight, New
York City time on , 1997, unless
extended (the "Expiration Date").
Description of the
Senior Notes -- Change
of Control Offer......... Unison is a holding company that has no material
assets or operations other than its investments in
its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured
joint and several basis by all of Unison's present
subsidiaries, and will be similarly guaranteed by
its future subsidiaries other than "Unrestricted
Subsidiaries," if any. Unison currently has no
Unrestricted Subsidiaries. As of June 30, 1997, the
aggregate outstanding principal amount of senior
indebtedness of Unison and its subsidiaries was
approximately $155.0 million (including the Senior
Notes), of which approximately
4
<PAGE> 9
$33.1 million was secured indebtedness that
effectively ranks senior to the Senior Notes.
In the event of a "Change of Control," the
indenture for the Senior Notes (the "Indenture")
requires Unison to offer to purchase any and all of
the outstanding Senior Notes at a purchase price
equal to 101% of the principal amount thereof plus
any accrued and unpaid interest thereon. A "Change
of Control" generally includes (1) any sale or
merger of Unison or its assets if any person or
group (other than "Excluded Persons") becomes the
direct or indirect beneficial owner of more than
50% of the voting power of the transferee or
surviving entity, (2) the acquisition by any person
or group (other than an Excluded Person) of more
than 50% of Unison's voting stock, or (3) changes
in the composition of Unison's board of directors
during any 12 consecutive months which cause a
majority of the directors to consist of people who
were neither directors at the beginning of that
period nor new directors whose election or
nomination was approved by a majority of the
qualifying directors. The "Excluded Persons" are
Bruce H. Whitehead, Jerry M. Walker, Phillip R.
Rollins, Craig R. Clark and Paul J. Contris,
together with their spouses and any controlled
trusts, corporations, partnerships or other
entities. Unison's board of directors cannot waive
the Change of Control provisions, but component (3)
of the Change of Control provisions would not apply
to a change in composition of the Board if a
majority of the prior directors approves the
change.
Although any failure to offer to repurchase the
Senior Notes as described above following a Change
of Control would constitute an event of default
under the Indenture, a holder of the Senior Notes
may not be able to compel Unison to purchase the
Senior Notes unless Unison is able to refinance or
obtain consents with respect to any other
indebtedness (including Permitted Secured
Indebtedness) that may restrict Unison's right to
lawfully make such payments at that time. Unison
may also be unable to repurchase the Senior Notes
if it is unable to obtain the funds to do so.
Conditions of the
Exchange Offer........... Unison's obligation to consummate the Exchange
Offer will be subject to certain conditions. Unison
will not be required to accept for exchange any
Original Notes tendered and may terminate or amend
the Exchange Offer as provided herein before the
acceptance of such Original Notes, if, among other
things, certain legal actions or proceedings are
instituted, there shall have occurred certain
changes or developments in the business or
financial affairs of the Company, there shall have
been proposed, adopted or enacted any law, statutes
or regulations materially affecting the Company or
the benefits of the Exchange Offer, the holders of
a majority in principal amount have not approved an
amendment to the Registration Rights Agreement to
cause the effectiveness of the registration
statement of which this Prospectus is a part to
cure the Registration Default thereunder (thereby
halting the accrual of Additional Interest), or
there shall have occurred certain economic or other
events. See "The Exchange Offer -- Conditions of
the Exchange Offer." Unison reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such conditions.
5
<PAGE> 10
Procedures for Tendering
Original Notes........... Each holder of Original Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Original Notes and any other required
documentation to the exchange agent (the "Exchange
Agent") at the address set forth herein. Original
Notes may be physically delivered, but physical
delivery is not required if a confirmation of a
book-entry of such Original Notes to the Exchange
Agent's account at The Depository Trust Company
("DTC" or the "Depository") is delivered in a
timely fashion. By executing the Letter of
Transmittal, each holder will represent to the
Company, among other things, (i) that the Exchange
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such Exchange Notes,
whether or not such person is the holder, (ii) that
neither the holder nor any such other person is
engaged in, or intends to engage in, or has an
arrangement or understanding with any person to
participate in, the distribution of such Exchange
Notes and (iii) that neither the holder nor any
such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of Unison, or
if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements
of the Securities Act, to the extent applicable.
Each broker or dealer that receives Exchange Notes
for its own account in exchange for Original Notes,
where such Original Notes were acquired by such
broker or dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "The Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering the Original Notes, either make
appropriate arrangements to register ownership of
the Original Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
entirely available or who cannot deliver their
Original Notes must complete, sign and deliver the
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date and
must tender their Original Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
6
<PAGE> 11
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to
midnight New York City time, on the Expiration
Date. See "The Exchange Offer -- Withdrawal of
Tenders."
Acceptance of Original
Notes and Delivery of
Exchange Notes........... Except as otherwise provided herein, and upon
satisfaction or waiver of certain conditions,
Unison will accept for exchange any and all
Original Notes which are properly tendered in the
Exchange Offer prior to midnight, New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer."
Exchange Agent............. First Bank National Association, St. Paul,
Minnesota is serving as Exchange Agent in
connection with the Exchange Offer. See "The
Exchange Offer -- Exchange Agent."
Effect on Holders of
the Original Notes....... Although a delay in the filing and in the effective
date of the Exchange Offer Registration Statement,
of which this Prospectus is a part, caused a
temporary increase in the interest accruing on the
Original Notes, upon the effective date of this
Exchange Offer Registration Statement and assuming
approval of the proposed amendment to the
Registration Rights Agreement, the stated rate of
12.25% per annum is again in effect in accordance
with their terms. As a result of the making of this
Exchange Offer, and upon acceptance for exchange of
all validly tendered Original Notes pursuant to the
terms of this Exchange Offer, Unison will have
fulfilled one of the covenants contained in the
Registration Rights Agreement and, accordingly,
there will be no new increase in the interest rate
on the Original Notes pursuant to the applicable
terms of the Registration Rights Agreement due to
the Exchange Offer. Holders of the Original Notes
who do not tender their Original Notes will be
entitled to all the rights and limitations
applicable thereto under the Indenture dated as of
October 31, 1996, among Unison, the Guarantors, and
First Bank National Association, St. Paul,
Minnesota, as trustee (the "Trustee") relating to
the Original Notes and the Exchange Notes (the
"Indenture"), except for any rights under the
Indenture or the Registration Rights Agreement
which by their terms terminate or cease to have
further effectiveness as a result of the making of,
and the acceptance for exchange of all validly
tendered Original Notes pursuant to, the Exchange
Offer. See "The Registration Rights Agreement." All
untendered Original Notes will continue to be
subject to the restrictions on transfer provided
for in the Original Notes and in the Indenture. To
the extent that Original Notes are tendered and
accepted in the Exchange Offer, the trading market
for untendered Original Notes could be adversely
affected.
Use of Proceeds............ There will be no cash proceeds to Unison from the
exchange pursuant to the Exchange Offer. See "Use
of Proceeds."
7
<PAGE> 12
TERMS OF EXCHANGE NOTES
The Exchange Offer applies to the entire outstanding $100.0 million
principal amount of Original Notes. The terms of the Exchange Notes are
identical in all material respects to the Original Notes, except for certain
transfer restrictions and registration and other rights relating to the exchange
of the Original Notes for Exchange Notes. The Exchange Notes will evidence the
same debt as the Original Notes and will be treated together with the Original
Notes under the Indenture pursuant to which both the Original Notes were, and
the Exchange Notes will be, issued. See "Description of the Senior Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that prospective
investors should consider in connection with the Exchange Offer and an
investment in the Senior Notes.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial data of Unison has
been derived from financial information prepared by Unison and should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus. The summary financial information should
also be read in conjunction with the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Selected Historical and Pro Forma Financial Data" included elsewhere herein.
The following unaudited summary pro forma statement of operations data,
other financial data and selected operating and other data for the year ended
December 31, 1996 give effect to the Completed Acquisitions, the Dispositions
and the Private Offering of the Original Notes as if they had been completed at
the beginning of the period.
The unaudited pro forma data does not purport to present the results of
operations of Unison had the business combinations taken place on the dates
specified, nor is it necessarily indicative of the results of operations that
may be achieved in the future.
8
<PAGE> 13
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA(1)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ --------------------
ACTUAL ACTUAL
------------------------------------------------ PRO FORMA --------------------
1992 1993 1994 1995(2) 1996 1996(3) 1996 1997
------ ------- ------- ------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues............. $4,523 $ 7,011 $18,406 $68,488 $ 148,674 $182,104 $68,559 $113,103
Expenses:
Wages and related........ 2,201 3,689 9,593 35,047 85,789 99,833 33,961 59,544
Other operating.......... 1,727 2,629 6,462 24,032 64,771 71,386 22,665 41,201
Rent..................... 155 206 1,406 6,673 15,658 15,613 6,704 8,386
Interest................. 14 44 147 1,176 5,824 14,759 1,508 9,594
Depreciation and
amortization........... 88 157 286 1,311 4,561 7,500 1,152 4,726
Impairment losses........ -- -- -- -- 3,865 3,865
------ ------ ------- ------- -------- -------- ------- -------
Total expenses......... 4,185 6,725 17,894 68,239 180,468 212,956 65,990 123,451
------ ------ ------- ------- -------- -------- ------- -------
Income (loss) before
income taxes......... 338 286 512 249 (31,794) (30,852) 2,569 (10,348)
Income taxes (benefit)..... 100 177 172 132 (8,356) (12,341) 1,050 (3,333)
------ ------ ------- ------- -------- -------- ------- -------
Net income (loss)...... $ 238 $ 109 $ 340 $ 117 $ (23,438) $(18,511) $ 1,519 $ (7,015)
====== ====== ======= ======= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------
ACTUAL
--------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 2,413
Working capital deficit............................................................ (18,985)
Total assets....................................................................... 223,187
Total debt......................................................................... 157,098
Stockholders' equity............................................................... 6,161
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ --------------------
ACTUAL ACTUAL
------------------------------------------------ PRO FORMA --------------------
1992 1993 1994 1995(2) 1996 1996(3) 1996 1997
------ ------- ------- ------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Skilled nursing
facilities:(4)
Number of facilities..... 4 6 16 45 54 48 43 50
Number of licensed
beds................... 436 671 1,621 4,629 5,455 4,818 4,455 4,930
Patient days............. -- 12,705 112,727 581,410 1,203,655 1,732,584 557,965 767,449
Assisted living
facilities:(4)
Number of facilities..... -- 1 4 6 8 8 5 8
Number of units.......... -- 30 104 229 320 320 136 315
Sources of patient revenues
(skilled nursing
facilities):
Medicare................. -- 3.4% 9.1% 26.9% 29.5% 30.2 % 32.4% 32.9%
Private pay.............. -- 13.8 32.4 17.2 17.0 18.1 15.8 15.8
------ ------ ------- ------- -------- -------- ------- -------
Quality mix............ -- 17.2 41.5 44.1 46.5 48.3 48.2 48.7
Medicaid................. -- 82.8 58.5 55.9 53.5 51.7 51.8 51.3
------ ------ ------- ------- -------- -------- ------- -------
Total................ -- 100.0% 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0%
====== ====== ======= ======= ======== ======== ======= =======
</TABLE>
9
<PAGE> 14
NOTES TO SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(1) The years ended December 31, 1992, 1993, 1994 and 1995 and the six months
ended June 30, 1996 have been restated to reflect the pooling accounting
treatment for the acquisition of Ampro.
(2) On August 10, 1995, Unison acquired BritWill HealthCare Company
("BritWill"). The actual results for the year ended December 31, 1995
include the results of operations for BritWill for the five months ended
December 31, 1995.
(3) Gives effect to (i) the Dispositions, (ii) the Completed Acquisitions and
(iii) the Private Offering and the application of the net proceeds
therefrom, effective, in each case, at the beginning of the period
presented. See "Use of Proceeds" and "Unaudited Pro Forma Condensed Combined
Financial Statements" and Notes thereto.
(4) Number of facilities, beds and units expressed are at end of period.
10
<PAGE> 15
RISK FACTORS
The following risk factors and the information provided elsewhere in this
Prospectus should be considered carefully in evaluating the Senior Notes.
Certain statements contained in this discussion of Risk Factors, as well as
elsewhere in this Prospectus, including without limitation statements containing
the words "believes," "anticipates," "intends," "expects" and words of similar
import, may constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). While the Company believes that the
assumptions underlying these statements are reasonable, such assumptions (and
thus the statements based upon them) could prove to be inaccurate. Important
factors which could cause results to vary include limitations on the Company's
access to debt or equity financing in light of recent losses and cash flow
shortfalls and the shift in the listing of the Company's Common Stock from the
Nasdaq National Market to the Nasdaq SmallCap Market, adverse uninsured
determinations in existing or future litigation or regulatory proceedings,
health care statutory or regulatory changes which disfavor the types of care
delivered by the Company and a reversal of the current limitations in the supply
of long-term care facilities. Important factors which could cause results to
vary also include the factors discussed in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Unison disclaims any obligation to update any such
factors or to announce revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
SIGNIFICANT LEVERAGE; LIMITED CAPITAL RESOURCES
At June 30, 1997, Unison had approximately $157.1 million in total
long-term indebtedness (96.2% of total capitalization). Unison also has
significant long-term lease obligations (approximately $15.5 million for 1997
and $164.7 million in the aggregate). Unison's pro forma rent expense (adjusted
for effects of the Completed Acquisitions and the Dispositions) for the year
ended December 31, 1996 was approximately $15.6 million. All of Unison's cash
flow and availability under its current line of credit, together with additional
funds from sources yet to be developed, will be needed for the next year and
beyond in order to satisfy its working capital, debt service and lease
obligations. The Company anticipates that it will need at least $10.0 million of
additional outside financing to meet its cash flow requirements for the
remainder of 1997. Substantially all of the assets of Unison and its
subsidiaries are pledged to secure indebtedness and lease obligations. See
"Capitalization," "Selected Historical and Pro Forma Combined Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Unison is a holding company and has no material assets or operations other
than its investment in its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured and joint and several basis
(the "Guarantees") by all of Unison's present subsidiaries and will be similarly
guaranteed by its future subsidiaries (collectively, the "Guarantors"). The term
Subsidiaries does not include Unrestricted Subsidiaries; however, as of the date
hereof there are no Unrestricted Subsidiaries. The Guarantees rank senior to all
Subordinated Indebtedness of the Guarantors and rank pari passu in right of
payment to all other indebtedness of the Guarantors. As of June 30, 1997, the
aggregate outstanding principal amount of senior indebtedness of Unison and its
subsidiaries was approximately $155.0 million (including the Senior Notes), of
which approximately $33.1 million was secured indebtedness that effectively
ranked senior to the Senior Notes.
Certain of Unison's leases and loan agreements contain covenants requiring
Unison to achieve and then maintain specified financial ratios. Although Unison
is current on its payment obligations on its outstanding loans and facilities
leases, it is not in compliance with certain covenants under mortgage loans with
one lender for six of its health care facilities and with the agreements for 20
facilities leased from Omega Healthcare Investors, Inc. ("Omega") and BritWill
Investments-Texas, Ltd. ("BritWill Texas"). A waiver from Omega for these
financial covenant violations expired April 12, 1997, and the Company and Omega
are negotiating the terms of revised covenants for the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." There can be no assurance,
however, that such negotiations will be successfully concluded.
11
<PAGE> 16
The Senior Notes and some of Unison's other indebtedness and lease
obligations include covenants that prohibit or limit, among other things, asset
sales, acquisitions, investments, incurrence of debt and liens, the making of
restricted payments, affiliate transactions, engaging in certain mergers and
consolidations and entering new lines of business. For example, the Senior Notes
generally limit Unison's debt incurrence to an amount equal to (1) the greater
of $30.0 million of Secured Indebtedness or the sum of 60% of inventory plus 90%
of accounts receivable and (2) the greater of $10.0 million of other
Indebtedness or 10% of Unison's consolidated net worth (in addition to
Indebtedness outstanding on October 31, 1996 after giving effect to the
application of the proceeds from the Senior Notes and refinancings of such
Indebtedness) except when its Fixed Charge Coverage Ratio after incurring the
Indebtedness would be greater than 2 to 1 (2.25 to 1 after December 31, 1997).
As of June 30, 1997, Unison had incurred approximately $17.5 million of such
Secured and other Indebtedness. Unison's failure to comply with any of these
covenants could result in an event of default, thereby permitting acceleration
of the related indebtedness or termination of the related lease, which could
have a material adverse effect on Unison's financial condition and results of
operations.
The degree to which Unison is leveraged, as well as the level of its rent
expense and the terms of its leases, could have important consequences to
holders of the Senior Notes, including: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired, (ii) a substantial
portion of the Company's cash flow from operations may be dedicated to the
payment of principal, interest and rent expense, thereby reducing the funds
available to the Company for its operations, (iii) all of the Company's other
indebtedness is scheduled to become due and nearly all of its leased facilities
are subject to renewal or repricing prior to the time any principal payments are
required to be made on the Senior Notes, (iv) certain of the Company's
borrowings bear, and will continue to bear, variable rates of interest, which
expose the Company to increases in interest rates, and (v) certain of the
Company's indebtedness and leases contain financial and other restrictive
covenants as described above. There can be no assurance that the Company's
operating results will be sufficient for the payment of the Company's
indebtedness and other obligations.
MANAGEMENT RESIGNATIONS AND DEPENDENCE ON SKILLED PERSONNEL
Three of Unison's executive officers, including its Chief Executive
Officer, Chief Financial Officer and Executive Vice President of Acquisitions,
resigned in April 1997 and its Chief Operating Officer resigned in October 1997.
The Company hired a CEO in September 1997 and expects to name a CFO before the
end of 1997. Approximately 30 other personnel have also been laid off in an
attempt to control overhead costs. In addition, several facility administrators
have recently resigned. Although the resignations to date of senior managers is
not expected to have a material adverse impact on Unison's results of
operations, the loss of certain other key personnel could adversely affect
Unison's results of operations and its efforts to rebuild its financial health.
Unison's business strategy also depends on its ability to attract and retain
qualified clinical management, marketing and other personnel. Unison competes
with general acute care hospitals, rehabilitation facilities, nursing homes,
ambulatory care facilities and other healthcare providers for the services of
physicians, registered nurses, therapists and other clinical personnel. Such
clinical personnel are in high demand and are often subject to competing offers.
There can be no assurance that Unison will be able to attract and retain the
qualified personnel necessary for its business and planned growth. See
"Business -- Operations" and "Management -- Employment Agreements."
Unison is a holding company and has no material assets or operations other
than its investment in its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured and joint and several basis by
all of Unison's present Subsidiaries and will be similarly guaranteed by its
future Subsidiaries. For purposes of the foregoing sentence, the term
Subsidiaries does not include Unrestricted Subsidiaries; however, as of the date
hereof Unison has no Unrestricted Subsidiaries. The guarantees rank senior to
all Subordinated Indebtedness and rank pari passu in right of payment to all
other Indebtedness. As of June 30, 1997, the aggregate outstanding principal
amount of senior indebtedness of Unison and its subsidiaries was approximately
$155.0 million (including the Senior Notes), of which approximately $33.1
million was secured indebtedness that effectively ranked senior to the Senior
Notes.
12
<PAGE> 17
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND ACCUMULATED DEFICIT
Unison began operations in 1992. Since then, except for a small net profit
in the fourth quarter of 1995 (and the pooling effect of the Ampro Acquisition
completed in October 1996), it has reported net losses for every period,
culminating in a loss of $23.4 million for 1996. Unison's future profitability
will depend on many factors, including its ability to reduce and control costs,
its ability to integrate recently acquired operations, occupancy levels,
government regulation and reimbursement policies, competition, its ability to
attract and retain qualified personnel at competitive rates, the outcome of
pending litigation and general economic conditions. While the Company has
instituted revenue enhancement and cost containment programs and continues to
work at integrating recent acquisitions, there can be no assurance that Unison
will be profitable in the future. See "-- Recent Business Expansion,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Acquisitions" and "-- Government Regulation."
PENDING SECURITIES LITIGATION
Unison and certain of its current and former directors and officers (among
others) are named as defendants in several purported class action lawsuits
following Unison's announcement in March 1997 that the Company expected to
restate its financial statements for the nine-month period ended September 30,
1996. To date, seven such claims have been filed in federal district court in
Phoenix, Arizona. The purported class periods vary, with the broadest such class
period beginning December 18, 1995 (when Unison commenced its initial public
offering (the "IPO")) and ending March 11, 1997 (when Unison announced the need
for a restatement). The complaints in these actions allege violations of
Sections 10 and 20 of the Exchange Act and Rule 10b-5 thereunder in that the
defendants knew, or were reckless in not knowing, that Unison's results for the
first three quarters of 1996 were materially overstated, or misrepresented the
capability of Unison's internal accounting system to reliably record and reflect
its financial condition. Amended complaints in four of these actions also allege
violations of Sections 11 and 15 of the Securities Act in that the registration
statement covering, and the prospectus used in connection with, the stock sold
in the IPO allegedly misleadingly touted Unison's "growth strategy" and ability
to control costs while failing to disclose inadequacies in its accounting
systems. The individual defendants named in some or all of these actions are
Jerry M. Walker (the Company's former Chief Executive Officer), Craig R. Clark
(the Company's former Chief Financial Officer), Paul J. Contris (the Company's
former Executive Vice President of Acquisitions and Development), Phillip R.
Rollins (the Company's former Chief Operating Officer) and Bruce H. Whitehead
(Chairman of the Board). On September 8, 1997 the Court consolidated the
aforesaid seven actions for all purposes.
In addition, an action has been filed in the Superior Court of the State of
California (County of Orange) against the Company and the aforesaid individuals,
as well as John T. Lynch, Jr. (a member of the Board of Directors), Trouver
Capital Partners, L.P. (a private investment banking firm of which Mr. Lynch is
a general partner), Cruttenden Roth Inc. and Wheat First Butcher Singer (the
latter two entities are investment banking firms that are named individually and
as representatives of a purported defendant underwriter class). The Orange
County action is purportedly filed on behalf of all persons who acquired Unison
stock in the IPO; it essentially alleges that in connection with the IPO, the
defendants made positive statements about the Company's prospects for which
there was no basis, that accounts receivable were overstated, and that the
Company's statement of financial position as of September 30, 1995 was not
fairly presented.
Unison's bylaws require the Company to indemnify current and former
officers and directors to the extent permitted by Delaware law against such
liabilities represented by the above described actions and related expenses. The
Company is also obligated, subject to certain conditions, to indemnify the
underwriters against such liabilities and expenses. The Company denies the
material allegations in these complaints and intends to defend the actions
vigorously. While there can be no assurances in such matters, Unison believes,
based on its analysis of the complaints and of its insurance coverage, that the
ultimate disposition of these actions will not adversely affect its liquidity.
13
<PAGE> 18
MARKET LISTING FOR EQUITY SECURITIES AND ACCESS TO CAPITAL MARKETS
Unison does not currently satisfy the minimum tangible net worth criteria
for the listing of its common stock on The Nasdaq Stock Market's National Market
System where the stock had traded since the IPO. On August 20, 1997, the Company
was advised by Nasdaq of its decision to move the Company's securities to The
Nasdaq SmallCap Market, effective August 22, 1997, pursuant to a waiver to the
$3.00 per share initial inclusion bid price requirement. The Company is unable
to determine what effect, if any, the movement of its stock to the SmallCap
Market will have on its ability to raise additional capital.
HOLDING COMPANY STRUCTURE; ENFORCEABILITY OF GUARANTEES; SECURED INDEBTEDNESS
Unison is a holding company whose only material assets are its investments
in its subsidiaries. Unison conducts no business and is dependent on
distributions from its subsidiaries to service its debt obligations, including
the payment of interest and principal on the Senior Notes. Some lease
obligations of Unison's subsidiaries have provisions that may limit or restrict
distributions to Unison. There can be no assurance that such distributions will
be adequate to fund the interest and principal payments on the Senior Notes when
due. The guaranty provisions of the Indenture relating to the Senior Notes
provide that if Unison fails to satisfy any payment obligation under the Senior
Notes, the holders of the Senior Notes will have a direct claim against the
Guarantors. However, as of December 31, 1996, on a pro forma basis after giving
effect to the Private Offering of the Original Notes, the application of the net
proceeds therefrom and certain other transactions described herein, the
aggregate outstanding principal amount of senior indebtedness of Unison and its
subsidiaries was approximately $155.0 million (including the Senior Notes), of
which approximately $33.1 million was secured indebtedness that effectively
ranked senior to the Senior Notes. If a court were to invalidate any one or more
of the Guarantees under fraudulent conveyance laws or other legal or equitable
principles or if, by the terms of such Guarantees, the obligations thereunder
were limited as necessary to prevent such avoidance, the claims of other
creditors of the Guarantors, including claims of trade creditors, would, to such
extent, have priority as to the assets of the Guarantors over the claims of the
holders of the Senior Notes. In addition, the Indenture provides that upon the
sale or other disposition of a Guarantor, which transaction is otherwise in
compliance with the Indenture, such Guarantor shall be deemed released from its
Guarantee. See "Description of the Senior Notes -- Future Guarantees."
ACQUISITION-RELATED RISKS; INCREASES IN INTANGIBLE ASSETS
A key element of Unison's business strategy during 1995 and 1996 was to
expand through the leasing of new or existing long-term and specialty healthcare
facilities and the acquisition or development of ancillary health care
businesses or services. The acquisitions of BritWill, Signature, Sunbelt,
RehabWest and Ampro and the formation of Quest were in pursuance of this
strategy. Acquisitions are inherently risky due to the possibility of unknown
and unforeseen contingencies affecting the new businesses and due to costs of
integrating acquired operations into the overall enterprise. These risks have
impacted and may continue to impact Unison's financial performance. For example,
difficulties in integrating acquired facilities within Unison's financial
reporting and management information systems were a substantial factor
contributing to the need to restate Unison's financial statements for the nine
months ended September 30, 1996. Those system difficulties then contributed to
the operating inefficiencies that led to the unexpected losses for that period
and subsequent periods. Although Unison has substantially curtailed its
acquisition strategy, its corporate overhead increased during the second half of
1996 in the expectation that the number and size of acquisitions might continue
to grow. This expansion has made it difficult to reduce costs in response to
liquidity challenges. Unison's acquisitions have also resulted in material
increases in its intangible assets. At December 31, 1996, the aggregate amount
of Unison's net intangible assets, including lease operating rights, goodwill,
deferred financing costs and other intangibles, was $142.2 million. This balance
represents 61.6% of Unison's total assets at December 31, 1996 and approximately
12.2 times its stockholders' equity. Amortization expense related to intangible
assets is expected to amount to approximately $6.7 million in 1997. In addition,
should events occur that result in impairment of the Company's long-lived
assets, such as unexpected increases in operating losses, the Company may in the
future need to record a write-down of its lease operating rights or goodwill.
See "Business -- Acquisitions."
14
<PAGE> 19
FEDERAL AND STATE LEGISLATION
Political, economic and regulatory influences have produced and are likely
to continue to produce fundamental changes in the healthcare industry in the
United States. For example, proposed federal budgets have called for substantial
reductions in projected Medicare spending. In addition, the Clinton
administration and various members of Congress have advanced a number of
legislative proposals to reform the healthcare system. Among the proposals
considered by the Congress has been a "block grant" funding mechanism for the
disbursement of the federal share of Medicaid payments to the individual states,
which, if enacted, could cause a reduction in the availability of Medicaid funds
in future years. Certain other proposals are intended to reduce the rate of
increase in Medicare and Medicaid expenditures through cost savings and other
measures which are expected to be developed in the near future. Unison
anticipates that federal and state governments will continue to review and
assess alternative healthcare delivery systems and payment methods. Due to
uncertainty regarding the ultimate features of reform initiatives and their
enactment and implementation, Unison cannot predict which, if any, reform
proposals will be adopted, when they may be adopted or what impact they may have
on Unison. There can be no assurance that such reforms, if enacted, or
administrative responses to budgetary constraints, will not have a material
adverse effect on Unison. See "Business -- Government Regulation."
RELIANCE ON REIMBURSEMENT FROM GOVERNMENT SOURCES
Unison is reimbursed under the Medicare program for its actual allowable
direct and indirect costs of services based on the submission of an annual cost
report. Each facility is also subject to limits on reimbursement for routine
costs. Exceptions to these limits are available for, among other things, the
provision of atypical services. Due in part to the provision of subacute
services, Unison's costs for care delivered to Medicare patients in certain of
its long-term and specialty healthcare facilities have exceeded the routine
costs limits in the aggregate amounts of $1,800,000 and $2,260,000 in 1995 and
1996, respectively. The Company has filed exception requests with HCFA with
respect to 1995 and has been granted interim routine cost limit exceptions in
each of 15 responses received thus far. Exception requests for 1996 have not yet
been filed. Unison's failure to recover excess costs or to obtain such
exceptions could adversely affect Unison's results of operations.
Governmental payors and their paying agencies and private third-party payor
sources have instituted cost containment measures of various kinds designed to
limit payments made for long-term care and ancillary services, and there can be
no assurance that future measures will not materially and adversely affect
reimbursements to Unison. Revenues received from the Medicare program for
services provided in Unison's facilities represented approximately 29.5% and
30.2%, respectively, of Unison's actual and pro forma long-term care revenues
for the year ended December 31, 1996. The Medicare program is subject to
statutory and regulatory changes, retroactive and prospective rate adjustments,
complex reimbursement audits, paying agency discretion and interpretations,
administrative rulings and funding restrictions, all of which could have the
effect of limiting or reducing reimbursement levels for Unison's services.
Unison cannot predict whether any changes to this program will be adopted or, if
adopted, the effect, if any, such changes will have on Unison. Any significant
decrease in Medicare reimbursement levels, or the imposition of significant
restrictions on participation in the Medicare program, could have a material
adverse effect on Unison. There can be no assurance that Unison's facilities
will continue to satisfy the requirements for participation in the Medicare
program.
Unison bills on a "salary equivalency" fee-based schedule for physical
therapy services and respiratory therapy services provided to Medicare patients
at its facilities, as is generally required by law. These rates are
significantly lower than those for speech and occupational therapy, which are
reimbursed under the "prudent buyer" rule. The federal Health Care Financing
Administration ("HCFA") recently proposed rules applying salary equivalency
guidelines for speech and occupational therapy services. The proposed rates for
these services are lower than the Medicare reimbursement rates currently
received by Unison for these services. For the year ended December 31, 1996,
Unison's revenues and direct contribution from speech and occupational therapy
services amounted to $14,917,000 and $5,725,000, respectively. Final rules are
expected to be promulgated by the end of 1997. The Company is taking steps which
it believes will help mitigate any adverse
15
<PAGE> 20
economic impact of these changes. There can be no assurance that future
legislation, regulatory changes or interpretations of the regulations will not
have a material adverse effect on the future operations of the Company. The
imposition of salary equivalency guidelines on speech and occupational therapy
services could significantly impact Unison's margins. See
"Business -- Government Regulation."
Unison's facilities that participate in applicable state Medicaid programs
are subject to risks of changes in Medicaid reimbursement and payment delays
resulting from budgetary shortfalls of state Medicaid programs. Unison operates
a total of 13 facilities in Texas and 12 facilities in Indiana including three
in Indiana held for disposition. The Texas and Indiana facilities accounted for
21.0% and 12.4%, respectively, of Unison's pro forma revenues for the year ended
December 31, 1996. Furthermore, some state Medicaid programs require
certification of all beds in the facility, which may limit the ability of a
facility in any such state to establish a distinct Medicare Part A unit for
subacute care. In 1994, the state of Indiana adopted Rule 14, which changed
Indiana's Medicaid reimbursement system from a true prospective payment system
to a modified cost-based system. The new system has resulted in an increase in
annual reimbursement rates of approximately 6%; however, Rule 14 also precludes
facility operators from billing separately for certain ancillary therapy
services and non-routine medical supplies. The Company understands that Rule 14
reduced total Medicaid nursing facility payments in the initial year of adoption
by $10 million statewide out of total prior year expenses of $720 million. The
implementation of Rule 14 has not had a material adverse impact on Unison's
results of operations. See "Business -- Government Regulation."
In an attempt to limit the Federal budget deficit, there have been, and
Unison expects that there will continue to be, a number of other proposals to
limit Medicare and Medicaid payments for services. Unison cannot predict whether
any of these proposals will be adopted or, if adopted, the effect, if any, such
proposals would have on Unison. There can be no assurance that the rates paid to
Unison by Medicare, Medicaid or other payors will be adequate to reimburse
Unison for the cost of providing services. In addition, cost increases due to
inflation without corresponding increases in reimbursement would adversely
affect Unison's business. See "Business -- Government Regulation."
EXTENSIVE GOVERNMENT REGULATIONS
The operation of skilled nursing facilities is subject to federal, state
and local laws relating to, among other things, the number of beds, the
provision of ancillary services, the adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention and
compliance with building codes, as well as those relating to other businesses,
such as those mandating fair employment practices and prohibiting damage to the
environment. Skilled nursing facilities are also subject to periodic inspection
by governmental and other authorities to assure compliance with various
standards and to maintain continued licensing under state law and certification
under the Medicare and Medicaid programs. Although Unison generally has been
able to secure necessary approvals or licenses in the past, it closed one
facility during 1996 due to violations of Medicare regulations, and the failure
to obtain or renew any required regulatory approvals or licenses could adversely
affect Unison's ability to offer existing or additional services, to receive
Medicaid and Medicare payments, and to expand the scope of its operations, any
of which could materially adversely affect Unison's business.
In May, 1996, HCFA announced the first year results of its "Operation
Restore Trust" initiative, designed to combat Medicare and Medicaid fraud, waste
and abuse by home health agencies, nursing homes and durable medical equipment
suppliers. Operation Restore Trust originally focused on five states and is now
extended to all states and is focused on problems with claims for services not
rendered or not provided as claimed and claims falsified to circumvent coverage
limitations on medical supplies. In addition, HCFA certification, survey and
enforcement regulations impose significant new burdens on long-term care
facilities. The regulations may require state survey agencies to take aggressive
enforcement actions, such as imposing fines, decertifying facilities, banning
admission or revoking necessary licenses and closing facilities. Additional
remedies are available. Published reports indicate that in the initial surveys
conducted, as many as 70% of the facilities surveyed were not in compliance with
the new rules. There can be no assurance that these rules, or future rules or
legislation, will not have a material adverse effect on Unison. See
"Business -- Government Regulation."
16
<PAGE> 21
COMPETITION FOR PATIENTS AND EMPLOYEES
The industries in which Unison operates are highly competitive. Unison
competes with general acute care hospitals, skilled nursing facilities,
rehabilitation hospitals, long-term care hospitals, assisted living facilities,
home care providers and other subacute and specialty care providers, both for
patients and for nurses and other key personnel. Many of these companies have
greater financial and other resources than Unison. A number of states in which
Unison operates do not have "certificate of need" or similar laws restricting
the construction of competing facilities. No assurance can be given that Unison
will have the resources to compete successfully with such companies. See
"Business -- Competition."
CONCENTRATION OF OWNERSHIP
Messrs. Walker, Contris, and Clark have pledged an aggregate of 389,834
shares of their Company stock (approximately 6.1% of Unison Common Stock
currently outstanding) to Mr. Bruce H. Whitehead, the chairman of Unison and
agent for the sellers, to secure the Company's obligations incurred in
connection with the BritWill Acquisition in 1995, a portion of which was repaid
in January 1997 using proceeds from the Private Offering of the Original Notes
and the remainder of which remains outstanding. In the event of a default, Mr.
Whitehead could foreclose on the pledged stock. Mr. Whitehead beneficially owns
approximately 7.3% of Unison's Common Stock currently outstanding. See
"Principal Stockholders."
In connection with the Signature Acquisition, 1,490,431 shares of Unison
Common Stock were issued to David A. Kremser, who also became a director of
Unison. This means that Mr. Kremser beneficially owns approximately 23.9% of the
Unison shares outstanding, making Mr. Kremser the largest shareholder and
potentially a controlling person of Unison. See "Principal Stockholders."
CHANGE OF CONTROL
Unison is required to make an offer to purchase all of the Senior Notes at
a price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, upon the occurrence of any "change of control" as defined in the
Indenture (the "Repurchase Covenant"). A change of control of Unison also
constitutes an event of default under Unison's obligations to HealthPartners
Funding, L.P. and Omega. Unison could in the future incur other indebtedness
subject to similar triggering events. See "Description of the Senior Notes --
Change of Control Offer."
Upon the occurrence of a change of control, Unison might be unable to
comply with the Repurchase Covenant if (i) a lender declares an event of default
with respect to such indebtedness as a result of such triggering event, or (ii)
the terms of any indebtedness (whether or not senior to the Senior Notes)
include a restriction on the repurchase by Unison of the Senior Notes, unless in
either case Unison obtains the consent of the holders of such indebtedness or
repays all of such indebtedness. There can be no assurance that Unison would
have sufficient funds available at the time of a change of control to take such
steps.
LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE OF THE ORIGINAL NOTES
There can be no assurance regarding the future development of a market for
the Original Notes and the Exchange Notes, or the ability of holders of the
Original Notes or Exchange Notes to sell their Original Notes or Exchange Notes
or the price at which such holders may be able to sell their Original Notes or
Exchange Notes. If such a market were to develop, the Original Notes and, if
issued, the Exchange Notes could trade at prices lower than the initial offering
price as a result of many factors, including prevailing interest rates, Unison's
operating results and the market for similar securities. The Initial Purchasers
have advised Unison that they currently intend to make a market in the Original
Notes and the Exchange Notes. The Initial Purchasers are not obligated to do so,
however, and any market-making with respect to the Original Notes or Exchange
Notes may be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the Original Notes and
the Exchange Notes, or that an active public market for the Original Notes or
Exchange Notes will develop. In addition, such market-making activity will be
subject to the limitations imposed by the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and may be limited during
this Exchange Offer. Unison does not intend to
17
<PAGE> 22
apply for listing or quotation of the Original Notes or the Exchange Notes on
any securities exchange or stock market; however, it is expected that the Senior
Notes will continue to be eligible for trading in the PORTAL Market of the
National Association of Securities Dealers, Inc. The Original Notes have not
been registered under the Securities Act or any state securities laws and,
unless so registered, may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. See "Plan of Distribution."
DOCUMENT AND TIMING REQUIREMENTS FOR TENDER OF ORIGINAL NOTES
Except as otherwise provided herein, the Exchange Notes will be issued in
exchange for Original Notes only after timely receipt by the Exchange Agent of
such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. See "The Exchange
Offer -- Procedures for Tendering" and "-- Guaranteed Delivery Procedures."
Therefore, holders of Original Notes desiring to tender such Original Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Original
Notes for exchange. Any holder of Original Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
RESTRICTIONS ON TRANSFER OF ORIGINAL NOTES
The Original Notes have not been registered under the Securities Act and
are subject to substantial restrictions on transfer. Original Notes that are not
tendered in exchange for Exchange Notes or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. The Company does not currently
anticipate that it will register the Original Notes under the Securities Act. To
the extent that Original Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Original Notes
could be adversely affected. See "The Exchange Offer -- Consequences of Failure
to Exchange."
18
<PAGE> 23
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by Unison on October 31, 1996 to the Initial
Purchasers, who resold the Original Notes to "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act) in
the Private Offering. In connection with the sale of the Original Notes, Unison
and the Initial Purchasers entered into a Registration Rights Agreement dated as
of October 31, 1996 (the "Registration Rights Agreement") pursuant to which
Unison agreed to use its best efforts to file with the Commission a registration
statement (the "Exchange Offer Registration Statement") with respect to an offer
to exchange the Original Notes for Exchange Notes as soon as practicable, and to
become effective under the Securities Act as soon as practicable, but in no
event later than 45 days and 135 days following the issuance of the Original
Notes, respectively. The Exchange Offer Registration Statement was actually
filed more than 45 days and became effective more than 135 days after issuance
of the Original Notes, so certain additional interest accrued on the Original
Notes for the period of the delay (the "Additional Interest"). As a condition to
its obligation to consummate the Exchange Offer, Unison has proposed an
amendment to the Registration Rights Agreement (the "Amendment") confirming that
the registration defaults will be deemed cured, and the resulting Additional
Interest will cease to accrue, as of the effective date of the Exchange Offer
Registration Statement. A copy of the Amendment is included in this Prospectus
as Appendix A. If the Amendment is not approved, the Additional Interest would
continue to accrue (whether or not the Exchange Offer is consummated) until and
unless Unison causes a resale shelf registration statement to become effective
in accordance with the Registration Rights Agreement. Unison has proposed the
Amendment in the belief that both the Company and the holders of the Senior
Notes will generally benefit from the Exchange Offer Registration Statement
procedure rather than using a continuing resale shelf registration statement. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "The Registration
Rights Agreement."
This Prospectus is a part of the Exchange Offer Registration Statement that
Unison has filed with the Commission as provided above. The Exchange Offer is
being made pursuant to the Registration Rights Agreement to satisfy Unison's
obligations thereunder. The term "holder," with respect to the Exchange Offer,
means any person in whose name Original Notes are registered on the books of the
Company or any other person who has obtained a properly completed bond power
from the registered holder, or any person whose Original Notes are held of
record by the Depository. Assuming the Amendment becomes effective, upon
completion of the Exchange Offer Unison generally will not be required to file
any registration statement to register any outstanding Original Notes. Holders
of Original Notes who do not tender their Original Notes or whose Original Notes
are tendered but not accepted generally will have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Original Notes.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to Unison, Unison believes
that the Exchange Notes issued pursuant to the Exchange Offer in exchange for
Original Notes may be offered for resale, resold and otherwise transferred by
any holder of such Exchange Notes (other than a person that is an "affiliate" of
Unison within the meaning of Rule 405 under the Securities Act and except as set
forth in the next paragraph) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder is not engaged and does not intend to engage, and has no arrangement
or understanding with any person to engage, in the distribution of such Exchange
Notes.
If any person were to be participating in the Exchange Offer for the
purpose of distributing securities in a manner not permitted by the Commission's
interpretation: (i) the position of the staff of the Commission enunciated in
interpretive letters would be inapplicable to such person and (ii) such person
would be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making
19
<PAGE> 24
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Prior to the Exchange Offer Unison will register or qualify the Exchange
Notes for offer and sale under the securities or Blue Sky laws of such
jurisdictions as is necessary to permit consummation of the Exchange Offer and
do any and all other acts or things necessary or advisable to enable the offer
and sale in such jurisdictions of the Exchange Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, Unison will accept any and all
Original Notes validly tendered prior to midnight, New York City time, on the
Expiration Date (as defined below). Unison will issue up to $100.0 million
aggregate principal amount of Exchange Notes in exchange for a like principal
amount of outstanding Original Notes which are validly tendered and accepted in
the Exchange Offer. Subject to the conditions of the Exchange Offer described
below, the Company will accept any and all Original Notes which are so tendered.
Holders may tender some or all of their Original Notes pursuant to the Exchange
Offer.
The Exchange Offer is not conditioned upon any number of Original Notes
being tendered.
The form and terms of the Exchange Notes will be the same in all material
respects as the form and terms of Original Notes, except that the initial
issuance and exchange of the Exchange Notes will be registered under the
Securities Act and hence the Exchange Notes will not bear legends restricting
the transfer thereof. The Exchange Notes will not represent additional
indebtedness of Unison and will be entitled to the benefits of the Indenture
together with (and as a part of a single class with) the Original Notes.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid on the Original Notes. Interest has been paid
through April 30, 1997, and is next due on November 1, 1997 for interest through
October 31, 1997. Accordingly, registered holders of Exchange Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest (including Additional
Interest) accruing from the most recent date to which interest has been paid or,
if no further interest has been paid, from April 30, 1997. Original Notes
accepted for exchange will cease to accrue interest from and after the date of
the consummation of the Exchange Offer. Holders whose Original Notes are
accepted for exchange will not receive any payment in respect of interest on
such Original Notes otherwise payable on any interest payment date the record
date for which occurs on or after consummation of the Exchange Offer.
Holders of Original Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. Unison intends to
conduct the Exchange Offer in accordance with the provisions of the Registration
Rights Agreement. Original Notes which are not tendered for exchange or are
tendered but not accepted in the Exchange Offer will remain outstanding and be
entitled to the benefits of the Indenture, but generally will not be entitled to
any registration rights under the Registration Rights Agreement. See "The
Registration Rights Agreement."
Unison shall be deemed to have accepted validly tendered Original Notes
when, as and if Unison has given oral or written notice thereof to the Exchange
Agent for the Exchange Offer. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the Exchange Notes from Unison.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letters of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and
20
<PAGE> 25
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer,
Unison will not be required to accept for exchange any Original Notes tendered
for Exchange Notes and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Original Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency or regulatory authority with
respect to the Exchange Offer which, in the judgment of the Company, could
reasonably by expected to materially impair the ability of Unison to
proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to Unison; or
(b) there shall have been proposed, adopted or enacted any law,
statute, rule or regulation which, in the judgment of Unison, could
reasonably be expected to materially impair the ability of Unison to
proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to Unison; or
(c) the Initial Purchasers and holders of a majority in principal
amount of outstanding Original Notes do not consent in writing to the
Amendment to the Registration Rights Agreement proposed by Unison
confirming that the Registration Defaults thereunder are cured or waived,
and accordingly Additional Interest has ceased to accrue, as of the
effective date of the Exchange Offer Registration Statement.
The foregoing conditions are for the sole benefit of Unison and may be
asserted by Unison regardless of the circumstances giving rise to such
conditions or may be waived by Unison in whole or in part at any time and from
time to time in its sole discretion. If Unison waives or amends the foregoing
conditions, Unison will, if required by applicable law, extend the Exchange
Offer for a minimum of five business days from the date that Unison first gives
notice, by public announcement or otherwise, of such waiver or amendment, if the
Exchange Offer would otherwise expire within such five business-day period. Any
determination by Unison concerning the events described above will be final and
binding upon all parties.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at midnight, New York City Time, on
, 1997, subject to extension by the Company by notice to the
Exchange Agent as herein provided. Unison reserves the right to so extend the
Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the time and date on which the Exchange Offer as so extended shall
expire. The Company will notify the Exchange Agent of any extension by oral or
written notice and will make a public announcement thereof, each prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
Unison reserves the right (i) to delay accepting for exchange any Original
Notes for any Exchange Notes or to extend or terminate the Exchange Offer and
not accept for exchange any Original Notes for any Exchange Notes if any of the
events set forth under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by Unison by giving oral or written
notice of such delay or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance for
exchange, extension or amendment will be followed as promptly as practicable by
public announcement thereof. If the Exchange Offer is amended in a manner
determined by Unison to constitute a material change, Unison will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of Exchange Notes of such amendment and the Company will extend the Exchange
Offer for a period of five to 10 business days, depending upon the significance
of the amendment and the manner of disclosure to the holders of the Exchange
Notes, if the Exchange Offer would otherwise expire during such five to 10
business-day period. The rights reserved by the Company in this paragraph are in
addition to the Company's rights set forth under the caption "Conditions of the
Exchange Offer."
21
<PAGE> 26
PROCEDURES FOR TENDERING
Only a holder of Original Notes may tender such Original Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Original Notes (unless such tender is being effected pursuant to the
procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to midnight, New York City time, on the
Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depositary to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depositary's procedure for such
transfer. Although delivery of Original Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses set forth in "Exchange
Agent" below prior to midnight, New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Original Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Original Notes and the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date. No
Letter of Transmittal or Original Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect the tenders for such holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member of a signature
guarantee program within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal or any Original Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
Unison, evidence satisfactory to Unison of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Original Notes will be
determined by Unison in its sole discretion, which determination will be final
and binding. Unison reserves the absolute right to reject any and all Original
Notes not properly tendered or any Original Notes Unison's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. Unison also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Original Notes. Unison's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Original Notes must be
cured within such times as the Company shall determine. Although Unison intends
to request the Exchange Agent to notify holders of defects or irregularities
with respect to tenders of Original Notes, neither Unison, the Exchange Agent
nor any other person shall incur any liability for failure to give such
notification. Tenders of Original Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Original
Notes received by the Exchange Agent that are not properly tendered and as to
which the
22
<PAGE> 27
defects or irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders, unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date.
In addition, Unison reserves the right in its sole discretion (subject to
limitations contained in the Indenture) (i) to purchase or make offers for any
Original Notes that remain outstanding subsequent to the Expiration Date and
(ii) to the extent permitted by applicable law, purchase Original Notes or
Exchange Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to Unison, among other things, (i)
that the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, (ii) that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and (iii) that
neither the holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of Unison or, if such person is an affiliate
of Unison, that such person will comply with the registration and prospectus
delivery requirements of the Securities Act, to the extent applicable. If the
holder is a broker-dealer that will receive Exchange Notes for its own account
in exchange for Original Notes that were acquired as a result of market-making
activities or other trading activities, such holder by tendering will
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available, or (ii) who cannot deliver their Original
Notes and other required documents to the Exchange Agent prior to the Expiration
Date, or cannot complete the procedure for book-entry transfer prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly competed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Original Notes (if available) and the principal amount of Original
Notes tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date,
the certificate(s) representing the Original Notes to be tendered in proper
form for transfer (or a confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Original Notes delivered
electronically) with any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) Such certificate(s) representing all tendered Original Notes in
proper form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Original Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to midnight, New York City Time, on the Expiration
Date, unless previously accepted for exchange.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to midnight, New York City time, on
the Expiration Date, and prior to acceptance for exchange thereof by the
Company. Any
23
<PAGE> 28
such notice of withdrawal must (i) specify the name of the person having
deposited the Original Notes to be withdrawn (the "Depositor"), (ii) identify
the Original Notes to be withdrawn (including the certificate number or numbers
and principal amount of such Original Notes), (iii) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Original Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Original Notes register the transfer of such
Original Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Original Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by Unison, whose determination shall be final and binding on all
parties. Any Original Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Original Notes so withdrawn are validly
re-tendered. Any Original Notes which have been tendered but which are not
accepted for exchange or which are withdrawn will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Original Notes may be re-tendered by following one of the procedures described
above under "Procedures for Tendering" at any time prior to the Expiration Date.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Unison. The principal solicitation for tenders pursuant to the Exchange
Offer is being made by mail; however, additional solicitation may be made by
telegraph, telephone or in person by officers and regular employees of Unison
and its affiliates.
Unison has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Unison, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith. Unison may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Original Notes and in handling or forwarding tenders for exchange. Unison will
pay the other expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Trustee, accounting and legal fees and
printing costs.
Unison will pay all transfer taxes, if any, applicable to the exchange of
Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Original Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Original Notes tendered,
or if tendered Original Notes are registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Original Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, Unison believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise transferred by any holder of such
Exchange Notes (other than broker-dealers, as set forth below, and other than
any such holder which is "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. Any
24
<PAGE> 29
holder who tenders in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the Exchange Notes may
not rely on the position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available May 13, 1988) and Morgan Stanley & Co.,
Incorporated (available June 5, 1991), or similar no-action letters, but rather
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. In addition, any such
resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Original Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
By tendering in the Exchange Offer, each holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a holder,
(ii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such holder incurring liability
under the Securities Act for which such holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of
Unison will represent to the Company that such holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of making of this Exchange Offer, Unison will have fulfilled
one of its obligations under the Registration Rights Agreement and holders of
Original Notes who do not tender their Original Notes generally will not have
any further registration rights under the Registration Rights Agreement or
otherwise. See "The Registration Rights Agreement." Accordingly, any holder of
Original Notes that does not exchange that holder's Original Notes for Exchange
Notes will continue to hold the untendered Original Notes and will be entitled
to all the rights and limitations applicable thereto under the Indenture, except
to the extent of such rights or limitations that, by their terms, terminate or
cease to have further effectiveness as a result of the Exchange Offer.
The Original Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Original Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) to an institutional accredited investor that, prior
to such transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Original Notes evidenced thereby (the form of which letter can be obtained from
the Trustee) or (vi) pursuant to another available exemption from the
registration requirements of the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
25
<PAGE> 30
Accordingly, if any Original Notes are tendered and accepted in the
Exchange Offer, the trading market for the untendered Original Notes could be
adversely affected. See "Risk Factors -- Consequences of Failure to Exchange
Original Notes."
TERMINATION OF CERTAIN RIGHTS
Holders of the Senior Notes will not be entitled to certain rights under
the Registration Rights Agreement following the consummation of the Exchange
Offer. The rights that generally will terminate are the right (i) to have the
Company file with the Commission and use its best efforts to have declared
effective a shelf registration statement to cover resales of the Original Notes
by the holders thereof and (ii) to receive additional interest if the
registration statement of which this Prospectus is a part or the shelf
registration statement are not filed with, or declared effective by, the
Commission within certain specified time periods or the Exchange Offer is not
consummated within a specified time period. See "The Registration Rights
Agreement."
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Unison or its subsidiaries since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tender be accepted from or on behalf of) holders of Original Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company intends to take such action as it may deem necessary to make the
Exchange Offer in any such jurisdiction and extend the Exchange Offer to holders
of Original Notes in such jurisdiction.
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Original
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Original Notes except to the
extent that it may be required to do so under the Registration Rights Agreement.
See "The Registration Rights Agreement."
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes, as reflected in Unison's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by Unison upon the consummation of the Exchange Offer. The expenses
of the Exchange Offer will be amortized by Unison over the term of the Exchange
Notes under generally accepted accounting principles.
26
<PAGE> 31
EXCHANGE AGENT
First Bank National Association, St. Paul, Minnesota has been appointed as
Exchange Agent for the Exchange Offer. All correspondence in connection with the
Exchange Offer and the Letter of Transmittal should be addressed to the Exchange
Agent, as follows:
By Hand/Overnight Courier/Mail:
First Bank National Association
Attn: David Haussen, Specialized Finance Group
180 East 5th Street
St. Paul, Minnesota 55101
Facsimile Transmission:
(612) 244-1537
(For Eligible Institutions Only)
Confirm by Telephone:
(612) 244-8162
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
nor modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders of either Original Notes or Exchange Notes. Certain
holders of the Original Notes (including insurance companies, tax exempt
organizations, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) may be subject
to special rules not discussed below. EACH HOLDER OF AN ORIGINAL NOTE SHOULD
CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF
EXCHANGING SUCH HOLDER'S ORIGINAL NOTES FOR EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The issuance of the Exchange Notes to holders of the Original Notes
pursuant to the terms set forth in this Prospectus should not constitute a
recognition event for federal income tax purposes. Consequently, no gain or loss
should be recognized by holders of the Original Notes upon receipt of the
Exchange Notes. For purposes of determining gain or loss upon the subsequent
sale or exchange of the Exchange Notes, a holder's basis in the Exchange Notes
should be the same as such holder's basis in the Original Notes exchanged
therefor. Holders should be considered to have held the Exchange Notes from the
time of their original acquisition of the Original Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of Unison's obligations
under the Purchase Agreement and the Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the Exchange Notes
offered hereby. In consideration for issuing the Exchange Notes contemplated in
this Prospectus, the Company will receive the Original Notes in like principal
amount, the form and terms of which are the same as the form and terms of the
Exchange Notes (which replace the Original Notes, except as otherwise described
herein). The Original Notes surrendered in exchange for the Exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of Unison.
27
<PAGE> 32
The net proceeds to the Company from the sale of the Original Notes were
used to effect a series of transactions referred to below (collectively, the
"Transactions"). The remainder was used for general corporate purposes,
including acquisitions.
The Transactions include:
(i) the Signature Acquisition, for which the cash paid at closing
totaled approximately $43,067,000, including approximately $5,350,000 to
acquire the stock of RehabWest and a pre-sale distribution by RehabWest of
approximately $667,000 to the former owner (see
"Business -- Acquisitions");
(ii) the Ampro Acquisition, for which cash paid from proceeds of the
Original Notes was approximately $487,000 (see "Business -- Acquisitions");
(iii) the reduction of Unison's outstanding revolving credit facility,
which bore interest at the rate of prime plus 2.0%, by approximately
$8,900,000, and payment of $200,000 of related fees;
(iv) the repayment of certain bank financing in the principal amount
of $7,500,000, bearing interest at the rate of 9.75% per annum and maturing
in February 1997 (the "Bank Financing");
(v) the repayment in January 1997 of $9,750,000 of the obligations due
to the former BritWill shareholders in connection with the BritWill
Acquisition, comprised of the $8,000,000 outstanding principal amount of a
subordinated note (the "Subordinated Note"), which at the time of repayment
bore interest at 8.0% per annum and which would have matured in 2000, and
$1,750,000 of a lump sum contingent obligation (the "Additional Payment
Obligation") (see "Business -- Acquisitions");
(vi) the repayment of leasehold mortgage financing from Omega (the
"Omega Leasehold Mortgage Financing") in the principal amount of
$4,000,000, which bore interest at rates of 10.25% to 10.75% per annum;
(vii) the prepayment in January 1997 of Unison's $2,000,000 of
outstanding convertible promissory notes and debentures (the "Sunbelt
Notes") issued in connection with Unison's 1996 acquisition of Sunbelt
Therapy Management Services, Inc. ("Sunbelt"), which bore interest at the
rate of 10.0% per annum and matured in annual installments through February
1, 1999; and
(viii) the repayment of certain other indebtedness, totaling
approximately $2,883,000, bearing interest at rates ranging from the prime
rate to 10.0% and having maturities from May 1997 to June 1998.
The source and uses of funds are set forth below (in thousands).
<TABLE>
<S> <C>
Source of funds:
Private Offering of Original Notes...................................... $100,000
========
Uses of funds(1):
Signature Acquisition payment........................................... $ 43,067
Ampro Acquisition payment............................................... 487
Reduction of revolving credit facility and payment of related fees(2)... 9,100
Repayment of Bank Financing(3).......................................... 7,634
Repayment of Subordinated Note and payment of Additional Payment
Obligation........................................................... 9,750
Repayment of Omega Leasehold Mortgage Financing(4)...................... 4,034
Repayment of the Sunbelt Notes(5)....................................... 2,048
Repayment of certain other indebtedness(6).............................. 2,883
General corporate purposes(7)........................................... 15,547
Fees and expenses from Private Offering(8).............................. 5,450
--------
Total uses of funds............................................. $100,000
========
</TABLE>
28
<PAGE> 33
- ---------------
(1) The funds were used over a period of time beginning on October 31, 1996
through approximately March 15, 1997.
(2) Includes $200,000 of fees. The revolving credit facility was paid down to a
zero balance with proceeds of the Offering, and has since been drawn upon.
As of July 31, 1997 the outstanding balance was approximately $8.3 million.
The balance is subject to change on a daily basis.
(3) Includes interest and fees in the amount of $134,000.
(4) Includes interest in the amount of $34,000.
(5) Includes interest in the amount of $48,000. The holders of the Sunbelt Notes
elected to receive a portion of the total payment due them in the form of
Unison common stock valued at $800,000.
(6) Includes bank debt of Ampro and Sunbelt in the aggregate amount of $896,000;
debt owed to various parties in connection with prior acquisitions by Ampro
or Unison in the aggregate amount of $1.1 million; and $892,000 of other
indebtedness.
(7) Includes disbursements for reduction of accounts payable; working capital
related to the conversion of therapy services to Sunbelt from other
providers; costs related to certain capital expenditures; costs related to
the relocation of the corporate office; costs related to the upgrade of the
general ledger, accounts payable, payroll, and labor time-keeping systems;
costs related to acquisitions in the approximate amount of $1.1 million; and
other costs.
(8) Includes costs related to the Offering as well as certain costs related to
the Ampro and Signature acquisitions, including a fee to Trouver Capital
Partners, L.P. ("Trouver") in the amount of $83,940.
29
<PAGE> 34
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of Unison as of December 31, 1996 and as adjusted to assume the
application of the remaining proceeds from the sale of the Original Notes and as
of June 30, 1997. This table should be read in conjunction with the information
contained in Use of Proceeds, the Consolidated Financial Statements of the
Company and the Unaudited Pro Forma Condensed Combined Statement of Operations,
including the related notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JUNE 30,
------------------------- 1997
PRO FORMA -----------
ACTUAL AS ADJUSTED ACTUAL
-------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 17,409 $ 4,865 $ 2,413
======== ======== ========
Long-term debt, including current portions:
Senior Notes........................................... $100,000 $100,000 $ 100,000
Signature mortgage..................................... 18,640 18,640 18,534
Subordinated Note...................................... 8,000 -- --
Additional Payment Obligation.......................... 11,500 9,750 9,671
Sunbelt Notes.......................................... 2,800 -- --
Other indebtedness..................................... 16,378 15,404 28,893
-------- -------- --------
Total debt..................................... 157,138 143,794 157,098
Stockholders' equity..................................... 11,689 12,489 6,161
-------- -------- --------
Total capitalization........................... $168,827 $156,283 $ 163,259
======== ======== ========
</TABLE>
30
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1996 is presented after the Signature
Acquisition has been accounted for as a purchase and the Ampro Acquisition has
been accounted for as a pooling of interests. Accordingly, the Unaudited Pro
Forma Condensed Combined Statement of Operations includes the combined
operations of Unison and Ampro. The Unaudited Pro Forma Condensed Combined
Statement of Operations has been prepared as if the Completed Acquisitions (if
consummated later) and the Dispositions had been consummated as of the beginning
of the period presented. The application of the proceeds of the Senior Notes was
completed in March 1997 and is therefore reflected in Unison's historical
balance sheet as of June 30, 1997.
The pro forma information is based on the historical statements of
operations of the acquired businesses giving effect to the placement of the
Original Notes and the other assumptions and adjustments described in the
accompanying Notes to Unaudited Pro Forma Condensed Combined Statement of
Operations.
The Unaudited Pro Forma Condensed Combined Statement of Operations does not
purport to present the results of operations of Unison had the business
combinations taken place on the dates specified, nor are they necessarily
indicative of the results of operations that may be achieved in the future. The
Unaudited Pro Forma Condensed Combined Statement of Operations should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the separate historical financial statements and
notes thereto included elsewhere in this Prospectus.
31
<PAGE> 36
UNISON HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
OTHER PRO FORMA PRIVATE PRO FORMA
UNISON SIGNATURE(A) ACQUISITIONS(B) ADJUSTMENTS PRO FORMA OFFERING AS ADJUSTED
-------- ------------ --------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.............. $148,674 $ 41,964 $ 6,283 $ (14,539)(c)
(278)(d) $182,104 $ -- $ 182,104
Expenses:
Wages and related......... 85,789 18,235 3,668 (7,859)(c) 99,833 -- 99,833
Other operating........... 64,771 10,376 2,500 (5,983)(c)
(278)(d) 71,386 -- 71,386
Rent...................... 15,658 1,748 22 (2,467)(c)
652(d) 15,613 -- 15,613
Interest.................. 5,824 6,256 283 (170)(c)
(283)(d)
23(e) 11,933 2,826(i) 14,759
Depreciation and
amortization............ 4,561 2,849 128 (380)(c)
(128)(d)
23(f) 7,053 447(j) 7,500
Impairment losses......... 3,865 -- -- -- 3,865 -- 3,865
------- ------- ------ ------- -------- -------- -------
Total expenses..... 180,468 39,464 6,601 (16,850) 209,683 3,273 212,956
------- ------- ------ ------- -------- -------- -------
Income (loss) before income
taxes..................... (31,794) 2,500 (318) 2,033 (27,579) (3,273) (30,852)
Income tax benefit.......... (8,356) (323) -- (2,352)(g) (11,031) (1,310)(g) (12,341)
------- ------- ------ ------- -------- -------- -------
Net income (loss)........... $(23,438) $ 2,823 $ (318) $ 4,385 $(16,548) $(1,963) $ (18,511)
======= ======= ====== ======= ======== ======== =======
Shares used in per share
calculation............... 4,676 -- -- 1,491(h) 6,167 -- 6,167
Net loss per share.......... $ (5.01) $ (2.68) $ (3.00)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
32
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(a) Represents the combined operating results for Signature for the ten
months ended October 31, 1996 after application of the purchase method of
accounting. The table below illustrates the historical operating results of the
Signature Affiliates and RehabWest and the purchase accounting adjustments
associated with the Signature Acquisition.
<TABLE>
<CAPTION>
TEN MONTHS ENDED OCTOBER 31, 1996
----------------------------------------------------------
PURCHASE
ACCOUNTING
SIGNATURE AND PRO FORMA
AFFILIATES REHABWEST ADJUSTMENTS SIGNATURE
---------- --------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total revenues............................. $ 37,953 $ 4,011 $ -- $41,964
Expenses:
Wages and related........................ 15,753 2,482 -- 18,235
Other operating.......................... 16,360 630 (6,614)(1) 10,376
Rent..................................... 1,739 9 -- 1,748
Interest................................. 1,780 3 4,473(2) 6,256
Depreciation and amortization............ 1,380 2 1,467(3) 2,849
------- ------ ------- -------
Total expenses.................... 37,012 3,126 (674) 39,464
------- ------ ------- -------
Income before taxes........................ 941 885 674 2,500
Income tax expense (benefit)............... (593) -- 270 (323)
------- ------ ------- -------
Net income................................. $ 1,534 $ 885 $ 404 $ 2,823
======= ====== ======= =======
</TABLE>
- ---------------
(1) To eliminate management fees paid to a related party ($7,077,000) net of
estimated incremental overhead costs ($463,000).
(2) To record interest on debt incurred in connection with the Signature
Acquisition, as follows (dollars in thousands).
<TABLE>
<CAPTION>
DEBT INTEREST INTEREST
INCURRED RATE EXPENSE
-------- -------- -------
<S> <C> <C> <C>
Signature Affiliates (allocation of Senior Notes)............. $ 37,054 12.25% $3,783
RehabWest (allocation of Senior Notes)........................ 6,013 12.25 614
Seller notes in escrow........................................ 1,146 8.00 76
------- ------
$ 44,213 $4,473
======= ======
</TABLE>
(3) Under the purchase method of accounting, assets acquired and liabilities
assumed were recorded at the estimated fair value as determined by an
independent appraisal. The resultant excess of the purchase price over
fair value of net assets acquired is being amortized over a period of 40
years for the Signature Affiliates and 20 years for RehabWest, the
noncompete costs and assembled workforce are amortized over five years
and lease operating rights are amortized over the lease term, including
renewal options, not to exceed 30 years. The adjustment to property and
equipment is depreciated over 20 years. Such depreciation and
amortization amounts to approximately $1,942,000 for the 10 months ended
October 31, 1996. In addition, amortization expense was reduced by
$475,000 for the 10-month period as a result of eliminating prior
goodwill amortization in Signature's historical statement of operations.
33
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS -- (CONTINUED)
(b) Other Acquisitions: The following table summarizes the unaudited
operating results for the following acquisitions for the period from January 1,
1996 through the acquisition date.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
ACQUISITION ---------------------
ACQUISITION DATE REVENUES EXPENSES
------------------------------------------------------------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sunbelt Therapy.............................................. Feb. 1996 $ 544 $ 568
Franciscan Enumclaw.......................................... Aug. 1996 2,487 2,755
Franciscan Walla Walla....................................... Aug. 1996 1,116 1,182
Other acquisitions........................................... July 1996 2,136 2,096
------ ------
$6,283 $6,601
====== ======
</TABLE>
(c) In September 1996, Unison announced a plan to dispose of seven nursing
facilities, two of which were not in operation. To record the disposition of
these facilities and one additional facility disposed of in March 1997 as if the
dispositions had occurred at the beginning of the period presented.
(d) Operating lease pro forma adjustments represent adjustments to the
pre-lease operating results of the facilities identified in note (b). The
historical results have been adjusted to include the lease expense incurred by
Unison, elimination of management fee income to Unison and elimination of the
lessor's depreciation, interest expense and management fees.
(e) To record interest on debt incurred to acquire Sunbelt, as follows (in
thousands):
<TABLE>
<S> <C>
Sunbelt Notes................................................. $2,800
Interest rate................................................. X 10.0%
------
Annual interest expense....................................... 280
X 1/12
------
Interest on the Sunbelt Notes for the month of January 1996... $ 23
======
</TABLE>
(f) To record amortization of goodwill related to the acquisition of
Sunbelt, as follows (in thousands):
<TABLE>
<S> <C>
Goodwill recorded............................................. $5,425
Amortization period -- months...................... divided by 240
------
Amortization for the month of January 1996.................... $ 23
======
</TABLE>
(g) To record the tax provision related to the pro forma adjustments and
adjustments related to the sale of the Original Notes at an assumed rate of 40%.
(h) Unison issued 1,747,486 shares of its common stock in connection with
the Signature Acquisition. To adjust shares used in the earnings per share
calculation as if the Signature Acquisition had occurred at the beginning of the
period presented.
34
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS -- (CONTINUED)
(i) To record interest expense on the $100,000,000 principal amount of
Senior Notes for the ten months ended October 31, 1996, net of repayments and
reductions, as follows (dollars in thousands).
<TABLE>
<CAPTION>
INTEREST INTEREST
AMOUNT RATE EXPENSE
-------- -------- --------
<S> <C> <C> <C>
Senior Notes........................................................... $100,000 12.25% $ 10,208
Less amounts allocated to:
Signature (adjustment a)............................................. (37,054) 12.25 (3,782)
RehabWest (adjustment a)............................................. (6,013) 12.25 (614)
Repayments(1).......................................................... (35,833) 10.00(2) (2,986)
-------- -------
$ 21,100 $ 2,826
======== =======
</TABLE>
- ---------------
<TABLE>
<C> <S> <C>
(1) Repayments are comprised of the following:
Reduction of revolving credit facility................................................... $8,900
Repayment of Bank Financing.............................................................. 7,500
Repayment of Subordinated Note and payment of Additional Payment Obligation.............. 9,750
Repayment of Omega Leasehold Mortgage Financing.......................................... 4,000
Repayment of the Sunbelt Notes........................................................... 2,800
Repayment of other indebtedness.......................................................... 2,883
-------
$35,833
=======
(2) Represents the weighted average interest rate of debt repaid.
</TABLE>
(j) To record amortization expense related to debt issue costs amounting to
$5,366,000 incurred in connection with the Private Offering of the Original
Notes.
35
<PAGE> 40
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA(1)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------------------------------------------- ---------------------
ACTUAL ACTUAL
--------------------------------------------------------- PRO FORMA ---------------------
1992 1993 1994 1995(2) 1996 1996(3) 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................... $ 4,523 $ 7,011 $ 18,406 $ 68,488 $ 148,674 $182,104 $ 68,559 $ 113,103
Expenses:
Wages and related............... 2,201 3,689 9,593 35,047 85,789 99,833 33,961 59,544
Other operating................. 1,727 2,629 6,462 24,032 64,771 71,386 22,665 41,201
Rent............................ 155 206 1,406 6,673 15,658 15,613 6,704 8,386
Interest........................ 14 44 147 1,176 5,824 14,759 1,508 9,594
Depreciation and amortization... 88 157 286 1,311 4,561 7,500 1,152 4,726
Impairment losses............... -- -- -- -- 3,865 3,865 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses................ 4,185 6,725 17,894 68,239 180,468 212,956 65,990 123,451
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes....................... 338 286 512 249 (31,794) (30,852) 2,569 (10,348)
Income taxes (benefit)............ 100 177 172 132 (8,356) (12,341) 1,050 (3,333)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 238 $ 109 $ 340 $ 117 $ (23,438) $(18,511) $ 1,519 $ (7,015)
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) per share....... $ 0.13 $ 0.06 $ 0.19 $ 0.05 $ (5.01) $ (3.00) $ 0.33 $ (1.11)
Shares used in per share
calculation..................... 1,806,164 1,806,164 1,806,164 2,280,213 4,676,037 6,167,089 4,671,955 6,318,722
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE
--------------------------------------------------------- PRO FORMA 30,
1992 1993 1994 1995 1996 1996(4) 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 169 $ 199 $ 306 $ 6,169 $ 17,409 $ 4,865 $ 2,413
Working capital (deficit)......... 272 298 1,691 (927) (13,955) (14,855) (18,985)
Total assets...................... 879 1,862 7,468 81,301 230,921 218,377 223,187
Total debt........................ 163 259 2,623 26,737 157,138 143,794 157,098
Stockholders' equity.............. (157) (47) 736 20,903 11,689 12,489 6,161
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------------------------------------------- ---------------------
ACTUAL ACTUAL
--------------------------------------------------------- PRO FORMA ---------------------
1992 1993 1994 1995(2) 1996 1996(3) 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Skilled nursing facilities:(5)
Number of facilities............ 4 6 16 45 54 48 43 50
Number of licensed beds......... 436 671 1,621 4,629 5,455 4,818 4,455 4,930
Patient days.................... -- 12,705 112,727 581,410 1,203,655 1,732,584 557,965 767,449
Assisted living facilities:(5)
Number of facilities............ -- 1 4 5 8 8 5 8
Number of units................. -- 30 104 229 320 320 136 315
Sources of patient revenues:
Medicare........................ -- 3.4% 9.1% 26.9% 29.5% 30.2 % 32.4% 32.9%
Private pay..................... -- 13.8 32.4 17.2 17.0 18.1 15.8 15.8
--------- --------- --------- --------- --------- --------- --------- ---------
Quality mix................... -- 17.2 41.5 44.1 46.5 48.3 48.2 48.7
Medicaid........................ -- 82.8 58.5 55.9 53.5 51.7 51.8 51.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total..................... -- 100.0% 100.0% 100.0% 100% 100% 100.0% 100.0%
======== ======== ======== ======== ======== ========== ======== ========
Ratio of earnings to fixed
charges(6).................... 6.15x 3.54x 1.83x 1.07x -- -- 1.6x 0.18x
</TABLE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(1) The years ended December 31, 1992, 1993, 1994 and 1995 have been restated to
reflect the pooling accounting treatment for the acquisition of Ampro.
(2) On August 10, 1995, Unison acquired BritWill. The actual results for the
year ended December 31, 1995 include the results of operations for BritWill
for the five months ended December 31, 1995.
(3) Gives effect to (i) the Dispositions, (ii) the Completed Acquisitions and
(iii) the Private Offering of the Senior Notes and the application of the
net proceeds therefrom, effective, in each case, at the beginning of the
period presented.
(4) Gives effect to the application of the remaining proceeds of the Senior
Notes effective as of December 31, 1996.
(5) Number of facilities, beds and units expressed are at end of period.
(6) Earnings are defined as income (loss) before income taxes and fixed charges.
Fixed charges are defined as interest expense and a portion of rent expense
representing the interest factor, which Unison estimates to be one-third of
base rents. Earnings were inadequate to cover fixed charges by approximately
$31,794,000 in 1996, $31,731,000 in 1996 on a pro forma basis, and
$10,348,000 for the six months ended June 30, 1997.
36
<PAGE> 41
BRITWILL SEPARATE DATA
HISTORICAL
Separate financial statements of an acquired business ordinarily need not
be presented once the operating results of the acquired business have been
reflected in the audited financial statements of the acquiring company for a
complete fiscal year unless the acquired business is of such significance to the
registrant that omission of such financial statements would materially impair an
investor's ability to understand the historical results of the acquiring
company. At the date of acquisition (August 10, 1995), BritWill was of such
significance to Unison as to be considered a predecessor company. Accordingly,
BritWill's separate selected historical financial data is provided for the
periods from 1992 to the date of acquisition.
The selected historical financial data set forth below for the years ended
December 31, 1992, 1993 and 1994 and the seven months ended July 31, 1995 are
derived from BritWill's audited financial statements. The audited financial
statements of BritWill for the one month ended July 31, 1995, the six months
ended June 30, 1995 and the year ended December 31, 1994, together with the
Notes thereto, are included elsewhere herein. The data for the seven months
ended July 31, 1994 are derived from the unaudited financial statements of
BritWill which are not included herein. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" applicable to BritWill's
separate historical results and other financial information included herein.
<TABLE>
<CAPTION>
SEVEN MONTHS
YEARS ENDED ENDED
DECEMBER 31, JULY 31,
------------------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient.................... $27,107 $32,107 $53,801 $29,098 $38,378
Other.......................... 70 625 624 759 476
------- ------- ------- ------- -------
Total revenues......... 27,177 32,732 54,425 29,857 38,854
Expenses:
Operating...................... 15,162 23,483 40,037 22,666 28,333
General and administrative..... 6,714 3,670 6,252 3,350 3,870
Rent........................... 3,750 5,097 8,264 4,719 5,223
Interest....................... 2,850 385 872 571 906
Depreciation and
amortization................ 791 704 987 487 591
------- ------- ------- ------- -------
Total expenses......... 29,267 33,339 56,412 31,793 38,923
------- ------- ------- ------- -------
Income (loss) from operations.... (2,090) (607) (1,987) (1,936) (69)
Other Income:
Interest income............. 220 65 55 50 113
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (1,870) (542) (1,932) (1,886) 44
Income taxes..................... -- 52 53 26 31
------- ------- ------- ------- -------
Net income (loss)................ $(1,870) $ (594) $(1,985) $(1,912) $ 13
======= ======= ======= ======= =======
</TABLE>
37
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act which are based on
assumptions set forth in this discussion that could prove to be inaccurate.
Important factors that could cause actual events to vary from the discussions
herein include the factors discussed in "Prospectus Summary", "Risk Factors",
"Business", "-- Overview" and "-- Risks and Uncertainties".
The following material should be read in conjunction with Unison's
Consolidated Financial Statements and related notes thereto for the years ended
December 31, 1996, 1995 and 1994 and the six months ended June 30, 1997 and
1996. All references in this discussion and analysis to years are to fiscal
years ended December 31 of such year.
SIGNIFICANT EVENTS
- - On September 30, 1996, Unison announced a plan to dispose of seven
(subsequently increased to eight) underperforming nursing facilities and
recorded a $3,865,000 nonrecurring charge in the 1996 third quarter. See
"-- Acquisitions and Dispositions".
- - On October 31, 1996, Unison completed the private placement of its
$100,000,000 12 1/4% Senior Notes Due 2006 (the "Senior Notes").
- - On October 31, 1996, Unison completed the Signature Acquisition and the Ampro
Acquisition. See "-- Acquisitions and Dispositions".
- - For the year ended December 31, 1996, Unison recorded a net loss of
$23,438,000 compared to net income of $117,000 and $340,000 in 1995 and 1994,
respectively. See "-- Results of Operations".
OVERVIEW
From a financial performance standpoint, 1996 was a very disappointing year
for Unison. The Company pursued in late 1995 and 1996 an aggressive expansion
program that, in time, overwhelmed the Company's financial reporting and
management information systems and personnel. As a result, the Company was
compelled to announce on March 11, 1997, that it would restate its financial
results for the nine months ended September 30, 1996 by an estimated $5,000,000
to $6,000,000. On May 12, 1997, after consultation with the Company's auditors,
Unison announced that the restatement would be significantly higher than the
previous estimate. Indeed, as finally reported, the restated pretax loss for the
period was approximately $15,000,000.
Adjustments to the nine-month statement of operations as originally
reported resulted in (i) a decrease in revenues of $3,713,000; (ii) an increase
in operating expenses (other than fixed costs) in the aggregate amount of
$8,271,000; (iii) an increase in fixed costs (rent, interest depreciation and
amortization) amounting to $1,476,000; and (iv) an increase in impairment losses
of $1,865,000. The decrease in revenues was primarily due to adjustments to
third party settlement receivables. These adjustments resulted from revisions to
certain estimates used in the calculation of Medicare rates used to record
revenues. The increase in operating expenses resulted primarily from (i)
additions to reserves for doubtful accounts related to management fees
receivable and patient accounts receivable; (ii) reserves for potential
liabilities for gross receipts taxes and related penalties and interest; (iii)
amortization of prepaid expenses; and (iv) previously unrecorded liabilities.
The adjustments to increase fixed costs by $1,476,000 were comprised primarily
of (a) additional rent expense related to escalating rent provisions in certain
of the Company's facility leases; (b) adjustments to increase amortization
expense, due in part to revisions to the amortization periods of certain
intangible assets; and (c) the write-off of deferred financing charges. The
adjustment to increase impairment losses resulted from an evaluation of the
Company's long-lived assets in accordance with SFAS No. 121. The total provision
for impairment losses as revised includes (1) adjustments to reduce the carrying
value of certain long-lived assets to fair market value and (2) a provision for
estimated losses on the disposition of facilities. See "-- Results of
Operations".
38
<PAGE> 43
The Company has taken steps which it believes will remedy these problems
and prevent them from recurring. Unison has curtailed its acquisition program
and in April 1997 accepted the resignations of several of its principal
officers, including its chief executive officer and chief financial officer.
Several managers in accounting and finance have been replaced. The Company hired
a new CEO in September 1997 and expects to name a new CFO before the end of
1997. In the second quarter of 1997, the Company completed the conversion to new
accounts payable, accounting and financial reporting computer systems.
Unison believes that its core businesses remain fundamentally sound. Its
nursing home occupancy levels and quality mix have shown improvement. Unison's
quality of care as measured by levels of compliance in state health care surveys
is high. Unison's ancillary services subsidiaries (providing therapy, pharmacy
Medicare Part B supply and laboratory services both to Unison facilities and
those of independent nursing home companies) are profitable, recording pretax
income in the aggregate amount of $1,893,000 in 1996 and $4,734,000 for the six
months ended June 30, 1997. The Company is current in all of its loan and
leasehold payment obligations. The Company has reduced its corporate cost
structure, and is implementing revenue enhancement programs and expense controls
in its nursing homes and ancillary services companies. See "-- Liquidity and
Capital Resources". The Company is focusing its marketing efforts on increasing
occupancy levels and improving quality mix in order to increase revenues. See
"Business -- Operations". Unison is attempting to increase its ancillary
services revenues, both in terms of acquiring contracts with nonaffiliated
facilities and increasing the level of services to its existing patients. The
Company is at the same time attempting to reduce costs without adversely
impacting the quality of care it provides. With the recent implementation of new
management reporting systems, the Company is better equipped to monitor and
control its labor costs and other operating expenses. The Company also
streamlined its corporate and regional office staff, laying off approximately 30
employees. This, combined with attrition and the closure of the Signature
corporate office, resulted in a 35% reduction in corporate staff, from 142 on
December 31, 1996 to 92 on May 15, 1997. These initiatives are designed to
improve both the Company's results of operations and its cash flows.
RISKS AND UNCERTAINTIES
Risks and uncertainties that may impact future operating results and cash
flows include those described below.
High Leverage and Limited Capital Resources. At December 31, 1996, Unison
had approximately $157,138,000 in total long-term indebtedness, which was
approximately 93.1% of its total capitalization. It also has significant
long-term operating lease obligations (approximately $15,492,000 for 1997 and
$164,743,000 in the aggregate). All of Unison's cash flow and availability under
its current lines of credit, together with additional funds from sources yet to
be developed, will be needed for the next year and beyond in order to satisfy
its working capital, debt service and lease obligations. The Company anticipates
that it will need at least $10,000,000 of additional outside financing to meet
its cash flow requirements for the remainder of 1997. See "-- Liquidity and
Capital resources". The Senior Notes and Unison's other indebtedness and lease
obligations include certain covenants that prohibit or limit asset sales,
acquisitions, incurrence of additional debt and liens, the making of restricted
payments, affiliate transactions, engaging in certain mergers and consolidations
and entering new lines of business. For example, the Senior Notes generally
limit Unison's debt incurrence to an amount equal to (1) the greater of $30
million of Secured Indebtedness or the sum of 60% of inventory plus 90% of
accounts receivable and (2) the greater of $10 million of other Indebtedness or
10% of Unison's consolidated net worth (in addition to Indebtedness outstanding
on October 31, 1996 after giving effect to the application of the proceeds from
the Senior Notes and refinancings of such Indebtedness) except when its Fixed
Charge Coverage Ratio after incurring the Indebtedness would be greater than 2
to 1 (2.25 after December 31, 1997). As of June 30, 1997, Unison had incurred
approximately $17,490,000 of such Secured and other Indebtedness. Unison's
ability over the near term to respond to unexpected obligations or revenue
shortfalls or to other risks and uncertainties is limited.
Unison is a holding company and has no material assets or operations other
than its investment in its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured and joint and several basis by
all of Unison's present subsidiaries and will be similarly guaranteed by any
future subsidiaries.
39
<PAGE> 44
The guarantees rank senior to all subordinated indebtedness and rank pari passu
in right of payment to all other indebtedness. As of June 30, 1997, the
aggregate outstanding principal amount of senior indebtedness of Unison and its
subsidiaries was approximately $154,957,000 (including the Senior Notes), of
which approximately $33,098,000 was secured indebtedness that effectively ranked
senior to the Senior Notes.
Resignations of Executive Officers and Dependence on Skilled
Personnel. Three of Unison's executive officers, including its Chief Executive
Officer and Chief Financial Officer, resigned in April 1997 and its Chief
Operating Officer resigned in October 1997. The Company hired a CEO in September
1997 and expects to name a CFO before the end of 1997. Approximately 30 other
personnel have also been laid off in an attempt to control overhead costs. In
addition, several facility administrators have recently resigned. Although the
resignations to date of senior managers is not expected to have a material
adverse impact on Unison's results of operations, the loss of certain other key
personnel could adversely affect Unison's efforts to rebuild its financial
health.
Pending Securities Litigation. Unison and certain of its current and
former directors and officers (among others) are named as defendants in several
purported class action lawsuits following Unison's announcement in March 1997
that the Company expected to restate its financial statements for the nine-month
period ended September 30, 1996. To date, seven such claims have been filed in
federal district court in Phoenix, Arizona. The purported class periods vary,
with the broadest such class period beginning December 18, 1995 (when Unison
commenced the IPO) and ending March 11, 1997 (when Unison announced the need for
a restatement). The complaints in these actions allege violations of Sections 10
and 20 of the Exchange Act and Rule 10b-5 thereunder in that the defendants
knew, or were reckless in not knowing, that Unison's results for the first three
quarters of 1996 were materially overstated, or misrepresented the capability of
Unison's internal accounting systems to reliably record and reflect its
financial condition. Amended complaints in four of these actions also allege
violations of Sections 11 and 15 of the Securities Act in that the registration
statement covering, and the prospectus used in connection with, the stock sold
in the IPO allegedly misleadingly touted Unison's "growth strategy" and ability
to control costs while failing to disclose inadequacies in its accounting
systems. The individual defendants named in some or all of these actions are
Jerry M. Walker (the Company's former Chief Executive Officer), Craig R. Clark
(the Company's former Chief Financial Officer), Paul J. Contris (the Company's
former Executive Vice President of Acquisitions and Development), Phillip R.
Rollins (the Company's former Chief Operating Officer) and Bruce H. Whitehead
(Chairman of the Board). On September 8, 1997 the Court consolidated the
aforesaid seven actions for all purposes.
In addition, an action has been filed in the Superior Court of the State of
California (County of Orange) against the Company and the aforesaid individuals,
as well as John T. Lynch, Jr. (a member of the Board of Directors), Trouver
Capital Partners, L.P. (a private investment banking firm of which Mr. Lynch is
a general partner), Cruttenden Roth Inc. and Wheat First Butcher Singer (the
latter two entities are investment banking firms that are named individually and
as representatives of a purported defendant underwriter class). The Orange
County action is purportedly filed on behalf of all persons who acquired Unison
stock in the IPO; it essentially alleges that, in connection with the IPO, the
defendants made positive statements about the Company's prospects for which
there was no basis, that accounts receivable were overstated, and that the
Company's statement of financial position as of September 30, 1995 was not
fairly presented.
Unison's bylaws require the Company to indemnify current and former
officers and directors to the extent permitted by Delaware law against
liabilities represented by the above described actions and related expenses. The
Company is also obligated, subject to certain conditions, to indemnify the
underwriters against such liabilities and expenses. The Company denies the
material allegations in these complaints and intends to defend the actions
vigorously. While there can be no assurances in such matters, Unison believes,
based on its analysis of the complaints and of its insurance coverage, that the
ultimate disposition of these matters will not adversely affect its liquidity.
Market Listing for Equity Securities and Access to Capital Markets. Unison
does not currently satisfy the minimum tangible net worth criteria for the
listing of its common stock on The Nasdaq Stock Market's National Market System
where the stock had traded since the IPO. On August 20, 1997, the Company was
40
<PAGE> 45
advised by Nasdaq of its decision to move the Company's securities to The Nasdaq
SmallCap Market, effective August 22, 1997, pursuant to a waiver to the $3.00
per share initial inclusion bid price requirement. The Company is unable to
determine what effect, if any, the movement of its stock to the SmallCap Market
will have on its ability to raise additional capital.
History of Losses and Accumulated Deficit. Unison began operations in
1992. Since then, except for a small net profit in the fourth quarter of 1995
(and the pooling effect of the Ampro Acquisition completed in October 1996), it
has reported net losses for every period, culminating in a loss of $23,438,000
for 1996. Unison's future profitability will depend upon many factors, including
its ability to reduce and control costs, its ability to integrate recently
acquired operations, occupancy levels, government regulation and reimbursement
policies, competition, its ability to attract and retain qualified personnel at
competitive rates, the outcome of pending litigation and general economic
conditions. While the Company has instituted revenue enhancement and cost
containment programs and continues to work at integrating recent acquisitions,
there can be no assurance that Unison will be profitable in the future.
Acquisition-Related Risks; Increases in Intangible Assets. A key element
of Unison's business strategy during 1995 and 1996 was to expand through the
leasing of new or existing long-term and specialty healthcare facilities and the
acquisition or development of ancillary healthcare businesses or services. The
acquisitions of BritWill, Signature, Sunbelt, RehabWest, and Ampro and the
formation of Quest were in pursuance of this strategy. Acquisitions are
inherently risky due to the possibility of unknown and unforeseen contingencies
affecting the new businesses and due to costs of integrating acquired operations
into the overall enterprise. These risks have impacted and may continue to
impact Unison's financial performance. For example, difficulties in integrating
acquired facilities within Unison's financial reporting and management
information systems were a substantial factor contributing to the need to
restate Unison's financial statements for the nine months ended September 30,
1996. Those system difficulties then contributed to the operating inefficiencies
that led to the unexpected losses for that period and subsequent periods.
Although Unison has substantially curtailed its acquisition strategy, its
corporate overhead increased during the second half of 1996 in the expectation
that the number and size of acquisitions might continue to grow. This expansion
has made it difficult to reduce costs in response to liquidity challenges.
Unison's acquisitions have also resulted in material increases in its intangible
assets. At December 31, 1996, the aggregate amount of Unison's net intangible
assets, including lease operating rights, goodwill, deferred financing costs and
other intangibles, was $142,212,000. This balance represents 61.6% of Unison
total assets at December 31, 1996 and approximately 12.2 times its stockholders'
equity. Amortization expense related to intangible assets is expected to amount
to approximately $6,746,000 in 1997. In addition, should events occur that
result in impairment of the Company's long-lived assets, such as unexpected
increases in operating losses, the Company may in the future need to record a
write-down of its lease operating rights or goodwill.
Rate Increases on Senior Notes. Pursuant to the Senior Note Registration
Rights Agreement, the interest rate payable on Unison's outstanding Senior Notes
has temporarily increased from 12.25% to 13.50%, and it is subject to further
increases at 90 day intervals (to a maximum rate of 14.25%) until a registration
statement for the Senior Notes (or for Exchange Notes on the same terms) is
filed and becomes effective with the Securities and Exchange Commission (the
"Commission"). Unison has delayed filing the required registration statement
while it completed work on its financial statements for 1996. Whereas the
Company made the filing on July 3, 1997, it has not yet become effective.
Accordingly, further delays in completing the required registration, with
corresponding additional interest expense on the Senior Notes, are likely.
Loan and Lease Covenant Violations. Although Unison is current on its
payment obligations on its outstanding loans and facilities leases, it is not in
compliance with certain covenants under mortgage loans with one lender for six
of its health care facilities and with the lease agreements for 20 facilities
leased from Omega and BritWill Texas. A waiver from Omega for these financial
covenant violations expired April 12, 1997, and the Company and Omega are
negotiating the terms of revised covenants for the future. There can be no
assurance, however, that such negotiations will be successfully concluded. An
acceleration of Unison's obligations under any of its financial instruments or
an actionable default under any of its facilities leases could have a material
adverse impact on Unison.
41
<PAGE> 46
Reliance on Reimbursement from Government Sources. Unison is reimbursed
under the Medicare program for its actual allowable direct and indirect costs of
services based on the submission of an annual cost report. Each facility is also
subject to limits on reimbursement for routine costs. Exceptions to these limits
are available for, among other things, the provision of atypical services. Due
in part to the provision of subacute services, Unison's costs for care delivered
to Medicare patients in certain of its long-term and specialty healthcare
facilities have exceeded the routine costs limits in the aggregate amounts of
$1,800,000 and $2,260,000 in 1995 and 1996, respectively. The Company has filed
exception requests with HCFA with respect to 1995 and has been granted interim
routine cost limit exceptions in each of 15 responses received thus far.
Exception requests for 1996 have not yet been filed. Unison's failure to recover
excess costs or to obtain such exceptions could adversely affect Unison's
results of operations.
HCFA recently proposed rules applying salary equivalency guidelines to
certain speech and occupational therapy services. The proposed rates for these
services are lower than the Medicare reimbursement rates currently received by
Unison for these services. For the year ended December 31, 1996, Unison's
revenues and direct contribution from speech and occupational therapy services
amounted to $14,917,000 and $5,725,000, respectively. Final rules are expected
to be promulgated by the end of 1997. The Company is taking steps which it
believes will help mitigate any adverse economic impact of these changes. There
can be no assurance that future legislation, regulatory changes or
interpretations of the regulations will not have a material adverse effect on
the future operations of the Company.
In 1994, the state of Indiana adopted Rule 14, which changed Indiana's
Medicaid reimbursement system from a true prospective payment system to a
modified cost-based system. The new system has resulted in an increase in annual
reimbursement rates of approximately 6%; however, Rule 14 also precludes
facility operators from billing separately for certain ancillary therapy
services and non-routine medical supplies. The Company understands that Rule 14
reduced total Medicaid nursing facility payments in the initial year of adoption
by $10 million statewide out of total prior year expenses of $720 million. The
implementation of Rule 14 has not had a material adverse impact on Unison's
results of operations. See "Business -- Government Regulation."
ACQUISITIONS AND DISPOSITIONS
On October 31, 1996, Unison acquired by merger Signature Health Care
Corporation and four affiliated companies (collectively, the "Signature
Mergers") for an initial aggregate purchase price of approximately $50,653,000
comprised of 1,509,434 shares of Unison Common Stock with a market value at
October 31, 1996 of $12,453,000, approximately $37,054,000 in cash and
promissory notes totaling approximately $1,146,000. In addition, in accordance
with an adjustment provision of the Signature merger agreements relating to
stockholders' equity, in March 1997 the former shareholders of Signature
received additional consideration of $2,511,000, paid in convertible promissory
notes ($1,827,000) and 238,052 shares of Unison common stock ($684,000 valued as
of March 27, 1997). Signature operated 11 long-term care facilities and two
assisted living facilities in Arizona and metropolitan Denver, Colorado. Unison
also acquired RehabWest (a related rehabilitation company) for approximately
$5,350,000 in cash. The Signature Mergers and the acquisition of RehabWest,
referred to collectively as the "Signature Acquisition," were accounted for as a
purchase.
On October 31, 1996, Unison also acquired American Professional Holding,
Inc. and Memphis Clinical Laboratory, Inc. (together, "Ampro") (the "Ampro
Acquisition") in a pooling of interests transaction. The consideration paid for
Ampro amounted to $4,942,000 which included: (a) cash of approximately $237,000;
(b) 540,000 shares of Unison Common Stock with a market value at October 31,
1996 of $4,455,000; and (c) a promissory note in the amount of $250,000 which
has since been repaid. Ampro operates medical laboratories in Texas, Missouri
and Tennessee which, at June 30, 1997, provided testing services for 275 nursing
homes and other healthcare facilities. Summarized results of operations of Ampro
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues............................. $6,000,000 $7,203,000 $6,547,000
Net income (loss).................... 420,000 143,000 (565,000)
</TABLE>
42
<PAGE> 47
Other acquisitions that have closed within the past three years include
BritWill (1995), Sunbelt (1996) and several smaller facilities or enterprises.
See "Business -- Acquisitions."
On September 30, 1996, Unison announced a disposition plan designed to
improve its long-term financial strength and operating performance (the
"Dispositions"). The plan includes the disposition of eight nursing facilities
(the "Disposition Facilities"), two of which are closed, which do not meet
Unison's operational or financial criteria due to inadequate Medicaid
reimbursement, low occupancy rates or adverse local market conditions. Unison
also recorded a nonrecurring charge of $3,865,000 in the quarter ended September
30, 1996 to record impairment of long-lived assets and to establish reserves for
costs to dispose of the Disposition Facilities. Four of these facilities were
subleased to an unrelated party effective March 1, 1997 and the other four are
held for disposition. Results of operations of the Disposition Facilities were
as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1995 1996 1996 1997
------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.............................................. $16,269 $14,539 $7,970 $4,618
Net loss before taxes and impairment losses........... 90 2,320 753 618
</TABLE>
RESULTS OF OPERATIONS
UNISON HISTORICAL
The following table summarizes selected operating statistics. Pro forma
data give effect to the Dispositions as if all of the Disposition Facilities had
been disposed of on December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------ PRO FORMA ---------------
1994 1995 1996 1996 1996 1997
---- ----- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Leased/Owned Facilities:
Number of facilities......... 11 42 59 53 42 56
Number of licensed beds:
Long-term care............ 631 3,872 5,145 4,508 3,785 4,770
Assisted and independent
living.................. 104 112 320 320 136 315
Managed Facilities:
Number of facilities......... 9 8 3 3 6 2
Number of licensed beds...... 990 874 310 310 670 160
Institutional Pharmacies:
Number of outlets............ -- 1 2 2 2 2
Nonaffiliated facilities
served.................... -- 17 42 42 32 51
Therapy Services:
Nonaffiliated entities
served.................... -- -- 55 55 44 71
Laboratory Services:
Nonaffiliated entities
served.................... 225 260 295 295 295 275
</TABLE>
43
<PAGE> 48
The following table identifies Unison's sources of revenues. Pro forma data
give effect to (i) the Dispositions and (ii) acquisitions completed after
January 1, 1996 as if such transactions had occurred on January 1, 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- PRO FORMA ---------------
1994 1995 1996 1996 1996 1997
----- ----- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Percentage of total revenues:
Long-term care................ 67.4% 87.6% 81.0% 84.1% 84.9% 76.7%
Therapy services.............. -- -- 8.9 7.5 4.8 14.7
Pharmacies services........... -- 1.0 4.6 3.8 4.0 4.9
Laboratory services........... 32.6 10.5 4.4 3.6 5.2 2.9
Medicare Part B billing and
supply..................... -- 0.9 1.1 1.0 1.1 0.8
----- ----- ----- ----- ----- -----
Total...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
Unison's revenues fluctuate from facility to facility based on various
factors, including total capacity, occupancy rates, reimbursement systems and
rates among the payor categories, payor mix and the scope and utilization of the
Company's ancillary services. Medicare patients generate the highest revenue per
patient day, although profitability is not always increased due to the
additional costs associated with the higher level of care required by such
patients. In general, private pay sources are more profitable to the Company
than governmental reimbursement sources. Unison generally derives a higher
profit margin from ancillary services than from basic nursing services.
Data for nursing center operations with respect to sources of net patient
revenues by payor type are set forth below (long-term care only). Pro forma data
give effect to (i) the Dispositions and (ii) acquisitions completed after
January 1, 1996, as if such transactions had occurred on January 1, 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- PRO FORMA ---------------
1994 1995 1996 1996 1996 1997
----- ----- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Medicare........................ 9.1% 26.9% 29.5% 30.2% 32.4% 32.9%
Private and other............... 32.4 17.2 17.0 18.1 15.8 15.8
----- ----- ----- ----- ----- -----
Quality Mix................... 41.5 44.1 46.5 48.3 48.2 48.7
Medicaid........................ 58.5 55.9 53.5 51.7 51.8 51.3
----- ----- ----- ----- ----- -----
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1997, Unison recorded a net loss of
$7,015,000 or $1.11 per share compared to net income of $1,519,000 or $.33 per
share of the 1996 period. Loss before income taxes was $10,348,000 compared to
pre-tax income of $2,569,000 for the 1996 period. The losses for the six months
ended June 30, 1997 are primarily attributable to: (i) fixed costs (rent,
interest, depreciation, and amortization) increasing to 20.1% of revenues from
13.7% in the 1996 period as a result of financing and acquisition activities;
(ii) corporate overhead costs (excluding corporate fixed costs) amounting to
8.3% of total revenues for the six months ended June 30, 1997 compared to 5.3%
for the 1996 period, due in part to the costs associated with the accounting and
information systems conversion and relocation to new office space; (iii) a
$600,000 charge in the first quarter of 1997 resulting from increasing the
estimated liability recorded for settlement of certain litigation with a therapy
services provider; and (iv) operating losses of the four long-term care
facilities disposed of on March 1, 1997 amounting to $261,000 for the two months
ended February 28, 1997. Pretax earnings from the Company's therapy, pharmacy
and laboratory subsidiaries aggregated approximately $4,734,000 for the six
months ended June 30, 1997. For the nursing home operations, earnings before
interest, taxes, depreciation, amortization, rent and allocated overhead
amounted to 17.0% of revenues
44
<PAGE> 49
of $86,522,000 for the six months ended June 30, 1997 compared to 20.8% of
revenues of $57,415,000 for the 1996 period.
Total operating revenues increased $44,544,000 or 65.0% to $113,103,000 in
the six months ended June 30, 1997 from $68,559,000 in the comparable 1996
period. The increase is due to revenues from patient services which increased
from $67,004,000 in the 1996 period to $109,532,000 in the current period.
Patient days increased from 557,965, or 76.8% average occupancy, in the 1996
period to 767,449, or 81.4% average occupancy, in 1997. The increase in patient
days and net patient service revenues is primarily attributable to (i) the
increase in the number of long-term care facilities operated which increased
revenues by approximately $26,040,000 and patient days by approximately 198,000,
(ii) the increase in the services provided by institutional pharmacies and
therapy companies, and progress in providing ancillary products and services to
patients of Unison facilities and unrelated facilities which increased revenues
by approximately $15,900,000; and (iii) an increase in Unison's quality mix to
48.7% in the 1997 period quarter compared to 48.2% in the prior year period
which contributed to an increase in the revenue per patient day from $104.31 for
the six months ended June 30, 1996 to $112.89 for the 1997 period. Theses
increases were offset by a reduction in patient revenues of approximately
$3,000,000 due to the disposition of four long-term care facilities on March 1,
1997. Other operating revenues increased to $3,571,000 in the 1997 period from
$1,555,000 in the prior year period due primarily to ancillary company
management fees of $3,113,000, offset by a decrease in managed facilities from
six at June 30, 1996 to two at June 30, 1997.
Wages and related expense increased $25,583,000 or 75.3% from $33,961,000
in the 1996 period to $59,544,000 in the 1997 period and as a percentage of
revenues from 49.5% in 1996 to 52.6% in 1997. The dollar increase is due
primarily to the increase in the number of facilities operated, an increase in
the services of the ancillary companies and an increase in corporate overhead
due to Unison's acquisition program during 1996 and its accounting and
information system conversions. The percentage increase is due primarily to the
acquisition of therapy companies which have an inherently higher percentage of
salaries to revenues than long-term care providers (64.2% for the 1997 period)
and an increase in corporate and regional overhead.
Other operating expenses increased $18,536,000 or 81.8% from $22,665,000 in
the 1996 period to $41,201,000 in the 1997 period due primarily to an increase
in the number of facilities operated, an increase in the services of the
ancillary companies and increases in corporate overhead. Other operating
expenses as a percentage of revenues was 36.4% in the 1997 period compared to
33.1% in the 1996 period due primarily to an increase in corporate and regional
overhead and an increase in the products provided by the pharmacy and laboratory
companies which have an inherently higher percentage of operating expenses to
revenues than long-term care providers.
Rent expense increased $1,682,000 or 25.1% from $6,704,000 in the first six
months of 1996 to $8,386,000 in the 1997 period but decreased as a percentage of
revenues from 9.8% in the 1996 period to 7.4% in the current period. The dollar
increase is due primarily to the increase in the number of leased facilities
operated. The percentage decrease is due to a higher percentage of owned
facilities to total facilities in 1997 than in 1996 and due to the increased
operations of therapy, laboratory, and pharmacy companies, which in the
aggregate have rent expense of less than 1% of revenues in the 1997 period.
Interest expense amounted to $9,594,000 in the current period compared to
$1,508,000 in the 1996 period and increased as a percentage of revenues from
2.2% in the 1996 period to 8.5% in the 1997 period. The increase is primarily
the result of debt incurred and assumed in connection with acquisitions,
including the $100,000,000 of Senior Notes issued on October 31, 1996, as well
as increases in borrowings for working capital. See "-- Liquidity and Capital
Resources."
Depreciation and amortization expense increased $3,574,000 from $1,152,000
in the first six months of 1996 to $4,726,000 in the 1997 period and increased
as a percentage of revenues from 1.7% in the 1996 period quarter to 4.2% in the
1997 period. The increase is due primarily to the increase in goodwill and lease
operating rights associated with acquisitions and an increase in fixed assets
resulting from capital expenditures and ownership interests in six facilities
acquired with the acquisition of Signature on October 31, 1996.
45
<PAGE> 50
Unison recorded an income tax benefit for the first six months of 1997
amounting to $3,333,000. The effective tax rate of 32.2% is lower than the
statutory federal income tax rate due primarily to: (i) amortization of
intangible assets and other expenses which are not deductible for tax purposes;
(ii) taxable income of certain subsidiaries which are not consolidated for tax
purposes; and (iii) the valuation allowance established against deferred tax
assets. Unison recorded a tax provision in the 1996 period of $1,050,000, or
40.9% of pretax income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Unison recorded a net loss of $23,438,000 in 1996 and net income of
$117,000 in 1995. Loss before taxes amounted to $31,794,000 in 1996 compared to
pretax income in 1995 of $249,000. The pretax loss in 1996 is primarily
attributable to: (i) provisions for doubtful accounts related to management fees
and patient and other receivables in the aggregate amount of $2,713,000; (ii) a
provision for impairment of long-lived assets and the Dispositions amounting to
$3,865,000; (iii) gross receipt taxes, interest, and various penalties of
approximately $3,565,000; (iv) accrued accounting, legal and other professional
fees relating to 1996 matters of $1,300,000; (v) loan transaction costs and fees
for debt which has been paid off and acquisition costs of $1,762,000; (vi)
increased corporate salary costs from $2,838,000 in 1995 to $5,340,000 in 1996;
(vii) a litigation settlement amounting to $725,000; and (viii) losses from
nursing home operations of approximately $10,882,000, of which $3,215,000 were
from the Disposition Facilities. The majority of the charges to income which
resulted in the net loss were identified during the course of the 1996 audit
examination and were also included in the restated results of operations for the
nine months ended September 30, 1996. The losses from nursing home operations in
1996 were due primarily to an average occupancy rate of 77.0% and controllable
costs which exceeded budgets. In 1997, the Company implemented revenue
enhancement and expense control initiatives which are designed to improve the
operating results of its nursing homes. See " -- Overview".
Revenues. Revenues were $148,674,000 in 1996 compared to $68,488,000 in
1995. The $80,186,000 increase is due primarily to revenues from patient
services which increased from $64,947,000 in 1995 to $146,379,000 in 1996.
Patient days increased from 613,000 in 1995 to 1,235,000 in 1996. Of the
increase in net patient service revenues, (i) approximately $54,681,000 is
attributable to the increase in the number of facilities operated, including a
full year of operations of the 28 facilities acquired in the BritWill
Acquisition on August 10, 1995 and 13 facilities with the Signature Acquisition
on October 31, 1996; (ii) approximately $18,741,000 is due to the acquisitions
of institutional pharmacies and therapy companies, and progress in providing
ancillary products and services to patients of Unison facilities and unrelated
facilities; and (iii) the balance is due to the increases in the Company's
quality mix and census. Other operating revenues decreased to $2,295,000 in 1996
from $3,541,000 in 1995 due primarily to the decrease in managed facilities from
eight at December 31, 1995 to three at December 31, 1996.
Wages and Related. Wages and related expense increased 144.8% from
$35,047,000 in 1995 to $85,789,000 in 1996 and as a percentage of revenues from
51.2% in 1995 to 57.7% in 1996. The dollar increase is due primarily to the
increase in the number of leased facilities operated and an increase in
corporate salaries due to Unison's acquisition program during 1996 and
accounting and information system conversions. The percentage increase is due
primarily to the acquisition of therapy companies which have an inherently
higher percentage of salaries to revenues than long-term care providers and an
increase in corporate and regional overhead.
Other Operating. Other operating expenses increased 169.5% from
$24,032,000 in 1995 to $64,771,000 in 1996, or 43.6% of revenues in 1996
compared to 35.1% in 1995. The dollar and percentage increases are due primarily
to (i) an increase in the number of leased facilities operated; (ii) an increase
in the provision for doubtful accounts related to management fees and other
accounts receivable in the aggregate amount of $2,713,000; (iii) a litigation
settlement amounting to $725,000; (iv) gross receipt taxes, interest, and
various penalties of approximately $3,565,000; and (v) an increase in corporate
operating expenses in 1996, due in part to loan transaction costs and fees for
debt which has been paid off and professional fees associated with litigation
and the restatement of financial results for the nine months ended September 30,
1996. The provision for doubtful accounts for 1996 relates to patient accounts
receivable, management fees receivable and other miscellaneous receivables. The
provision for doubtful patient accounts receivable was determined by
46
<PAGE> 51
analyzing the aged accounts receivable detail by facility and payor type and the
collectability of each account based on the facts and circumstances of each
category of receivable. The provision for doubtful accounts related to
management fees and other receivables was determined by analyzing individual
account balances for collectability including a review of subsequent
collections. The majority of these receivables were outstanding in excess of one
year.
Unison's Indiana and Washington facilities are subject to a gross receipts
tax based on a percentage of each facility's gross revenues. In late 1996, the
Company determined that gross receipts taxes had not been paid to the state of
Indiana related to facilities acquired from BritWill for fiscal years 1993
through 1995. Accordingly, the Company recorded a liability for these taxes
including estimated interest and penalties.
Rent Expense. Rent expense increased 134.6% from $6,673,000 in 1995 to
$15,658,000 in 1996. The increase is due primarily to the increase in the number
of leased facilities operated. Rent expense as a percentage of revenues
increased to 10.5% in 1996 from 9.7% in 1995.
Interest Expense. Interest expense amounted to $5,824,000 in 1996 compared
to $1,176,000 in 1995. The increase is primarily the result of debt incurred and
assumed in connection with acquisitions, including the $100,000,000 of Senior
Notes issued on October 31, 1996, as well as increases in borrowings for working
capital. See "-- Liquidity and Capital Resources." Interest expense as a
percentage of revenues increased to 3.9% in 1996 from 1.7% in 1995.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1,311,000 in 1995 to $4,561,000 in 1996. The increase is due
primarily to the increase in goodwill and lease operating rights associated with
acquisitions and an increase in fixed assets resulting from capital expenditures
and ownership interests in six facilities acquired in the Signature Acquisition.
Depreciation and amortization expense as a percentage of revenues was 3.1% in
1996 and 1.9% in 1995.
Impairment Losses. In 1996, Unison incurred operating losses and
shortfalls of cash from operations. The Company also announced the planned
disposition of the eight Disposition Facilities. Of these Disposition
Facilities, one was closed in June 1996 and three others, which had incurred
operating losses since the Company had acquired them in August 1995, were
disposed of in March 1997. These events, as well as a history of operating
losses at certain facilities, raised the possibility of continuing losses
associated with the Company's income producing assets. Consequently, Unison
evaluated its long-lived assets including property and equipment, goodwill,
lease operating rights and other intangible assets for impairment in accordance
with SFAS No. 121. Unison estimated the undiscounted net cash flows from all
business units and determined that the carrying value of certain of Unison's
long-lived assets exceeded such undiscounted cash flows. Accordingly, Unison
then compared the fair value of the assets based on the present value of the
estimated future cash flows for the facilities (which were estimated based on
the remaining weighted average useful lives of the assets, earnings history, and
a discount rate commensurate with the risks involved and market conditions and
assumptions reflecting internal operating plans and strategies) with the
carrying value. Unison determined that the fair value of certain assets was less
than the carrying value and, accordingly, recorded a provision for impairment
losses in the amount of $3,865,000. Included in this amount is the estimated
cost to sublease and exit from the Disposition Facilities.
Income Tax Expense (Benefit). Unison recorded an income tax credit for
1996 amounting to $8,356,000, or 26.3% of pretax loss of $31,794,000. The
effective tax rate is lower than the statutory federal income tax rate due
primarily to (i) amortization of intangible assets and other expenses which are
not deductible for tax; (ii) taxable income of certain subsidiaries which are
not consolidated for tax; and (iii) the valuation allowance established against
deferred tax assets. The Company recorded a valuation allowance at December 31,
1996 amounting to $1,528,000 against tax benefits arising from net operating
losses and depreciation of certain of the Company's subsidiaries. The valuation
allowance was established due to the uncertainty of the ultimate realization of
these tax benefits based upon past performance and expiration dates. The Company
will recognize these benefits only as reassessment demonstrates that they are
realizable. Unison recorded a tax provision in 1995 of $132,000, or 53.0% of
pretax income.
47
<PAGE> 52
The effective tax rate for 1995 is higher than the statutory federal tax
rate due primarily to amortization of intangible assets and other nondeductible
expenses.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased from $18,406,000 in 1994 to $68,488,000 in
1995. The increase is primarily attributable to revenues from patient services
which increased from $17,070,000 in 1994 to $64,947,000 in 1995. Patient days
increased from 140,000 in 1994 to 613,000 in 1995. Of this growth in patient
revenues and census, approximately 90% is attributable to acquisitions, with the
remainder attributable primarily to the increase in quality mix and an increase
in average census of facilities owned throughout the period. Unison operated 11
leased nursing and assisted living facilities at December 31, 1994 compared to
42 leased nursing and assisted living facilities at December 31, 1995. The
revenues related to the 28 facilities acquired from BritWill are included in
Unison's results of operations for periods subsequent to July 31, 1995.
Management fees and other revenue increased from $1,336,000 in 1994 to
$3,541,000 in 1995 as a result of an increase in the number of managed
facilities from nine facilities in 1994 to 12 facilities during 1995 (with eight
facilities under such management agreements at December 31, 1995).
Wages and Related. Wages and related expense increased from $9,593,000 in
1994 to $35,047,000 in 1995. The increase in wages and related expense is
primarily attributable to the increase in the number of leased facilities
operated. Wages and related expense as a percent of revenues decreased from
52.1% in 1994 to 51.2% in 1995 as a result of the higher proportion of revenues
from certain ancillary businesses whose operations are less labor-intensive than
those of the nursing facilities.
Other Operating. Other operating expenses increased from $6,462,000 in
1994 to $24,032,000 in 1995. The increase is attributable primarily to an
increase in the number of facilities operated. Other operating expenses as a
percent of revenues remained constant at 35.1% in 1994 and 1995.
Rent Expense. Rent expense increased from $1,406,000 in 1994 to $6,673,000
in 1995. The increase is primarily a result of the acquisition of 4 leased
facilities during the first seven months of 1995 and an additional 28 facilities
from the BritWill Acquisition for the last five months of the year. Rent expense
as a percent of patient revenues increased from 7.6% in 1994 to 9.7% in 1995.
Interest Expense. Interest expense increased from $147,000 in 1994 to
$1,176,000 in 1995. The increase is primarily attributable to the agreement
entered into in April 1995 to sell the Company's accounts receivable and
additional indebtedness assumed in connection with the BritWill Acquisition.
Interest expense as a percent of revenues increased from 0.8% in 1994 to 1.7% in
1995.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased from $286,000 in 1994 to $1,311,000 in 1995. The increase is
due primarily to the amortization of goodwill and lease operating rights
attributable to the increase in leased facilities, related equipment purchases
and leasehold improvements. Depreciation and amortization expense as a percent
of revenues increased from 1.6% in 1994 to 1.9% in 1995.
BRITWILL HISTORICAL
Overview
Separate financial statements of an acquired business ordinarily need not
be presented once the operating results of the acquired business have been
reflected in the audited financial statements of the acquiring company for a
complete fiscal year unless the acquired business is of such significance to the
registrant that omission of such financial statements would materially impair an
investor's ability to understand the historical results of the acquiring
company. At the date of acquisition (August 10, 1995), BritWill was of such
significance to Unison as to be considered a predecessor company. Accordingly,
the following discussion of BritWill's historical results of operations is
provided on a comparative basis for the year ended December 31, 1994 and 1993
and the seven months ended July 31, 1995 and 1994.
48
<PAGE> 53
BritWill's long-term care facilities derived 28.6% of resident care revenue
from Medicare and ancillary services for the seven months ended July 31, 1995
compared to 18.8% in the comparable 1994 period. For the year ended December 31,
1994, 17.6% of resident care revenue was derived from Medicare and ancillary
services compared with 5.0% for the year ended December 31, 1993.
Seven Months Ended July 31, 1995 Compared to Seven Months Ended July 31, 1994
Revenues. Revenues increased from $29.9 million in 1994 to $38.9 million
in 1995, an increase of 30.1%. These increases are primarily attributable to the
expansion of Medicare services; there were 15 facilities in the Medicare program
in the first seven months of 1994 compared to 24 in 1995. Medicare and ancillary
revenue were 7.0% and 7.0%, respectively, of patient revenues in 1994 compared
to 23.0% and 6.0%, respectively, of patient revenues for 1995. Management fee
revenues decreased by $120,000 or 75% due to the conversion of 2 facilities from
management contracts to leases in November of 1994. However, this decrease was
offset by an additional $3.2 million in patient revenues.
Wages and Related Expense. Wages and related expense increased from $17.0
million in 1994 to $23.3 million in 1995, an increase of 37.1%. Salary and wages
increased 18.4%. New leases contributed to $1.7 million of the wage increase.
The remaining increase is attributable to increased staffing necessary to
support the Company's increased Medicare services.
Lease Expense. Lease expense increased from $4.7 million in 1994 to $5.2
million in 1995, an increase of 10.6% due to the addition of the 3 facilities in
the fourth quarter of 1994.
General and Administrative. General and administrative expenses increased
from $3.4 million in 1994 to $3.9 million in 1995, an increase of 14.7%. This
increase is primarily attributable to new leases. As a percentage of revenues,
general and administrative expenses declined from 11.2% of revenue in 1994 to
10.0% of revenue in 1995.
Depreciation and Amortization. Depreciation and amortization increased
from $487,000 in 1994 to $591,000 in 1995, an increase of 21.4%. This increase
is attributable to additional equipment and leasehold improvements at BritWill's
facilities.
Interest Expense. Interest expense increased from $571,000 in 1994 to
$906,000 in 1995, an increase of 58.7%. This increase was primarily due to
additional borrowings under the revolving credit facility.
Income (Loss) before Income Taxes and Net Income. Income before income
taxes increased from a loss of $1.9 million for the seven months ended July 31,
1994 to income of $43,880 for the seven months ended July 31, 1995. This was
primarily attributable to an increase in acuity of patients and an increase in
Medicare patients in 1995; thus, ancillary utilization increased resulting in
substantially improved performance. There was no tax benefit provided for the
1994 loss since a valuation reserve was established for such income tax
benefits. Net income increased from a net loss of $1.9 million for the seven
months ended July 31, 1994 to net income of $13,380 for the seven months ended
July 31, 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased from $32.7 million in 1993 to $54.4 million
in 1994, an increase of 66.4%, primarily attributable to the acquisition of nine
facility leases in Texas, primarily in the fourth quarter of 1993. In addition,
in the latter half of 1994, there was a significant increase in Medicare patient
days as there were more Medicare certified facilities. Management fee revenues
decreased 28.1% due to the conversion of two facilities from management
contracts to leases in June 1994 and two additional facilities in November. The
increase in patient census was diluted by a modification in Rule 14 under the
Indiana Medicaid reimbursement program. The effect of this ruling decreased
revenues by $1.2 million.
Operating Expenses. Operating expenses increased from $23.5 million in
1993 to $40.0 million in 1994, an increase of 70.2%. Facility salaries and wages
increased 68.2%, attributable to new leases in Texas. Ancillary expenses
increased $1.7 million due to the increase in the number of facilities
participating in the Medicare program.
Lease Expense. Lease expense increased from $5.1 million in 1993 to $8.3
million in 1994, an increase of 62.7%, due to the new leases.
49
<PAGE> 54
General and Administrative. General and administrative expenses increased
from $3.7 million in 1993 to $6.3 million in 1994, an increase of 70.3%. This
increase is primarily attributable to new leases and additional resources
dedicated to expanded Medicare operations in 1994.
Depreciation and Amortization. Depreciation and amortization increased
from $704,000 in 1993 to $987,000 in 1994, an increase of 40.2%. This is
primarily attributable to the amortization of leasehold rights recorded as part
of the acquisition of five of the Texas facilities in December of 1994.
Interest Expense. Interest expense increased from $385,000 in 1993 to
$872,000 in 1994, an increase of 126.5%, primarily due to the payment of
interest on subordinated long-term debt.
Income/Loss before Income Taxes and Net Loss. Loss before income taxes
increased from $542,155 for the year ended December 31, 1993 to $1.9 million for
the year ended December 31, 1994. This was primarily attributable to an increase
in supplies expense, principally ancillary costs, in 1994 which were not
billable to Medicaid. There was no tax benefit provided for the losses since a
valuation reserve was established for such income tax benefit. Net loss
increased from $593,905 in 1993 to $2.0 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Unison had $17,409,000 in cash and cash equivalents
compared to $6,169,000 at December 31, 1995. The Company had a working capital
deficit of $13,955,000 at December 31, 1996 compared to a working capital
deficit at December 31, 1995 amounting to $927,000. The working capital deficit
shown at December 31, 1996 is primarily the result of current maturities of
notes and debt amounting to $33,915,000. Of this amount, approximately
$12,545,000 was repaid in January 1997 with proceeds from the Senior Notes and
$19,622,000 is classified as a current liability because Unison is not in
compliance with certain financial covenants; however, although the financial
covenants have not yet been cured, management has no reason to believe that this
debt will be accelerated and paid off in 1997. At June 30, 1997, Unison had cash
and cash equivalents in the amount of $2,413,000 and a working capital deficit
of $18,985,000. Current maturities of notes and debt at June 30, 1997 amounted
to $28,888,000, of which $19,134,000 is classified as current due to the
noncompliance with financial covenants.
Cash used in operations in the year ended December 31, 1996 amounted to
$23,658,000 compared to $932,000 in 1995 and $43,000 in 1994. The increase is
due primarily to losses from operations for the various reasons described above
in the comparison of 1996 to 1995 and a net increase in accounts receivable of
$5,310,000, partially offset by an increase in accounts payable and accrued
expenses of $2,454,000 and a decrease in prepaid expenses of $825,000. Cash used
in operations for the six months ended June 30, 1997 amounted to $5,872,000, due
primarily to the net loss of $7,016,000 net of noncash items of $1,850,000.
Net accounts receivable increased 56.1%, or $10,284,000, to $28,608,000 as
of December 31, 1996 from $18,324,000 at December 31, 1995. Of this increase,
$13,522,000 is primarily attributable to accounts receivable of operations
acquired subsequent to December 31, 1995 offset by the increase in the allowance
for doubtful accounts. At June 30, 1997, net accounts receivable amounted to
$34,818,000. The increase from December 31, 1996 is due primarily to collection
issues resulting from changes in Medicare intermediaries, one facility recently
certified to participate in the Medicare program and turnover in the facility
business office and field accounting staffs who are primarily responsible for
the collection of accounts receivable. Days outstanding in accounts receivable
for the long-term care facilities increased from 38 days at December 31, 1996 to
43 days at June 30, 1997. The Company is actively monitoring the collection of
account receivable and does not believe that these events will affect the
ultimate collectability of these receivables.
The allowance for doubtful accounts increased as a percentage of
receivables from 4.1% at December 31, 1995 to 11.7% at December 31, 1996. This
increase is the result of the adjustments described in "-- Results of
Operations" as well as the higher proportion of bad debt reserves recorded by
acquired companies. The allowance for doubtful accounts decreased as a
percentage of receivables to 9.7% at June 30, 1997. While the Company believes
that the allowance is adequate, if the current accounts receivable increase
trend continues, the provision for bad debts will increase in future periods.
The Company anticipates that its allowance for doubtful accounts will fluctuate
in the future and will depend, in large part, on the mix of revenues as well as
the timing of payments by private and third-party payors.
50
<PAGE> 55
Accrued expenses increased 132%, or $12,199,000, to $21,437,000 as of
December 31, 1996 from $9,238,000 at December 31, 1995 primarily as a result of
(i) accrued expenses of companies acquired in 1996 amounting to $6,776,000; (ii)
accrued gross receipts taxes, interest and various penalties amounting to
$3,565,000; (iii) accrued interest in the amount of $2,871,000, primarily
related to the Senior Notes; and (iv) a liability in the amount of $2,511,000
for additional purchase consideration paid in March 1997 to the former owners of
Signature in accordance with an equity adjustment provision of the Signature
merger agreements. Accrued expenses at June 30, 1997 amounted to $17,927,000.
Net cash used in investing activities amounted to $48,723,000 in 1996
compared to $3,679,000 in 1995 and $1,630,000 in 1994. In 1996, capital
expenditures amounted to $3,587,000 compared to $1,333,000 in 1995 and $995,000
in 1994. Capital expenditures of approximately $2,144,000 are budgeted for 1997
for routine replacements and refurbishment of facilities, which is anticipated
to be funded from operating cash flows and borrowings under lines of credit.
Expenditures for acquisitions, net of cash acquired, amounted to $41,225,000 in
1996, $40,066,000 of which relates to the Signature Acquisition, compared to
$677,000 in 1995 for the BritWill Acquisition and $300,000 in 1994. Increases in
intangible and other assets amounted to $2,707,000 in 1996, $1,397,000 in 1995
and $155,000 in 1994. Net cash used in investing activities for the six months
ended June 30, 1997 amounted to $3,084,000. Capital expenditures amounted to
$1,621,000 and expenditures for acquisitions, net of cash acquired, amounted to
$592,000.
Net cash provided by financing activities amounted to $83,621,000 in 1996
compared to $10,474,000 in 1995 and $1,795,000 in 1994. At December 31, 1996,
Unison had $157,138,000 in total debt (93.1% of total capitalization) compared
to $26,737,000 (56.1% of total capitalization) at December 31, 1995. For the six
months ended June 30, 1997, net cash was used in financing activities in the
amount of $6,040,000. At June 30, 1997, Unison had $157,098,000 in total debt,
which was 96.2% of total capitalization.
On October 31, 1996, Unison completed the private placement of $100,000,000
of the Senior Notes. The net proceeds to Unison amounting to $94,550,000 were
used to complete the Signature Acquisition and the Ampro Acquisition and prepay
certain debt and contingent obligations as described below. Excess proceeds of
approximately $15,500,000 were used for acquisitions and working capital. The
stated interest rate of 12 1/4% per annum is subject to temporary increase if
the Senior Notes (or Exchange Notes with the same terms) are not registered with
the Commission within specified time periods. As of December 31, 1996, the
interest rate on the Senior Notes was 12.75% and as of September 12, 1997 the
interest rate was 13.50%. The interest rate is subject to further increases of
0.25% every 90 days thereafter (up to a maximum rate of 14 1/4%) until such
registration becomes effective.
In January 1997, Unison repaid with proceeds from the Senior Notes the
$8,000,000 subordinated note payable to the former BritWill shareholders (the
"Subordinated Note") and $1,750,000 of the contingent obligation due to the
former BritWill shareholders (the "Additional Payment Obligation"). Thereafter,
Unison's remaining obligation associated with the BritWill Acquisition is the
balance of the Additional Payment Obligation amounting to $9,750,000. The
Additional Payment Obligation is payable in monthly installments of $99,000 to
$166,000, which includes interest at 12.0% to 14.0%, with a balloon payment of
$8,146,000 due August 9, 2000. Because these payments are contingent upon
revenue targets that, in light of recent acquisitions, are likely to be
achieved, the Additional Payment Obligation is recorded as long-term debt and an
increase in lease operating rights in the consolidated balance sheet at December
31, 1996 and June 30, 1997. Although this does not change the amount of cash due
to the former BritWill shareholders, Unison will record an increase in
amortization and interest expense in 1997 in the aggregate amount of
approximately $1,600,000. In the event of a sale by Unison prior to August 9,
2000 of debt or equity securities exceeding $10,000,000, the remaining balance
of the Additional Payment Obligation will be due in full.
In connection with the Signature Acquisition, Unison assumed a 10.5%
mortgage loan (the "Mortgage Note") collateralized by property and equipment of
six of the Signature facilities. The Mortgage Note requires Unison to maintain,
among other things, a consolidated net worth of at least $39,000,000. Unison's
consolidated net worth was $11,689,000 as of December 31, 1996 and $6,161,000 as
of June 30, 1997 and accordingly, the Company was not in compliance with the net
worth covenant. Unison did not receive a waiver of this covenant violation and
accordingly, classified the entire obligation ($18,640,000 at December 31, 1996
51
<PAGE> 56
and $18,534,000 at June 30, 1997) as current. In addition, the Company has not
met the financial reporting requirements of the Mortgage Note. The Company is
current on its payments on the Mortgage Note and the lender has not indicated
any intention to declare the Company in default. In the event of a declaration
of default, Unison may be required to repay the Mortgage Note or the lender may
foreclose on the properties, which would adversely impact Unison's results of
operations. While the Company does not believe that a declaration of default
will occur, it is considering a refinancing of the Mortgage Note as discussed
below.
Effective February 1, 1996, in connection with the acquisition of Sunbelt
Therapy, Unison issued promissory notes and debentures in the aggregate amount
of $2,800,000 with interest payable quarterly at 10.0%. The notes and debentures
were convertible into shares of Unison Common Stock. In January 1997, Unison
repaid $2,000,000 of the notes and debentures with proceeds from the Senior
Notes, and the remaining $800,000 principal amount was converted into 105,196
shares of Unison Common Stock. The conversion price ($7.61) was equal to 85% of
the average closing price of Unison's Common Stock ($8.95) for the 20-day
trading period preceding notice of conversion on November 27, 1996. In November
1996, but effective February 1, 1996, Unison repurchased the 10% minority
interest in Sunbelt Therapy. Consideration for the purchase was comprised of
promissory notes and guaranteed payments totalling $1,876,000, with interest
payable quarterly at 9.0% per annum, and 27,942 shares of Unison Common Stock.
Additional contingent payments of up to $1,418,000 will be due if specified
income targets are achieved by Sunbelt Therapy.
Unison entered into a number of capital leases in 1996. At December 31,
1996, capital lease obligations for purchases of computer systems and other
fixed assets totalled $2,969,000, payable monthly over three to five years with
interest at 11.5% to 12.9%. The leases of two nursing facilities entered into in
August 1996 were recorded as capital leases; at December 31, 1996 the aggregate
lease obligation amounted to $4,122,000, payable monthly over the lease terms at
effective interest rates of 10.5% to 15.0%.
On April 21, 1997, the Company obtained a $2,950,000 loan for general
working capital purposes from affiliates of two of its directors, Messrs.
Kremser and Whitehead. The loan bears interest at prime plus 2% and is due on
the earlier of 30 days notice or August 1, 1997. Messrs. Kremser and Whitehead
have agreed to extend the maturity of this loan to November 1, 1997. The loan is
secured by a pledge of certain accounts receivable and the stock of certain
Unison subsidiaries. On September 25, 1997, the Company borrowed an additional
$1.0 million from Messrs. Kremser and Whitehead under the same terms with the
exception that the loan matures on October 7, 1997.
Unison's minimum annual contractual commitments for leaseholds and
principal and interest on debt are expected to be as follows:
<TABLE>
<CAPTION>
LONG-TERM OPERATING TOTAL
DEBT LEASES OBLIGATIONS
------------ ----------- ------------
<S> <C> <C> <C>
Year ending December 31,
1997............................................ $ 43,857,000 $15,492,000 $ 59,349,000
1998............................................ 20,878,000 15,591,000 36,469,000
1999............................................ 19,268,000 15,362,000 34,630,000
2000............................................ 25,793,000 14,727,000 40,520,000
2001............................................ 16,499,000 13,975,000 30,474,000
Thereafter...................................... 177,071,000 89,596,000 266,667,000
</TABLE>
Unison finances its working capital needs out of its operating cash flows
and under a $10,000,000 revolving credit facility. Borrowings under this credit
facility bear interest at the prime rate plus 2.0% (10.25% at December 31, 1996)
and are secured by certain of Unison's eligible accounts receivable. On October
31, 1996, Unison repaid the outstanding balance of $8,900,000 (plus $200,000 of
fees) with proceeds from the Senior Notes. There were no outstanding borrowings
under this credit facility at December 31, 1996. In March 1997, Unison paid a
management fee (in lieu of a termination fee) of $500,000. The lender agreed
that the existing facility would remain in place at Unison's option until
December 31, 1997. At July 31, 1997, $8,333,000 (the maximum amount available
based on current levels of collateral) was outstanding under this line of credit
with interest at 12.5% per annum.
52
<PAGE> 57
The Company believes that absent additional financing, its cash flows from
operations and draws under its existing $10,000,000 line of credit will probably
not be sufficient to meet all of its debt service requirements in 1997,
aggregating approximately $28,000,000 for the period July through December 1997.
This amount includes the payment of interest on the Senior Notes of
approximately $6,700,000 and the scheduled repayment of borrowings under the
revolving line of credit in the estimated amount of approximately $8,000,000.
In late July 1997, the Company completed development of a recapitalization
plan designed to: (i) reduce its costs of capital and operating expenses to
improve operating results; (ii) provide short-term and long-term liquidity; and
(iii) restructure its balance sheet and increase stockholders' equity. The key
elements of the plan include: (i) reductions in controllable costs as described
in "-- Overview"; (ii) hiring a new CEO and CFO; (iii) obtaining a new revolving
line of credit in the amount of at least $15,000,000 (as described below); (iv)
completing a mortgage refinancing transaction in the amount of approximately
$40,000,000 (as described below); and then (v) depending on market conditions,
an equity infusion. A financing proposal has been distributed to potential
lenders and initial negotiations are taking place.
The proposed new revolving line of credit will be secured by the Company's
eligible accounts receivable. Proceeds from this credit facility will be used to
repay borrowings under the current line of credit with the balance of $6 - $7
million available for debt service and other working capital requirements.
As part of the Signature Acquisition, Unison acquired the land and
buildings of six facilities. The Company is seeking to replace the existing
Mortgage Note on these facilities or to refinance the mortgage. Management
believes that the current fair market value of these facilities is in excess of
$50,000,000. The balance of the Mortgage Note at June 30, 1997 is approximately
$18,534,000. In connection with this financing, Messrs. Kremser and Whitehead
have agreed to convert approximately $4.4 million of debt that they hold into
shares of Unison Common Stock which will provide additional working capital and
liquidity.
If the Company completes the recapitalization plan outlined above, it may
incur a charge to earnings of up to $2,500,000 from prepayment penalties and the
write-off of deferred financing costs related to the obligations which are
proposed to be paid off.
The Company desires to complete the line of credit and mortgage financing
transactions in the fourth quarter of 1997. Market conditions permitting, it
expects to then seek to raise additional equity through the private placement of
stock. Proceeds from the sale of stock would be used to expand Unison's
ancillary businesses and for working capital. The Company believes that
implementation of its recapitalization plan, if successful, will provide Unison
with the liquidity it needs in 1997 and beyond. There can be no assurance,
however, that the desired financings will be completed, or if completed, will be
on terms that are favorable to Unison and its shareholders.
The terms of certain of Unison's indebtedness and lease obligations require
the Company to meet certain financial covenants including cash flow to rent
ratios, cash flow to debt service ratios, and minimum levels of cash and net
worth. The Company is also subject to periodic financial reporting requirements.
At December 31, 1996, Unison was not in compliance with many of these covenants.
At December 31, 1996, Unison was obligated to Omega Healthcare Investors, Inc.
("Omega") as a tenant under three master lease agreements covering 14 facilities
having an aggregate minimum rent of approximately $34,900,000 (subject to
increase) during the remainder of their initial terms. The master leases require
the Company to maintain specified cash flow to rent ratios, cash flow to debt
service ratios, minimum cash, current ratios and tangible net worth ratios.
Unison also leases six facilities located in Texas from BritWill Texas (the
"BritWill Texas Leases") for an initial term that expires in December 2005. The
lease agreement with BritWill Texas requires the Company to pay to Omega monthly
amounts equal to (i) the amount of loan payments due to Omega from BritWill
Texas pursuant to a loan agreement between those parties, which provided the
financing for BritWill Texas' acquisition of the facilities and (ii) lease
payments on the facilities that are subleased to Unison. The BritWill Texas
Leases contain cross default provisions with the Omega leases by which if Unison
is in default with any Omega indebtedness or lease obligation, the Company is
also in default under the BritWill Texas Leases. Although the Company has made
all required payments, it was not, at June 30, 1997, in compliance with the
53
<PAGE> 58
master lease financial covenants and did not obtain a waiver of the covenant
violations. The Company continues to be out of compliance with these covenants
after this date and, accordingly , is negotiating with Omega to restructure such
covenants. Although discussions with Omega are ongoing, there can be no
assurance that such restructuring will be accomplished, or if accomplished, that
the restructuring will result in more favorable terms to Unison and its
stockholders. With the exception of the aforementioned classification of the
Mortgage Note as a current liability, there was no financial statement impact as
of and for the year ended December 31, 1996 and the six months ended June 30,
1997 as a result of the Company's covenant defaults on its debt and lease
agreements.
Inflation. The Company does not believe that inflation has adversely
affected the Company's business during the past three years, even though
Medicare and Medicaid reimbursement rates in some areas have not kept pace with
inflation. To the extent inflation occurs in the future, the Company may not be
able to pass on the increased costs associated with providing health care
services to patients if reimbursement from third party payors does not keep up
with such increases.
54
<PAGE> 59
BUSINESS
INTRODUCTION
Unison is a leading provider of comprehensive long-term and specialty
healthcare services. As of September 30, 1997, after giving effect to the
Dispositions, Unison ranks as one of the 25 largest long-term care operators in
the United States, operating facilities in 11 states clustered in the Midwest,
Southwest and Southeast. These facilities include 46 long-term and specialty
care facilities with 4,572 licensed beds and eight independent or assisted
living facilities with 315 units. Unison seeks to operate its businesses as an
interrelated network of services to provide a full continuum of cost-effective
long-term and specialty healthcare.
Unison's healthcare services include both traditional long-term care
services and higher margin specialized healthcare, such as rehabilitation,
infusion and respiratory therapy. Unison also has recently expanded its role as
a medical supplier, both to its facilities and to non-affiliated facilities, of
pharmaceutical services, rehabilitation and therapy services, medical supplies
and laboratory testing.
The Company was incorporated in Delaware as SunQuest HealthCare Corporation
in July 1992 and changed its name to Unison HealthCare Corporation on November
14, 1995.
INDUSTRY OVERVIEW
Unison believes there will continue to be significant business
opportunities to provide healthcare services to long-term care residents in
non-hospital settings, including both long-term care facilities and assisted or
independent living facilities. Certain factors that contribute to this growth
potential are described below.
Industry Consolidation. The long-term care industry is highly fragmented.
There are approximately 16,000 long-term care facilities in the United States
which contain a total of approximately 1.6 million licensed beds. The 35 largest
long-term care providers operate approximately 4,000 facilities comprising
approximately 450,000 licensed beds, or 28% of the industry total. Recently, the
long-term care industry has been subject to competitive pressures and
uncertainty with regard to future changes in governmental regulations, which
have resulted in a trend toward consolidation, especially of smaller, local
operators into larger, more established regional or national providers. The
increasing complexity of medical services provided, growing regulatory and
compliance requirements and increasingly complicated and potentially volatile
reimbursement systems have resulted in the consolidation of operators who lack
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively. Unison believes that this trend
toward consolidation will continue. See "-- Business Strategy."
Aging Population. The overwhelming majority of the patients in long-term
care facilities and residents in assisted or independent living facilities are
over the age of 65. According to the United States Bureau of the Census, the
number of people over the age of 65 in the United States has grown from
approximately 25.6 million in 1980, or 11.3% of the population, to approximately
31.1 million in 1990, or 12.5% of the population, and is projected to increase
to approximately 62.2 million, or 18% of the population, by 2025. The United
States Bureau of the Census also reported that approximately 6% of the United
States population between the ages of 75 and 84 and 22% of those over 84 used
some form of healthcare services in a long-term care facility. As the United
States population ages, the demand for the types of service Unison provides is
expected to increase. According to published reports, one in three Americans
currently 65 years old can be expected to enter a nursing home, for an average
of two to three years.
Cost Containment Pressures. Governmental and private pay sources have
adopted cost containment measures which encourage reduced lengths of stay in
acute care hospitals. Many of the patients being discharged, in particular
elderly patients, require additional skilled nursing care and specialty
healthcare services, such as those provided by Unison. Any subsequently adopted
healthcare reform proposals are expected to continue to emphasize the cost
containment efforts included in healthcare reform legislation. See
"-- Government Regulation."
Advances in Medical Technology. Sophisticated new forms of medical
equipment and treatment have lengthened life expectancies, increasing the number
of individuals requiring specialized care and supervision.
55
<PAGE> 60
In the past, the level of care required by many of these individuals was not
generally available outside acute care hospitals. However, long-term care
providers such as Unison have become a more attractive alternative to acute care
hospitals in certain instances due to technological advances that have enabled
long-term care providers to offer services less expensively than are provided by
acute care hospitals.
Limitations in the Supply of Long-Term Care Facilities. In many areas the
number of available long-term care beds has not grown as quickly as the demand
for them in recent years. Many states (but not all of the states in which Unison
operates) have enacted certificate of need or similar legislation which
generally limit the construction of long-term care facilities and the addition
of beds or services in existing facilities. Furthermore, high construction
costs, limitations on government reimbursement for the full costs of
construction, and start-up expenses also act to constrain growth in the numbers
of facilities. As a result, the Company believes that the supply of long-term
care facilities may not grow as quickly as the demand for such facilities. See
"-- Government Regulation -- Certificates of Need."
BUSINESS STRATEGY
Unison's business strategy is to become a preferred provider of long-term
and specialty healthcare services in its markets by offering a full range of
high quality, cost competitive, long-term healthcare services. Unison seeks to
offer these services across the entire continuum of care from independent and
assisted living, to traditional long-term, specialty and subacute care.
Provide a Continuum of Care. Unison operates both skilled nursing and
assisted living facilities and provides a wide variety of medical,
rehabilitative and pharmaceutical treatments. This strategy provides an
opportunity for entry at each point in the continuum of care. As patients' needs
change, they may be served by different elements of the care continuum. The
primary benefit of offering a continuum of care is that it offers patients an
appropriate level of cost-effective care which the Company believes is
attractive to third party payors.
Unison believes that independent and assisted living arrangements have
become an increasingly important component of the continuum of care required by
older Americans. Cost containment pressures from government and private payors
alike encourage discharge from long-term and specialty care facilities before
residents may be fully able to care entirely for themselves. The change from the
traditional family structure which was able to care for the sick and elderly to
dual income families has increased the need for facilities that can assist such
persons. Unison believes that offering services at this important level of the
continuum of care enables it to maintain contacts with potential consumers of
its long-term and specialty healthcare services and thus to improve its
occupancy levels and profitability.
Improve Payor Quality, Occupancy Levels and Operating Margins. Unison is
focused on improving its payor quality mix and occupancy levels. The
profitability of caring for private-pay and Medicare patients is generally
higher than that of Medicaid patients. Unison's marketing efforts are focused on
the hospital and medical community in each market to promote higher occupancy
levels and improved payor mix at its long-term care facilities and assisted or
independent living centers.
Unison seeks to improve its profitability by attempting to obtain an
increasing proportion of its revenue from specialized healthcare services which
typically generate higher profit margins than basic long-term nursing care.
Specialty healthcare services are developed in cooperation with and in
accordance with the needs of the local medical community. Specialty programs are
developed by marketing professionals and facility administrators working
directly with local hospital discharge planners and physicians. Management
believes that this approach generally has been well received by local medical
communities, as demonstrated by the recent increases in Unison's quality mix.
Increase Contribution from Ancillary Services. Unison believes that
opportunities exist to capture ancillary service revenues and operating profits,
both from its own facilities and from non-affiliated facilities. Unison provides
ancillary services to facility residents in response to physician orders. The
major ancillary services include physical, speech, and occupational therapies;
pharmaceuticals; parenteral and enteral nutrition; infusion and respiratory
therapies; and laboratory services. Historically, Unison has provided most of
56
<PAGE> 61
these services through contracts with third party providers, but it is
increasingly offering such services through its ancillary services companies. In
addition to providing services to its own long-term and specialty healthcare
facilities, each of these ancillary providers offers services to other,
unrelated long-term care providers, adding to Unison's revenue base. See
"-- Acquisitions."
Concentrate Healthcare Facilities in Geographic "Clusters." Although
Unison's acquisition program has been substantially curtailed for the indefinite
future, Unison has in the past sought to acquire facilities which fit within
existing geographic regions or "clusters," and to enter new markets through
clustered acquisitions. Clustering is intended to attempt to capture local
economies of scale by providing ancillary services, purchasing, marketing,
information systems, risk management, accounting, reimbursement and quality
control to geographically concentrated facilities. The cluster strategy is based
on the belief that clustering facilities will enable Unison to leverage
management across a larger base of client revenue and efficiently monitor
individual facilities, ensuring high quality patient care. Clustering facilities
should also enable Unison to leverage the addition of ancillary services over a
larger patient base. The Signature Acquisition, which included the acquisition
of five long-term care facilities in the Denver, Colorado area, is an example of
this strategy.
Provide High Quality Care on an Economic Basis. Unison seeks to position
each of its facilities as a high quality provider in its respective market, but
to do so on a cost-effective basis. Unison believes it provides quality patient
care and is generally successful in maintaining regulatory compliance. This is
illustrated by the reduction in the number of deficiencies cited in governmental
reviews from August 1995 through July 1996 of the 28 operating facilities Unison
acquired in the BritWill Acquisition. Under Unison management, these facilities
averaged a 43% reduction in the number of deficiencies cited after the first
review, a 75% reduction as of October 1, 1996, and a 93% reduction as of May 20,
1997 as compared with the number of deficiencies cited prior to the acquisition.
At the time of the Signature Acquisition all of Unison's facilities had
implemented Unison's quality improvement program.
Contain Costs. Unison believes that the increasing penetration of managed
care will intensify the focus on containing costs. Unison establishes detailed
operating budgets at its facilities and the administrator is responsible for
adherence to these budgets. Monitoring the performance of these budgets at the
facility level is necessary to enable Unison to control operating costs.
PATIENT SERVICES
Unison's objective is to provide long-term care services across the
continuum of care from independent living services to subacute care services,
all of which are provided primarily to the elderly. Independent living
facilities that offer assistance with activities of daily living are appropriate
for those among the elderly requiring limited healthcare services. Assisted
living facilities are appropriate for residents in need of greater assistance,
but who do not need the services of a skilled nursing facility. The services of
an assisted living facility are appropriate where nutritional, housekeeping, and
only limited medical services are needed. For the elderly and other patients in
need of specialized support, rehabilitation, nutrition, respiratory therapies
and other treatments, skilled nursing care is often required. The innovation of
specialized subacute services within skilled nursing facilities also responds to
the needs of patients requiring intense and specialized treatment and
rehabilitation therapy services immediately after hospitalization.
Assisted and Independent Living Services. Services and facilities at
assisted and independent living centers include central dining facilities,
limited nursing services, recreational areas, social programs, housekeeping,
laundry and maintenance service, emergency call systems, special features for
handicapped persons and transportation to shopping and special events. These
facilities provide fewer nursing and medical services than are provided at
Unison's long-term care facilities. Unison believes that the availability of
healthcare services and assistance with the activities of daily living are
significant reasons that residents move to an assisted or independent living
center.
Skilled Nursing Care Services. Unison's skilled nursing facilities provide
basic healthcare services, including room and board, dietary services,
recreational therapy, social services, housekeeping, laundry and nursing
services. In addition, the long-term care facilities dispense medications and
otherwise follow care plans
57
<PAGE> 62
prescribed by the patient's physician. Unison's long-term care facilities are
licensed by state licensing agencies and are extensively regulated at the
federal, state, and local level. Unison also provides for the delivery of
specialty medical services at its facilities.
Subacute and Other Specialty Care Services. Unison's facilities currently
offer a wide variety of subacute and specialty healthcare services, which may
include (i) intensive rehabilitation services; (ii) wound management; (iii)
enteral and parenteral feeding programs; (iv) intravenous drug administration,
including chemotherapy; (v) respiratory therapy; (vi) orthopaedic
rehabilitation; and (vii) other specialized subacute services. Subacute and
other specialty care is a major component of Unison's strategy. Unison provides
care to certain types of patients with specialized needs through designated
units such as those for the treatment of Alzheimer's disease, AIDS and other
conditions. These units are located in specially designed sections within
selected facilities and are staffed by specially trained personnel. As of
September 30, 1997 Unison operated 246 licensed beds in Alzheimer's units, 36
beds in AIDS units and more than 200 beds in other specialty units, including
wound management, hospice care, rehabilitation services and respiratory therapy.
In addition to providing care tailored to the unique needs of patients within
these units, these services include education and support to the patients'
families. These units generally receive higher levels of reimbursement. The
daily cost to patients for Unison's specialty services are generally
significantly less than the cost charged for similar services by acute care
hospitals.
Ancillary Services. Unison provides ancillary services to the residents of
skilled nursing facilities in response to physician orders. The major ancillary
services include physical, speech and occupational therapies, pharmaceuticals,
parenteral and enteral nutrition, infusion and respiratory therapies and
laboratory services.
PAYOR MIX
Medicare, Medicaid, and other payor sources each pay at different rates,
which are customarily expressed as rates per patient day. Changes in the mix of
a facility's patient population among Medicaid, Medicare, and private pay can
significantly affect the profitability of the facility's operations because of
the widely varying rates of payment between these various payors. As the
following table indicates, Unison has achieved growth in its quality mix of
payor sources throughout the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------- PRO FORMA ---------------
SOURCE OF REVENUES 1993 1994 1995 1996 1996(1) 1996 1997
- ------------------------------- ----- ----- ----- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Medicare....................... 3.4% 9.1% 26.9% 29.5% 30.2% 32.4% 32.9%
Private and other.............. 13.8 32.4 17.2 17.0 18.1 15.8 15.8
----- ----- ----- ----- ----- ----- -----
Quality mix............... 17.2 41.5 44.1 46.5 48.3 48.2 48.7
Medicaid....................... 82.8 58.5 55.9 53.5 51.7 51.8 51.3
----- ----- ----- ----- ----- ----- -----
Total................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Adjusts for the Completed Acquisitions and the Dispositions as though such
transactions occurred as of the first day of the period presented.
58
<PAGE> 63
PROPERTIES
The following table summarizes certain information regarding the long-term
care facilities and assisted and independent living centers operated by Unison
as of September 30, 1997. Except as indicated, all of the facilities are leased.
The following table lists, by state, the nursing facilities operated by the
Company as of September 30, 1997.
<TABLE>
<CAPTION>
LICENSED MANAGED FOR
NUMBER BEDS OWNED LEASED THIRD PARTIES
------ -------- ----- ------ -------------
<S> <C> <C> <C> <C> <C>
Alabama......................................... 2 189 -- 2 --
Arizona......................................... 7 685 3 4 --
Colorado........................................ 5 473 3 2 --
Idaho........................................... 2 173 -- 2 --
Indiana(1)...................................... 12 1,074 -- 12 --
Kansas.......................................... 2 106 -- 2 --
Michigan........................................ 2 307 -- 1 1
Nevada.......................................... 1 99 -- 1 --
Pennsylvania.................................... 1 74 -- 1 --
Texas(2)........................................ 13 1,474 -- 13 --
Washington...................................... 2 187 -- 2 --
----- --- ----- ---
--
Number of nursing facilities.................... 6 42 1
49
=== ===== ===
==
Number of licensed beds......................... 4,841 480 4,290 71
===== === ===== ===
</TABLE>
- ---------------
(1) Includes three facilities with an aggregate of 269 licensed beds which are
held for disposition.
(2) On March 1, 1997, the Company subleased three facilities in Texas with an
aggregate of 368 licensed beds. The Company has also terminated the
management contracts for a facility in Florida with 150 licensed beds and a
facility in Tennessee with 89 licensed beds.
The following table lists, by state, the independent living and assisted
living facilities operated by the Company as of September 30, 1997. All of the
facilities are leased.
<TABLE>
<CAPTION>
NUMBER UNITS
------ -----
<S> <C> <C>
Alabama..................................................... 3 80
Arizona..................................................... 2 124
Idaho....................................................... 1 60
Indiana..................................................... 1 19
Pennsylvania................................................ 1 32
---
-
315
8
===
=
</TABLE>
Unison leases approximately 20,000 square feet of office space in
Scottsdale, Arizona. The Scottsdale office houses the executive offices and a
regional office of Unison, and the lease for that space expires in the year
2004. Unison maintains regional offices in Lakewood, Colorado and Indianapolis,
Indiana. These regional offices are either in small office suites or in homes of
the regional executives. Quest Pharmacies, Inc. ("Quest") leases approximately
3,600 square feet of commercial office space in Longview, Texas for its pharmacy
operations and approximately 2,000 feet of office space in Bloomington, Indiana
for its Indiana pharmacy. Sunbelt, through the four therapy companies, leases an
aggregate of approximately 38,000 square feet of space for outpatient clinics
and fitness centers in Mississippi and Alabama. Ampro leases an aggregate of
approximately 7,700 square feet for office and laboratory space in Texas and
Tennessee and owns one building with approximately 4,000 square feet of space,
in Missouri. Lease terms on most of the office,
59
<PAGE> 64
pharmacy, laboratory and therapy space range from one to five years. Management
believes that Unison's leased properties are adequate for its present needs and
that suitable additional or replacement space will be available as required.
Unison leases 50 long-term and specialty healthcare facilities and assisted
or independent living centers. Unison's leases typically are triple net
obligations, have initial terms of 5-10 years with renewal options for up to 15
to 20 years and are generally classified as operating leases within the meaning
of Statement of Financial Accounting Standards No. 13. Unison's leases typically
provide for automatic rent increases or repricing. Unison typically grants its
lessor a security interest in Unison's personal property at the leased facility.
Unison's leases are typically entered into by its subsidiaries and guaranteed by
Unison. Some of the leases require Unison to maintain a minimum net worth,
expend specified sums per bed for capital expenditures, maintain certain current
ratios and coverage ratios and prohibit Unison from operating any additional
facilities within a certain radius of the leased facility. In addition, Unison
is generally required to maintain comprehensive insurance covering the
facilities it leases as well as personal and real property damage insurance and
professional malpractice insurance. Failure to pay rent within a specified time
period constitutes a default under each lease agreement, which default, if
uncured, permits the facility's lessor to terminate the lease. In all cases,
Unison's interest in the premises is subordinated to that of the lessor's
mortgage lenders.
Unison's most significant lessors are Omega from which Unison leases 14
facilities, American Health Properties from which Unison leases six facilities
and BritWill Texas from which Unison leases six facilities. The leases typically
include cross default provisions. Covenants in the Omega leases require
maintenance of specified operating ratios, levels of working capital and net
worth. Although the Company has made all required payments, it was not, at June
30, 1997, in compliance with the master lease financial covenants and did not
obtain a waiver of the covenant violations. The Company continues to be out of
compliance with these covenants after this date and, accordingly, is negotiating
with Omega to restructure such covenants. Although discussions with Omega are
ongoing, there can be no assurance that such restructuring will be accomplished,
or if accomplished, that the restructuring will result in more favorable terms
to Unison and its stockholders.
ACQUISITIONS
On October 31, 1996, Unison acquired Signature. At the date of acquisition,
Signature had current assets of $9.7 million, land, buildings and improvements
with a net book value of $16.6 million, other assets with a net book value of
$3.6 million, long-term debt of $18.5 million and other liabilities of $9.4
million. As of September 30, 1997, Signature operates 11 long-term care
facilities with 1,043 licensed beds in Arizona and Colorado. Signature provides
rehabilitation services through its related company, RehabWest. Signature also
operates two assisted living facilities with 124 units. Signature's long-term
care facilities generally offer the same types of services as are provided by
Unison's other facilities.
At closing, the shareholders of Signature and RehabWest received (a) cash
equal to approximately $42.4 million (minus the amount paid by Unison to redeem
outstanding options for shares of Signature Health Care), (b) 1,509,434 shares
of Unison Common Stock, and (c) promissory notes of Unison in the aggregate
principal amount of $1.1 million bearing interest at the rate of 8% per annum
and maturing one to two years after the closing, which have been deposited into
escrow to secure Signature's representations and warranties. In accordance with
the adjustment provisions of the Signature merger agreements relating to their
stockholders' equity at closing, in March 1997 the former shareholders of
Signature received an additional $2.5 million in convertible promissory notes
and shares of Unison common stock.
On October 31, 1996, Unison also acquired Ampro in a pooling of interests
transaction. The consideration paid for Ampro included: (a) cash of
approximately $237,000, (b) 540,000 shares of Unison Common Stock, and (c) a
promissory note in the amount of $250,000, bearing interest at the rate of 10%
per annum and due in installments through April 15, 1998, which has since been
prepaid. The cash and promissory note eliminated the interest of a single
shareholder and represented less than 10% of the transaction value. Ampro
operates a medical laboratory business with laboratories in Texas, Missouri and
Tennessee which, at September 30, 1997, provided testing services for
approximately 275 nursing homes and other healthcare facilities.
60
<PAGE> 65
Unison's most significant acquisition prior to 1996 was the purchase of
BritWill on August 10, 1995. At the date of acquisition, BritWill operated 28
facilities in Indiana and Texas and had total assets and liabilities of
approximately $24.7 million and $23.0 million, respectively. The consideration
for the purchase included a debenture that was fully converted into 561,815
shares of Unison Common Stock and a combination of promissory notes and lump sum
contingent payment obligations totaling $25.0 million, as well as certain
monthly contingent payment obligations. Unison's only remaining obligation
related to the BritWill Acquisition is the Additional Payment Obligation with a
balance at June 30, 1997 of $9.7 million. The Additional Payment Obligation is
payable in monthly installments of $98,854 to $166,376 which includes interest
at 12.0% to 14.0% with a balloon payment of $8.1 million due August 9, 2000.
Because these payments are contingent upon revenue targets that, in light of
recent acquisitions are likely to be achieved, the Additional Payment Obligation
is recorded as long-term debt and an increase in lease operating rights in the
consolidated balance sheet. In the event of a sale by Unison prior to August 9,
2000 of debt or equity securities exceeding $10.0 million, the unamortized
balance of the Additional Payment Obligation will be due in full. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Management -- Compensation
Committee Interlocks and Insider Participation in Compensation Decisions."
The Company has also acquired and developed several other ancillary
businesses in recent years. In May 1995, Unison established Quest to develop an
institutional pharmacy business. Quest has acquired the pharmacy operations of
Med-Shop Pharmacy in Gilmer, Texas, Indiana Prescription Lab, an institutional
pharmacy in Bloomington, Indiana, and Pharmcare, an institutional pharmacy in
Longview, Texas. As of August 31, 1997, Quest provided institutional pharmacy
services to 89 long-term care facilities, including 44 Unison facilities and 45
facilities operated by others. Since March 1995 the Company has also operated a
Medicare Part B billing and supply company that specializes in wound management
and enteral and parenteral feeding services. On February 1, 1996, Unison
acquired Sunbelt to provide therapy services. At the date of acquisition Sunbelt
had assets of approximately $1.2 million and liabilities of approximately $1.0
million. Unison purchased 90% of the outstanding common stock of Sunbelt for
$3.6 million, including $800,000 of cash and convertible notes and debentures in
the aggregate amount of $2.8 million. In November, 1996, Unison purchased the
remaining 10% of Sunbelt's stock for $1.4 million, comprised of promissory notes
totaling $1.2 million and 27,942 shares of Unison Common Stock, plus a
guaranteed payment of $709,000. Additional contingent payments of up to $1.4
million will be due if specified income targets are achieved. As of June 30,
1997, Sunbelt (including RehabWest) provided therapy services to 110 facilities,
including 39 Unison facilities and 71 facilities operated by others.
The following table shows the growth in the number of long-term care
facilities and independent and assisted living facilities leased or managed by
Unison (excluding two closed facilities) as of the dates indicated together with
the related number of licensed beds or living units.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1996
1994 1995 1996 AS ADJUSTED(1)
------------------- ------------------- ------------------- -------------------
STATE FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
- -------------------------------------- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term care facilities:
Florida............................. 2 210 1 150 1 150 1 150
Indiana............................. 1 162 12 1,081 12 1,073 9 804
Michigan............................ 1 71 2 307 2 307 2 307
Nevada.............................. 1 99 1 99 1 99 1 99
Pennsylvania........................ 1 74 1 74 1 74 1 74
Tennessee........................... 1 89 2 176 1 89 1 89
Alabama............................. 3 337 2 189 2 189 2 189
Arizona............................. 1 115 1 115 7 685 7 685
Idaho............................... 2 183 2 183 2 183 2 183
Kansas.............................. 1 59 3 208 2 106 2 106
Washington.......................... 2 222 2 222 2 187 2 187
Texas............................... -- -- 16 1,825 16 1,837 13 1,469
Colorado............................ -- -- -- -- 5 476 5 476
-- -- -- --
----- ----- ----- -----
16 1,621 45 4,629 54 5,455 48 4,818
-- -- -- --
----- ----- ----- -----
</TABLE>
61
<PAGE> 66
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1996
1994 1995 1996 AS ADJUSTED(1)
------------------- ------------------- ------------------- -------------------
STATE FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS
- -------------------------------------- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assisted and independent living
facilities:
Pennsylvania........................ 1 30 1 30 1 32 1 32
Alabama............................. 3 74 3 82 3 82 3 82
Tennessee........................... -- -- 1 117 -- -- -- --
Idaho............................... -- -- -- -- 1 60 1 60
Indiana............................. -- -- -- -- 1 22 1 22
Arizona............................. -- -- -- -- 2 124 2 124
-- -- -- --
----- ----- ----- -----
4 104 5 229 8 320 8 320
-- -- -- --
----- ----- ----- -----
Total............................. 20 1,725 50 4,858 62 5,775 56 5,138
== ===== == ===== == ===== == =====
</TABLE>
- ---------------
(1) Excludes three facilities in Indiana and three facilities in Texas which
were held for disposition at December 31, 1996.
OPERATIONS
Unison is responsible for the day-to-day operation of both operated (owned
or leased) and managed facilities. These responsibilities include recruiting,
hiring and training all nursing and other personnel, and directing the full
scope of patient care activities that are necessary to operate the facilities.
In general, these activities include direct patient care, nursing services, food
service, social services and resident activity programs, housekeeping and
maintenance, business office services including billing and accounts receivable
management, accounts payable, accounting and finance, quality assurance, and
regulatory compliance at each facility.
Organization. Unison believes that long-term and specialty care facilities
should be managed on a decentralized basis. This approach is intended to place
direct decision making as close to the bedside as possible so that facilities
will be able to respond to the specific needs of each medical community. In
order to accomplish this, Unison has created five regions, each of which is
supervised by a regional director. The regional director is supported by a
clinical operations specialist, a financial consultant, a regional director of
marketing, and assistant regional managers and clerical personnel, all of whom
are employed by Unison. Daily operations of each leased and managed facility are
supervised by an on-site licensed administrator. The administrator of each
facility is supported by other professional personnel, including a medical
director, who assists in the medical management of the facility, a director of
marketing who directs the sales and marketing efforts of the facility and a
director of nursing who supervises a staff of registered nurses, licensed
practical nurses and nurses aides. Other personnel include dietary staff,
activities and social service staff, housekeeping, laundry and maintenance staff
and a business office staff.
Quality Management. Unison maintains a quality improvement program that is
focused on important aspects of care and critical key indicators that measure
the quality of care provided to its patients. The program is an internal
facility process focused on involvement by direct care givers. Reporting is
monitored by Unison's five registered nurses under the direction of the Senior
Vice President of Clinical Operations. Monthly reports are used to monitor
adherence to the standards of care established by Unison's quality improvement
program. On-site visits are conducted by specially trained healthcare
professionals. The quality improvement program is designed to provide patients
with better care, and thus a higher quality of life.
In addition to its quality improvement program, Unison strives to provide
each of its facilities with resources to deliver the high quality of care Unison
expects. Policy and procedure manuals are maintained by Unison and provided to
each facility. The manuals are updated to include changes in regulatory
requirements and improvements in clinical practices.
The facility administrator at each facility is primarily responsible for
adherence to Unison's standards of practice. Each facility administrator's
incentive compensation is based, in part, on the achievement of specified
quality objectives. Clinical Operations Specialists provide individualized
on-site training to direct
62
<PAGE> 67
care givers. Clinical Operations Specialists also conduct mock state and federal
surveys in advance of scheduled annual surveys.
In recent years Unison entered into certain leases of facilities that have
had regulatory compliance or quality difficulties. Unison has generally achieved
improvements of such facilities. In August 1995, Unison acquired 28 operating
facilities in the BritWill Acquisition. Regulatory records contained 244 total
deficiencies cited at these facilities prior to acquisition. On the first
governmental review conducted after acquisition this number was reduced to 138
deficiencies, a 43% reduction in regulatory noncompliance. Based on subsequent
governmental review, as of October 1, 1996 the number of deficiencies at these
facilities was 61, reflecting a cumulative reduction of 75%. As of May 20, 1997,
the equivalent number of deficiencies was 17. Company-wide, Unison's facilities
had 129 surveys from government agencies during the period from January 1, 1997
through August 1, 1997. The average number of deficiencies cited during these
reviews was four, compared to a national average of 5.7 in the states in which
Unison operates. The Company has reduced substandard quality of care
deficiencies from 5.7% of total surveys in 1996 to 1.2% in 1997, compared to a
national average of 5.3% in 1997 in the states in which Unison operates.
Marketing. Unison's marketing efforts are designed to promote higher
occupancy levels and improved payor quality mix. Quality mix has improved from
approximately 41.5% in 1994 to approximately 46.5% in 1996 and, after giving
effect to the Completed Acquisitions and the Dispositions, 48.3% in 1996. Over
the same period and on a same facility basis, average occupancy improved from
72.2% to 78.6%. On an overall basis, average occupancy was 77.0% for 1996, and
after giving effect to the Dispositions, average occupancy for 1996 was 78.9%.
For the six months ended June 30, 1997, Unison reported quality mix of 48.7% and
average occupancy of 81.4%. Unison believes that the long-term healthcare and
assisted and independent living industries are driven by local market forces and
that patients and referral sources are generally located in the immediate
geographic area of the facility. Unison's marketing strategy emphasizes the role
and performance of the administrator and director of admissions in marketing and
promoting the services offered by Unison facilities to each local community.
Unison's marketing program is focused on market analysis, competitive
services, sales training, and accountability and tracking systems. Quantitative
and systematic reporting and analysis is monitored by the regional directors of
marketing, under the supervision of the Vice President of Marketing. Market
specific information, along with weekly and monthly reporting, is used to
monitor adherence to the standards established by Unison.
The hub of this strategy is the local facility administrator and director
of admissions and marketing. These individuals, under the direction of the
corporate and regional marketing staff, are responsible for establishing and
building relationships with various referral sources including general and
specialty physicians, hospital administration and discharge planners, insurance
case managers and other local community organizations. Unison seeks to use their
input in conjunction with demographic and medical data analysis to identify
specific market needs, and to introduce new services where appropriate. The
facilities also are involved in community affairs in order to maintain a public
awareness of their services.
DESCRIPTION OF MANAGEMENT SERVICES AND AGREEMENTS
As of September 30, 1997, Unison manages one long-term care facility
pursuant to an agreement under which Unison's responsibilities include
recruiting, hiring and training all nursing and other personnel on behalf of the
owner and providing quality assurance, resident care, dietary care, marketing,
accounting, and data processing services. Services performed at the headquarters
level include group contract purchasing, employee training and development,
quality assurance oversight, human resource management, assistance with third-
party reimbursement, financial and accounting functions, cash management, system
design and development and marketing support.
Unison receives a management fee for the management of this long-term care
facility based on a percentage of net revenues of the facility. Other than
certain corporate and regional overhead costs, the costs for services provided
at the facility are the facility owner's obligation. The facility owner also is
obligated to
63
<PAGE> 68
pay for all required capital expenditures. Unison is not required to advance
funds to the owner of the facility it manages.
COMPETITION
Unison's facilities compete on a local and regional basis with general
acute care hospitals, skilled nursing facilities, rehabilitation hospitals,
long-term care hospitals, assisted living facilities, home care providers and
other subacute and specialty care providers. Many of these companies have
greater financial and other resources than Unison and some are nonprofit or
charitable organizations. No assurance can be given that Unison will have the
resources to compete successfully with such companies. In addition, cost
containment efforts, which encourage more efficient utilization of general acute
care hospital services, have resulted in decreased hospital occupancy in recent
years. As a result, a significant number of general acute care hospitals have
converted portions of their facilities to other purposes, including various
types of long-term and subacute care. The Company believes that significant
competitive factors include the quality and spectrum of care and services
provided, the reputation of the medical personnel employed, the physical
appearance of the facilities and, in the case of private-pay patients, the level
of charges for services. Because the Company's facilities compete primarily on a
local and regional basis, rather than on a national basis, the competitive
position of the Company varies from facility to facility. The Company seeks to
meet competition in each locality by improving the quality and types of services
provided in and the appearance of its facilities, by establishing a reputation
within the local medical communities for providing quality care, and by
responding appropriately to regional variations in demographics and preferences.
There is no price competition with respect to Medicare and Medicaid patients
because revenues for services administered to such patients are based on
strictly controlled fixed rates and cost reimbursement principles.
Unison's pharmacy, rehabilitation therapy, laboratory and product supply
businesses compete with national, regional and local pharmacies, therapy
providers, medical reference laboratories and product supply companies, some of
which have significantly greater financial and other resources than Unison. No
assurance can be given that Unison will have the resources to compete
successfully with such companies. Unison believes that the primary factors in
competing for product supply business are the price and quality of the products
offered, that the primary factor in competing for pharmacy and laboratory
businesses is prompt service and the primary factors in competing for
rehabilitation therapy business are quality of service and availability of
competent therapists.
The Company's strategy for its pharmacy services focuses on the expansion
of services beyond dispensing tablet, capsule and liquid medications to include
more intensive and higher margin IV therapy services, antibiotic and hydration
therapies, pain management and chemotherapy. The Company believes that the
primary factor in competing for pharmacy business in the markets it serves is
prompt service.
The Company competes for rehabilitation therapy business in the local
markets where it provides long-term care services and where its outpatient
clinics are located. Unison seeks to meet the competition in its local markets
by providing quality patient care service and being responsive to the needs of
its patients, healthcare facility customers, referral sources and payors.
INSURANCE
Unison carries general liability, comprehensive property damage,
malpractice, workers' compensation, directors and officers and other insurance
coverages that management considers adequate for the protection of its assets
and operations. The Company is partially self insured with respect to certain
healthcare benefits and workers' compensation benefits. There can be no
assurance, however, that the coverage limits of such policies will be adequate
or that insurance will continue to be available to Unison on commercially
reasonable terms in the future. A successful claim against Unison in excess of
its insurance coverage could have a material adverse effect on Unison and its
financial condition and results of operations. Claims against Unison, regardless
of their merit or outcome, may also have an adverse effect on Unison's
reputation and business.
64
<PAGE> 69
GOVERNMENT REGULATION
Introduction. The federal government and all states in which Unison
operates regulate various aspects of Unison's business. All of Unison's skilled
nursing facilities are certified or approved as providers under one or more of
the Medicaid or Medicare programs. To participate in the Medicare or Medicaid
program, each facility must comply with federal participation requirements and
meet additional state licensure requirements. All of these programs are
currently the subject of numerous legislative and regulatory proposals at both
federal and state levels, some of which could adversely affect Unison. Further,
some state Medicaid programs require certification of all beds in a facility,
which may limit the ability of a facility in such states to establish distinct
Part A Medicare units for subacute care. Unison does not currently operate in
any of these states. Long-term care facilities include both skilled nursing
facilities for Medicare and nursing facilities for Medicaid. The Federal Social
Security Act (the "Act") authorizes the Secretary of the Department of Health
and Human Services to execute agreements with state survey agencies to determine
whether skilled nursing facilities meet the federal participation requirements
for Medicare. State survey agencies perform the same survey tasks for nursing
facilities participating or seeking to participate in the Medicaid program. The
results of Medicare and Medicaid surveys are used by HCFA and Medicaid state
agencies as the basis for decisions to execute, deny or terminate provider
agreements with facilities.
Enforcement Proceedings and Sanctions; Certification Requirements. Under
the Omnibus Reconciliation Act of 1987 ("OBRA"), HCFA has promulgated survey,
certification and enforcement rules governing skilled nursing facilities and
nursing facilities participating in the Medicare and Medicaid programs. Among
other things, the HCFA rules governing survey and certification of long-term
care facilities define a number of terms used in the survey and certification
process. The rules require states to enact state plans (required by federal law)
to incorporate the provisions of the rules, including the full range of remedies
for nursing facilities subject to the jurisdiction of the state Medicaid agency.
Additional remedies are available.
Unannounced standard surveys must be conducted at least every 15 months
with a state-wide average of 12 months. In addition to the standard survey,
survey agencies have the authority to conduct surveys as frequently as necessary
to determine whether facilities comply with requirements of participation, to
determine whether facilities have achieved correction and to monitor care if
there is a change of ownership or management of a facility. Furthermore, the
state survey agency must review all complaint allegations and conduct a standard
or an abbreviated standard survey to investigate complaints of violations of
regulatory requirements by long-term care facilities if a review of the
complaint shows that a deficiency in one or more of the federal requirements may
have occurred and only a survey will determine whether a deficiency or
deficiencies exist. If a facility has been found to furnish substandard quality
of care, or to have deficiencies requiring "significant improvement," it is
subject to an extended survey. The extended survey is intended to identify
policies and procedures which may have caused a facility to furnish substandard
quality of care.
HCFA's rules allow either HCFA or state agencies to impose one or more
remedies provided under the rules for any particular deficiency. Facilities must
provide a plan of correction for all deficiencies regardless of whether a remedy
is imposed. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
residents or both; and state monitoring. States may also adopt optional
remedies. The rules divide remedies into three categories. Category 1 remedies
include directed plans of correction, state monitoring and directed in-service
training. Category 2 remedies include denial of payment for new admissions;
denial of payment for all individuals (imposed only by HCFA); and civil money
penalties of $50 to $3,000 per day. Category 3 remedies include temporary
management, immediate termination or civil money penalties of $3,050 to $10,000
per day. The rules define situations in which one or more of the penalties must
be imposed.
The HCFA certification, survey and enforcement regulations impose
significant new burdens on long-term care facilities. The regulations may
require state survey agencies to take aggressive enforcement actions. The
breadth of the rules create uncertainty over how the rules will be implemented
and the standards of compliance.
65
<PAGE> 70
Unison believes that its facilities substantially comply with the various
state licensure and Federal certification requirements applicable to them.
However, in the ordinary course of its business, Unison sometimes receives
notices of alleged deficiencies for failure to comply with regulatory
requirements. Unison reviews such notices and attempts to take corrective
action. Unison's facilities sometimes receive notices from state agencies which
result in fines and/or the agencies taking steps to decertify the facilities
from participation in Medicare and Medicaid programs. In one instance, Unison
paid or agreed to pay monetary penalties totaling $134,225 (following reductions
due to waiver of appeal rights) for violations of Medicare regulations and
approximately $16,000 for violations of state regulations, and voluntarily
terminated the participation of that facility in the Medicare program and
transferred residents to other facilities. This instance involved Unison's
Hillside Care Center located in Bonner Springs, Kansas. Hillside is currently
closed and is one of the Disposition Facilities. Also in 1996 the Company
received notices of monetary penalties related to two of its Texas facilities in
the aggregate amount of approximately $168,000. These fines are currently being
appealed. The Company has received no monetary penalties since November 1996.
Certificates of Need. Many states (although not every state in which
Unison operates) have adopted certificate of need or similar health planning
laws which generally require prior state agency approval of certain
acquisitions, new bed additions or services or capital expenditures. To the
extent that such approvals are required for Unison to expand its operations or
enter new geographic markets, Unison could be adversely affected by its
inability to obtain the necessary approvals and could incur delays and expenses
associated with obtaining such approvals. Currently, the states with certificate
of need requirements in which the Company operates include Washington, Nevada,
Michigan, Pennsylvania and Alabama. In addition, Colorado and Texas have placed
moratoriums on bed additions.
Patient Referral Regulations. Unison is also subject to federal and state
laws that prohibit direct and indirect payments between healthcare providers
that are intended to induce or encourage the referral of patients to a
particular provider of items or services. Violation of these laws may result in
criminal fines, imprisonment and exclusion from the Medicare and Medicaid
programs. Federal regulations establish certain safe harbors from liability
under this statute. While failure to satisfy all of the criteria for a safe
harbor does not necessarily mean that an arrangement is unlawful, arrangements
that are of the same generic kind as those for which a safe harbor is available
may be subject to scrutiny if they fail to qualify for the appropriate safe
harbor. In addition, under separate statutes, submission of claims for payment
that are deemed to be false or fraudulent, or for items or services that are
"not provided as claimed," may lead to civil monetary penalties, criminal fines
and imprisonment, and/or exclusion from participation in Medicare, Medicaid and
other federally funded state healthcare programs.
Under Medicare conditions of participation and some state licensure laws,
Unison, because of its method of service delivery, is required to contract with
healthcare providers, practitioners and suppliers, including hospitals,
facilities, physicians, pharmacies and medical equipment companies. Some of
these individuals or entities may refer, or be in a position to refer, patients
to Unison, and Unison may refer, or be in a position to refer, patients to
certain of these individuals or entities. The Health Insurance Portability and
Accountability Act ("HR 3103"), which was signed by President Clinton on August
21, 1996, has for the first time established a procedure requiring the Secretary
of the Department of Health and Human Services to issue advisory opinions
concerning some activity punishable under federal healthcare fraud statutes. See
"-- HR 3103". The section concerning advisory opinions did not take effect until
six months after the date of enactment of HR 3103, and will sunset four years
after the date of enactment. To the Company's knowledge, none of its patients
were referred under practices which are in violation of HR 3103. Although Unison
believes its practices are not in violation of these laws, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with Unison's practices.
Additional legislation that became effective in stages on January 1, 1992
and January 1, 1995 prohibits
physician referrals for certain "designated health services" rendered to
Medicare and Medicaid patients by a provider in which the referring physician
has an ownership interest or other financial relationship. Various exceptions
are available for financial arrangements that would otherwise prohibit physician
self-referrals. Many states have also enacted physician self-referral laws that
apply whether or not Medicare or Medicaid payments are involved. Similar
penalties, including fines and loss of licensure or eligibility to participate
in
66
<PAGE> 71
government reimbursement programs, apply to violations of these state
self-referral laws. These self-referral laws could require Unison to modify its
contractual arrangements in order to satisfy an available exception, or limit
the ability of physicians with whom Unison has compensation arrangements to
refer patients to Unison.
The nursing home industry has been a target of focus by government
regulators seeking to discover and prosecute claims of healthcare fraud and from
time to time Unison has received inquiries related to such claims. Medicare
intermediaries and carriers have been given new instructions from HCFA
concerning investigating and referring for prosecution suspected instances of
Medicare and Medicaid fraud and abuse. In May 1996, the federal government
announced the first year results of its "Operation Restore Trust" initiative.
This initiative is a combined federal and state effort designed to combat
healthcare fraud, waste and abuse and specifically targets the Medicare and
Medicaid programs in connection with services of home health agencies, nursing
homes and durable medical equipment suppliers. These entities are targeted
because they account for the fastest growing cost areas in the Medicare and
Medicaid programs. Operation Restore Trust originally focused on five states:
California, Florida, Illinois, New York and Texas. It is now extended to all
states and is concerned with detection of suspected nursing facility fraud and
abuse. This effort is focused on problems with claims for services not rendered
or not provided as claimed and claims falsified to circumvent coverage
limitations on medical supplies. The Company expects efforts of this sort to
continue.
Payment For Services. Unison derives a significant portion of its net
revenues, directly or indirectly, from the Medicare and Medicaid programs. These
programs are subject to statutory and regulatory changes, retroactive and
prospective rate adjustments, administrative rulings and funding restrictions,
all of which could limit or reduce reimbursement for Unison's services. Any
significant decrease in Medicare or Medicaid reimbursement amounts could have a
material adverse effect on Unison. Unison also obtains payment from private
insurers, including managed care organizations and private pay patients.
Unison's facilities also have contracts with private payors, including health
maintenance organizations and other managed care organizations, to provide
certain healthcare services to cover patients for a set per diem payment for
each patient. There can be no assurance that the rates paid to Unison by these
payors will remain at current levels or be adequate to reimburse Unison for the
cost of providing services to covered beneficiaries. In addition, cost increases
due to inflation without corresponding increases in reimbursement could
adversely affect Unison's business.
The Medicare Program. The Medicare Program is a federally funded and
administered health insurance program for individuals age 65 and over or who are
disabled as defined by the Social Security Administration. Medicare covers and
pays for rehabilitation therapy services furnished in facilities in various
ways. Medicare reimburses the skilled nursing facility based on a reasonable
cost standard. For rehabilitation services provided directly, specific
guidelines exist for evaluating the reasonable cost of physical therapy,
occupational therapy and speech language pathology services. Medicare applies
salary equivalency guidelines in determining the reasonable cost of physical
therapy and respiratory services, which is the cost that would be incurred if
the therapist were employed by a nursing facility, plus an amount designed to
compensate the provider for certain general and administrative overhead costs.
Medicare pays for occupational therapy and speech language pathology services on
a reasonable cost basis, subject to the so-called "prudent buyer" rule for
evaluating the reasonableness of the costs. Unison's gross margins for services
reimbursed under the salary equivalency guidelines are significantly less than
services reimbursed under the "prudent buyer" rule.
HCFA recently proposed rules applying salary equivalency guidelines to
certain speech and occupational therapy services, while updating physical and
respiratory therapy guidelines. The proposed rates for occupational therapy and
speech language pathology services are lower than the Medicare reimbursement
rates currently received by Unison for these services. The proposed rates are
open for comment and have been subject to criticism by the industry. Unison
cannot predict when or if changes will be made to current Medicare reimbursement
methodologies. The imposition of salary equivalency guidelines on speech
language pathology and occupational therapy services could significantly impact
Unison's margins.
The Medicare program covers patients requiring daily skilled nursing and
other rehabilitation care following a minimum three-day stay in a general acute
care hospital, but does not cover patients requiring only intermediate or
custodial levels of care. With certain exceptions, payment for skilled nursing
facility services is
67
<PAGE> 72
made prospectively with each facility receiving an interim payment during the
year for its expected reimbursable costs. The interim payment is later adjusted
to reflect actual allowable direct and indirect costs of services based on the
submission of an annual cost report at year end. Each facility is also subject
to limits on reimbursement for routine costs. Exceptions to these limits are
available for, among other things, the provision of atypical services. Due in
part to the provision of subacute services, Unison's costs for care delivered to
Medicare patients in certain of its long-term and specialty healthcare
facilities have exceeded the routine cost limits. Unison's failure to recover
excess costs or to obtain such exceptions could adversely affect Unison's
results of operations.
The Medicaid Program. All of Unison's nursing facilities are certified to
participate in applicable state Medicaid programs. Medicaid is a joint
federal-state medical assistance program for individuals who meet certain income
and resource standards. Facilities participating in the Medicaid program are
required to meet state licensing requirements to be certified in accordance with
state and federal regulations and to enter into contracts with the state agency
to provide services at rates established by the state. Current federal law
requires Medicaid programs to pay rates that are reasonable and adequate to meet
the costs which must be incurred by a nursing facility in order to provide care
and services in compliance with applicable standards. There can be no assurance
that this provision will survive the current legislative efforts to revise
Medicaid. Beyond this general mandate, however, states have considerable
flexibility in establishing their Medicaid reimbursement systems, and as a
result, the payment methodologies and rates vary significantly from state to
state. All of the states in which Unison operates Medicaid-certified facilities
use a cost-based reimbursement system under which reimbursement rates are
determined by the state from cost reports filed annually by each facility, on a
prospective or retrospective basis. Recently, several states, including Texas
and Pennsylvania, have adopted case-mix prospective payment systems, pursuant to
which payment levels increase based on a patient's acuity level and need for
services. Reimbursable costs normally include the costs of providing healthcare
services to patients, administrative and general costs, and the costs of
property and equipment. Not all costs incurred are reimbursed, however, because
of cost ceilings applicable to both operating and fixed costs. Some state
Medicaid programs include an incentive allowance for providers whose costs are
less than the ceilings and who meet other requirements. In addition, certain
Medicaid payments are subject to relatively long collection cycles and payment
delays due to budget shortfalls in state Medicaid programs.
Medicaid reimbursement regulations for Indiana nursing facilities have been
revised three times since August 1, 1994. The first set of revised regulations
(known as "Rule 14") replaced the Rule 4.1 prospective payment system which had
existed since 1983. Under Rule 4.1, actual rate increases after the base period
were generally limited to approximately 3.0% annually and facility operators
were permitted to bill separately for certain ancillary therapy services and
non-routine medical supplies.
With the adoption of Rule 14, the Indiana reimbursement system changed from
a true prospective payment system to a modified cost-based system. Base rates
are now determined by actual costs in the base period subject to various line
item limits. Rates for subsequent years are set at the lower of costs from the
prior year or rates from the prior year inflated by the HCFA Skilled Nursing
Facility Market Basket Index, subject to maximum allowable limits and various
line item limits. This system has, over the last decade, resulted in an increase
in annual reimbursement rates of approximately 6%. Rule 14 also precludes
facility operators from billing separately for certain ancillary therapy
services and non-routine medical supplies. The overall impact of Rule 14 reduced
total Medicaid nursing facility payments in the initial year of adoption by $10
million statewide out of total prior year expenses of $720 million. The
elimination of separate billing for supplies and therapies had a significant
effect on certain facility operators who had relied heavily on this mechanism to
underwrite operating losses from per diem rates. Rule 14.1, Rule 14.2 and
legislation effective July 1, 1995 have made minor amendments which have
generally increased certain line item limits. The implementation of Rule 14 has
not had a material adverse impact on Unison's results of operations.
HR 3103. On August 21, 1996, President Clinton signed HR 3103, which
contains a variety of significant healthcare fraud and abuse provisions,
including: creation of a coordinated federal healthcare fraud and abuse program;
establishment of a Medicare integrity program; expansion of current healthcare
fraud and abuse sanctions; creation of a healthcare fraud criminal sanction;
creation of a criminal penalty for fraudulent
68
<PAGE> 73
disposition of assets in order to obtain Medicaid benefits; and expansion of the
authority to impose, and increasing the amount of, civil monetary penalties.
Pharmacy. Pharmacists and those providing pharmacy services in the United
States are regulated by state statutes and the rules and regulations of state
boards of pharmacy. Currently, Unison operates pharmacies only in Texas and
Indiana. As required by Texas and Indiana law, Unison and its pharmacists are
licensed as a retail pharmacy and as pharmacists, respectively. In addition,
both state and federal regulators prohibit the dispensing of certain drugs or
medicines other than pursuant to a prescription written by a licensed
practitioner. In order to implement these restrictions, regulations impose
strict recordkeeping requirements with respect to the handling and dispensing of
controlled substances, small quantities of which are maintained in Unison's
pharmacy for use in filling prescriptions. These requirements also impose
significant recordkeeping obligations upon Unison and its pharmacists. Unison is
subject to regular audits by governmental authorities to monitor compliance with
recordkeeping and other requirements imposed by law and regulation. Penalties
for failure to comply with applicable regulations can range from imposition of
fines to the suspension or revocation of the license of the pharmacy, one or
more pharmacists, or both. As of August 31, 1997 Unison provided pharmacy
services to 17 Company-affiliated, and 35 non-affiliated skilled nursing
facilities in East Texas, and 11 Unison-affiliated and ten non-affiliated
skilled nursing facilities in Indiana (including the Disposition Facilities),
and 16 other Unison-affiliated skilled nursing facilities in Alabama, Arizona,
Colorado, Washington and Idaho.
Health Care Reform. The Clinton administration and various members of
Congress have made a number of legislative proposals to reform the healthcare
system. Congress is also considering proposals to significantly reduce Medicare
and Medicaid spending, either as a part of efforts to reduce the budget or as a
separate initiative. In addition, some of the states in which Unison operates
are considering or implementing various healthcare reform proposals. These
proposals could limit the types of services or number of providers available to
Medicaid beneficiaries. Unison anticipates that Congress and state legislatures
will continue to review and assess healthcare reform and budget reduction. Talks
in Congress have reached a stalemate with regard to the type and extent of
legislative reform of Medicare and Medicaid programs. Due to uncertainties
regarding the ultimate features of reform or budget initiatives and their
enactment and implementation, Unison cannot predict which, if any, reform
proposals will be adopted, when they may be adopted or what impact they may have
on Unison. No assurance can be given that such measures will not have a material
adverse effect on Unison.
EMPLOYEES
As of September 1, 1997, the Company employed approximately 5,200 full time
equivalent employees. Unison has collective bargaining agreements covering
approximately 500 of its full time equivalent employees. Unison believes that
its overall relations with its employees are good.
LEGAL PROCEEDINGS
Unison is, and may in the future be, party to litigation arising in the
ordinary course of its business. It is also routinely subject to surveys and
investigations by regulators and payors. There can be no assurance that Unison's
insurance coverage will be adequate to cover all liabilities occurring by reason
of such claims or investigations or that any such matters that are not covered
by insurance will not have an adverse effect on Unison's business.
Unison and certain of its current and former directors and officers are
named as defendants in several purported class action complaints following
Unison's announcement in March 1997 that the Company expected to restate its
financial statements for the nine-month period ended September 30, 1996. To
date, the following actions have been filed in federal district court in
Phoenix, Arizona:
Martin Grossman FBO Martin Grossman Profit Sharing Plan and Alan S.
Fellheimer v. Unison HealthCare Corporation, Jerry M. Walker, Craig R.
Clark and Paul J. Contris, Case No. CIV 97-0583.
69
<PAGE> 74
Leonard Goldstein and Ronne Goldstein v. Unison HealthCare
Corporation, Jerry M. Walker, Craig R. Clark and Paul J. Contris, Case No.
CIV 97-0584.
Toni Kaasbell v. Unison HealthCare Corporation, Craig R. Clark and
Paul J. Contras [sic], Case No. CIV 97-0602.
Joseph Grimes v. Unison HealthCare Corporation, Jerry M. Walker, Craig
R. Clark and Paul J. Contris, Case. No. CIV 97-0603.
Amothy Corp. v. Unison HealthCare Corporation, Bruce H. Whitehead,
Phillip R. Rollins, Jerry M. Walker, Craig R. Clark and Paul J. Contris,
Case No. CIV 97-0825.
Karl E. Falkenstein v. Unison HealthCare Corporation, Bruce H.
Whitehead, Phillip R. Rollins, Jerry M. Walker, Craig R. Clark and Paul J.
Contris, Case No. CIV 97-1017.
Dr. Stanley Levine as Trustee for Lakeside Urology Limited Employee
Profit Sharing Trust and Lakeside Urology Limited Employee Pension Plan v.
Unison HealthCare Corporation, Jerry M. Walker, Craig R. Clark and Paul J.
Contris, Case. No. CIV 97-1412.
On September 8, 1997 the Court consolidated the aforesaid actions for all
purposes under the title of the first filed case (Grossman). The purported class
periods asserted in these actions vary, with the broadest such period beginning
December 18, 1995 (when Unison commenced the initial public offering of its
stock (the "IPO")) and ending March 11, 1997 (when Unison announced the need for
a restatement). The complaints in all these actions allege violations of
Sections 10 and 20 of the Exchange Act and Rule 10b-5 thereunder in that the
defendants allegedly knew, or were reckless in not knowing, that Unison's
results for the first three quarters of 1996 were materially overstated, or
misrepresented the capability of Unison's internal accounting system to reliably
record and reflect its financial condition. Amended complaints in four of these
actions (Grossman et al. v. Unison HealthCare Corporation et al., Goldstein et
al. v. Unison HealthCare Corporation et al., Amothy Corp. v. Unison HealthCare
Corporation et al. and Falkenstein v. Unison HealthCare Corporation et al.) also
allege violations of Sections 11 and 15 of the Securities Act in that the
registration statement covering, and the prospectus used in connection with, the
stock sold in the IPO allegedly misleadingly touted Unison's "growth strategy"
and ability to control costs while failing to disclose inadequacies in its
accounting system. Two actions (Amothy Corp. v. Unison HealthCare Corporation et
al. and Falkenstein v. Unison HealthCare Corporation et al.) also allege that
the conduct allegedly giving rise to the alleged Exchange Act violations also
violated the defendants' state law fiduciary duties as directors and officers.
The individual defendants include Jerry M. Walker, Phillip R. Rollins, Craig R.
Clark and Paul J. Contris, who at the time of their resignations, were the
President and Chief Executive Officer, Executive Vice President and Chief
Operating Officer, Executive Vice President and Chief Financial Officer and
Executive Vice President -- Acquisitions and Development, respectively, of the
Company, and Bruce H. Whitehead, currently Chairman of the Board of the Company.
The plaintiffs in these purported class actions seek compensatory damages in
unspecified amounts plus interest, attorneys' fees and costs.
In addition, an action styled Jeffrey D. VanDyke v. Cruttenden Roth, Inc.,
Wheat First Butcher Singer, Bruce H. Whitehead, Unison HealthCare Corporation,
John T. Lynch, Jr., Trouver Capital Partners, L.P., Jerry M. Walker, Phillip R.
Rollins, Craig R. Clark and Paul J. Contris has been filed in the Superior Court
of the State of California (County of Orange) (Case No. 779111). Defendant John
T. Lynch, Jr. is a member of the Board of Directors of Unison; Trouver Capital
Partners, L.P. ("Trouver") is a private investment banking firm of which Mr.
Lynch is a general partner; and Cruttenden Roth Inc. and Wheat First Butcher
Singer are investment banking firms that are named individually and as
representatives of a purported defendant underwriter class. The Orange County
action is purportedly filed on behalf of all persons who acquired Unison common
stock in the Company's IPO; it essentially alleges that in connection with the
IPO, the defendants made positive statements about the Company's prospects, for
which there was no basis, that accounts receivable were overstated, and that the
Company's statement of financial position as of September 30, 1995 was not
fairly presented. The plaintiff seeks compensatory damages in an unspecified
amount as well as interest, attorneys' fees and costs and extraordinary,
equitable and injunctive relief as permitted by law or equity.
70
<PAGE> 75
Unison's bylaws require the Company to indemnify current and former
officers and directors to the extent permitted by Delaware law against such
liabilities and related expenses. The Company is also obligated, subject to
certain conditions, to indemnify the underwriters against such liabilities and
expenses. The Company denies the material allegations in these complaints and
intends to defend the actions vigorously. While there can be no assurances in
such matters, Unison believes that, based on its analysis of the complaints and
of its insurance coverage, that the ultimate disposition of these matters will
not adversely affect its liquidity.
Certain of the Company's subsidiaries were defendants in an action styled
Texas Star Therapy, Inc. v. Emory Care Center, Inc., et al. that was filed in
June 1996 in the District Court of Shelby County, Texas, and subsequently
transferred (as Cause No. 96-07767-B) to Dallas County. Plaintiff sought
$517,000 in unpaid fees for therapy services rendered as well as interest,
penalties, attorneys' fees and costs. Pursuant to the terms of a settlement
agreement entered into in May 1997, Unison is obligated to remit to the
plaintiff the sum of $875,000 in a series of payments that commenced in June and
will culminate in November 1997.
The Company also reached agreement, in July 1997, with the plaintiff in an
action styled Rehabworks, Inc. v. Unison HealthCare Corp., BritWill
Investments-II, Inc. and Sunbelt Therapy Management Services, Inc., being Cause
No. 366-1483-96 filed in the District Court of Collin County, Texas, and served
on the Company in October 1996. The complaint in this action alleged that the
Company was in arrears in the payment of fees for therapy services rendered of
$1,031,000 and that, in addition, Unison breached a non-solicitation covenant in
a contract with Rehabworks and tortiously interfered with Rehabworks' employment
relationship with several of its former employees. The suit sought to recover
such fees as well as damages of not less than $2,375,000 and exemplary damages
of not less than $2,250,000, plus interest and attorneys' fees. Unison is
obligated, under the terms of the agreement providing for the settlement of this
action, to pay the plaintiff the principal amount of $1,029,000 plus interest at
11% per annum in 24 consecutive monthly installments commencing October 1, 1997.
Another Unison subsidiary is the defendant in an action entitled
Carillon/Alpha Limited v. BritWill HealthCare Company filed, and assigned Cause
No. 96-5742, in the District Court of Dallas County, Texas. Plaintiff in this
action seeks compensatory damages in the amount of $216,000, allegedly for
unpaid rent, for the three-month period during which premises leased to the
subsidiary were vacant and the cost of releasing same, plus interest and
attorneys' fees. Unison, which has asserted various defenses and intends
vigorously to defend this lawsuit, nonetheless believes that an adverse outcome
would not have a material effect on its financial condition.
71
<PAGE> 76
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
As described more fully under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein, in March 1997 the Company
determined it to be necessary to restate its operating results for the nine
months ended September 30, 1996. Unison's independent directors thereupon took
steps to reorganize the financial and executive leadership of the Company. In
connection with these changes Messrs. Walker, Clark and Contris resigned as
executive officers, directors and employees of the Company. David A. Kremser, a
Unison director who served as president and CEO of Signature until it was
acquired by Unison in October 1996, was appointed the Chairman of the Executive
Committee of the Board of Directors in March 1997, thereby serving as the
Company's chief executive officer and chief financial officer until September 8,
1997. In October 1997, Mr. Rollins also resigned as an executive officer,
director and employee of Unison.
The following table sets forth certain information with respect to the
current directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------- ---- --------------------------------------------------
<S> <C> <C>
Michael A. Jeffries......... 47 President and Chief Executive Officer, Director
James A. Rice............... 50 Executive Vice President, General Counsel and
Secretary
L. Robert Oberfield......... 59 President, Quest Pharmacies, Inc.
Paul G. Henderson........... 41 President, Sunbelt Therapy Management Services,
Inc.
Terry Troxell............... 46 Senior Vice President - Clinical Operations
William G. Allen, Jr........ 46 Senior Vice President - Operations
Clayton Kloehr.............. 40 Senior Vice President and Treasurer
Bruce H. Whitehead(1)....... 44 Chairman of the Board, Director
David A. Kremser(1)(3)(4)... 49 Director
John T. Casey(2)(3)......... 51 Director
Tyrrell L. Garth(2)......... 48 Director
John T. Lynch, Jr.(1)(3).... 49 Director
Mark W. White(2)(3)......... 57 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Mr. Kremser became a director of Unison upon the closing of the Signature
Acquisition. Since March 1997, Mr. Kremser has served as Chairman of the
Executive Committee of the Board of Directors.
Michael A. Jeffries, 47, has served as President and Chief Executive
Officer of Unison since September 8, 1997. From 1989 to August 1997, Mr.
Jeffries was Senior Vice President and a Director of Horizon/CMS Healthcare, a
publicly traded long-term care company. From 1983 to 1989, Mr. Jeffries was
employed by Beverly Enterprises, the nation's largest long-term care company,
most recently as Senior Vice President, Operations. Prior thereto Mr. Jeffries
was the Director of Operations and Chief Financial Officer of Mid-America
Nursing, a regional nursing home system in Kansas.
James A. Rice has served as Executive Vice President, General Counsel and
Secretary of Unison since June 5, 1997. From 1995 to June 1997, when he joined
Unison, he was Special Counsel to Kaiser Foundation Health Plan, Inc., an
operator of prepaid health plans. From 1983 to 1995, Mr. Rice was an attorney in
private practice. From 1979 to 1983, Mr. Rice was Vice President, Associate
General Counsel and Assistant Secretary of American Medical International, Inc.,
a publicly traded hospital management company. Mr. Rice is a Certified
Administrator of Residential Care Facilities for the Elderly in California.
72
<PAGE> 77
L. Robert Oberfield, 59, has been President of Quest Pharmacies, Inc., a
subsidiary of Unison, since it was organized in March 1995. From December 1992
to March 1995, he was employed by Sunscript Pharmacy Corp., a subsidiary of Sun
Healthcare Company, most recently as President. From September 1990 to December
1992 he was employed by RDS Acquisition Corp. ("RDS"). RDS commenced bankruptcy
proceedings in December 1991. At the time the proceedings commenced, Mr.
Oberfield was the Senior Vice President of RDS, and he served as its President
thereafter until December 1992.
Paul G. Henderson has served as President of Sunbelt Therapy Management
Services, Inc. since the acquisition of Sunbelt by Unison in March 1996. For the
past six years, Mr. Henderson has been active in the founding and management of
physical therapy service providers (such as Sunbelt) and in providing patient
care.
Terry Troxell, 46, served as Director of Professional Services of Unison
since it commenced operations in July 1992. In November 1994, she became Vice
President of Clinical Operations of Unison and in September 1996 she became
Senior Vice President of Clinical Operations. From July 1991 until July 1992,
Ms. Troxell served as Director of Professional Services of Samaritan. She was
employed by the Arizona Department of Health from 1985 until 1991, where she
served as Program Manager of Health Care Facility Licensure and Enforcement,
overseeing the licensing, certification and enforcement of all licensed
healthcare facilities in Arizona. Ms. Troxell is a licensed Registered Nurse and
a Certified Gerontologist Clinical Specialist. She sits on the American Health
Care Association's national facility standards committee and Long-Term Care
Nurse Council. She is a member of the American Gerontological Nurses Association
and the Association for Professionals in Infection Control and Epidemiology.
William G. Allen, Jr., 46, has been Senior Vice President - Operations
since October 1996. Prior thereto he was a Regional Vice President for Unison
(since November 1994), and before that he was Executive Director of Plantation
Manor Incorporated, a private operator of skilled nursing and assisted living
facilities.
Clayton Kloehr has served as Senior Vice President and Treasurer since July
1, 1997. From August 1995 through June 30, 1997, Mr. Kloehr provided financial
consulting services to Unison. From February 1995 until August 1995, Mr. Kloehr
was BritWill's Treasurer. During the 14 years prior thereto Mr. Kloehr was
employed by Placid Oil Company, a privately held oil exploration and production
company based in Dallas, Texas, most recently as Manager of Treasury Operations.
Bruce H. Whitehead, 44, has served as the Chairman of the Board of Unison
since August 1995. He is also President and Chief Executive Officer of the
general partner of Whitehead Family Investments, Ltd. Prior to joining Unison,
Mr. Whitehead was Chairman of BritWill from its inception in 1992. From 1984
through 1992, Mr. Whitehead was President of The BritWill Company, which also
invested in and managed long-term care facilities.
David A. Kremser, 49, founded Signature in July 1987 and served as its
Chairman, President, Chief Executive Officer and a Director until it was
acquired by Unison in October 1996. From January 1985 through 1987, Mr. Kremser
was a Director and Executive Vice President of Columbia Corporation, a long-term
care company, and the President of Columbia West Corporation, a subsidiary of
Columbia Corporation. Prior to joining Columbia Corporation, he was affiliated
with ARA Services, Inc. ("ARA"), most recently with responsibility for ARA's
operations in California, Colorado, Wyoming and Texas.
John T. Casey, 51, has served as a Director of Unison since August 1995.
Mr. Casey was the Chief Executive Officer of InteCare LLC, a hospital management
firm in Irving, Texas, until June 1, 1997. From October 1991 through August
1995, Mr. Casey was the Chief Operating Officer of American Medical
International, a publicly traded hospital management company. Prior to October
1991, Mr. Casey was President of Samaritan Health Services, a hospital and
long-term care provider.
Tyrrell L. Garth, 48, has served as a Director of Unison since August 1995.
Mr. Garth became President of Cheyenne Capital in Beaumont, Texas, a personal
investment firm, in 1996. Prior thereto he was a partner in the law firm of
Moore, Landry, Garth, Jones, Barmeister and Hulett, LLP, which served as general
counsel to BritWill prior to its acquisition by Unison in August 1995.
73
<PAGE> 78
John T. Lynch, Jr., 49, has been a director of Unison since June 1992. Mr.
Lynch was also a director of BritWill between 1992 and its acquisition by Unison
in August 1995. In January 1990, he co-founded Trouver, a private investment
banking firm and serves as one of its general partners. Mr. Lynch was Managing
Director and a member of the Health Care Finance Group of Furman Selz
Incorporated, and was Managing Director and head of Health Care Finance Groups
at Thomson McKinnon Securities, Inc. and Dean Witter Reynolds, Inc. for the
period 1980 through 1990.
Mark W. White, 57, has served as a Director of Unison since August 1995.
Mr. White has been an attorney in private practice since 1987. From 1983 to
1987, Mr. White served as Governor of the State of Texas.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than 10% of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Commission.
Specific due dates for these reports have been established, and the Company is
required to disclose any failure to file by these dates. The Company believes
that all of these filing requirements were satisfied during the year ended
December 31, 1996, except that: (i) on June 24, 1997, Messrs. Walker, Clark and
Oberfield and Ms. Troxell reported on a Form 5 for the year ended December 31,
1996, a repricing of options on January 16, 1996; (ii) on June 24, 1997, Mr.
Rollins amended a Form 5 to report the same repricing of options; and (iii)
Messrs. Contris, Whitehead, Garth, Casey, Lynch and White have not yet reported
on a Form 5 for the year ended December 31, 1996, a repricing of options on
January 16, 1996.
74
<PAGE> 79
EXECUTIVE COMPENSATION
The following table sets forth, with respect to the years ended December
31, 1996, 1995 and 1994, compensation awarded to, earned by or paid to (i)
Unison's Chief Executive Officer throughout 1996 and (ii) the four other most
highly compensated executive officers who were serving as executive officers at
December 31, 1996.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING
SALARY BONUS OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)(2) COMPENSATION
- ---------------------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jerry M. Walker,........................ 1996 $275,000 $41,250 33,924
President, Chief Executive Officer(3) 1995 200,000 $37,500 33,924
1994 161,952
Phillip R. Rollins,..................... 1996 $220,000 $33,000 73,924
Executive Vice President - 1995 200,000 30,000 33,924
Operations, Chief Operating Officer(4) 1994 138,515
Craig R. Clark,......................... 1996 $220,000 $33,000 133,924
Executive Vice President, 1995 184,373 30,000 33,924 $175,000(6)
Chief Financial Officer, Chief 1994 14,231 20,000 88,250(7)
Accounting Officer(5)
Paul J. Contris,........................ 1996 $220,000 $33,000 65,443
Executive Vice President - 1995 200,000 30,000 33,924
Acquisitions and Development(8) 1994 138,515
L. Robert Oberfield,.................... 1996 $136,800 16,185
President, Quest Pharmacies, Inc. 1995 64,000 6,185
</TABLE>
- ---------------
(1) Certain columns have been omitted where there has been no compensation paid
or awarded to or earned by any of the named executives required to be
reported in such columns.
(2) The amounts shown for 1996 include both new option grants and outstanding
options from prior years that were granted during 1995 and "repriced" during
1996.
(3) Effective April 25, 1997, Mr. Walker resigned as President and Chief
Executive Officer and as a Director.
(4) Effective October 6, 1997, Mr. Rollins resigned as Executive Vice
President -- Operations and Chief Operating Officer and as a Director.
(5) Effective April 25, 1997, Mr. Clark resigned as Executive Vice President,
Chief Financial Officer and Chief Accounting Officer and as a Director.
(6) Represents a payment equal to one year's base salary in connection with the
termination of Mr. Clark's employment agreement with BritWill.
(7) Includes consulting fees of $87,750 paid by BritWill before Mr. Clark became
an employee of BritWill and $500 of fees as a director of BritWill. See
"-- Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements."
(8) Mr. Contris served as Unison's Executive Vice President - Finance and Chief
Accounting Officer from August 15, 1995 until June 1996. Effective April 25,
1997, Mr. Contris resigned as Executive Vice President -- Acquisitions and
Development and as a Director.
75
<PAGE> 80
OPTION GRANTS IN LAST FISCAL YEAR (1)
The following table sets forth information about stock option grants during
the last fiscal year to the executive officers named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
- ----------------------------------------------------------------------------------- AT ASSUMED ANNUAL
PERCENT OF RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES OR BASE TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION -------------------
NAME (#)(1) YEAR ($/SH) DATE 5% 10%
- ------------------------------- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jerry M. Walker................ 33,924(3) 4.97% $9.00 8/10/2005 $192,012 $486,595
Phillip R. Rollins(5).......... 33,924(3) 4.97 9.00 8/10/2005 192,012 486,595
40,000(4) 5.86 9.50 9/6/2006 238,980 605,622
Craig R. Clark................. 33,924(3) 4.97 9.00 8/10/2005 192,012 486,595
60,000 8.79 9.00 9/6/2006 339,603 860,621
40,000(4) 5.86 9.50 9/6/2006 238,980 605,622
Paul J. Contris................ 33,924(3) 4.97 9.00 8/10/2005 192,012 486,595
40,000(4) 5.86 9.50 9/6/2006 238,980 605,622
L. Robert Oberfield(5)......... 6,185(3) .91 9.00 8/10/2005 35,007 88,716
10,000(4) 1.46 9.50 9/6/2006 59,745 151,406
</TABLE>
- ---------------
(1) Consists entirely of stock options. In connection with their resignations,
Messrs. Walker, Contris and Clark relinquished their options. Includes
options granted in 1995 that were repriced in 1996.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% or 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciations, if any, in the price of the Common Stock. The potential
realizable value of the foregoing options is calculated by assuming that the
market price of the underlying security appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
repriced exercise price and sold on the last day of its term at the
appreciated price.
(3) These options were granted in 1995 with an exercise price of $10.00 per
share and were repriced in January 1996 to $9.00 per share, which was the
IPO price. The percent of total options granted to employees in fiscal year
is based on 270,541 total grants issued in 1995 and repriced in 1996 plus
412,412 new grants in 1996.
(4) These options were granted with an exercise price of $13.75 per share and
were repriced in December 1996 to $9.50 per share, which was the market
value of the shares on the date of repricing. The percent of total options
granted to employees in the fiscal year is based on 412,412 total grants in
1996 plus the 270,541 shares granted in 1995 that were repriced in 1996.
(5) In September 1997, Mr. Rollins and Mr. Oberfield surrendered their options
in exchange for new options with an exercise price of $2.44. See "-- 1995
Stock Option Plan". The options granted to and held by Messrs. Walker,
Clark, and Contris were terminated in connection with their resignations
from the Company without being exercised.
76
<PAGE> 81
LAST FISCAL YEAR-END OPTION VALUE TABLE(1)
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table concerning the number and value
of options outstanding at the end of the last fiscal year. There were no option
exercises during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE(1)
- -------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Jerry M. Walker......................................... 16,962/ 16,962 $69,968/$ 69,968
Phillip R. Rollins...................................... 16,962/ 56,962 69,968/ 214,968
Craig R. Clark.......................................... 16,962/116,962 69,968/ 462,468
Paul J. Contris......................................... 8,481/ 56,962 34,984/ 179,984
L. Robert Oberfield..................................... 2,474/ 13,711 10,205/ 46,455
</TABLE>
- ---------------
(1) Value as of December 31, 1996 is based upon the closing bid price on that
date of $13.125 as reported on the Nasdaq National Market, minus the
exercise price after repricing, multiplied by the number of shares
underlying the option. In connection with their resignations, Messrs.
Walker, Contris and Clark relinquished their options.
COMPENSATION OF DIRECTORS
The nonemployee directors of Unison receive an annual retainer of $10,000,
plus $1,000 for each Board and Committee meeting attended, and reimbursement of
expenses. In addition they are entitled to participate in the Option Plan.
Nonemployee Directors are entitled to receive annual option grants of 15,000
shares (17,500 shares in the case of the Chairman of the Board) for 1996 and at
the time of each subsequent annual meeting of stockholders, at market value on
that date. Each automatic grant becomes exercisable 50% one year after the grant
and 100% two years after the grant and has a term of ten years, subject to
earlier termination following the optionee's removal from the Board of Directors
for cause. Directors who are also employees of Unison receive no additional
compensation for serving on the Board of Directors. Mr. Kremser received
compensation through September 1997 pursuant to a services agreement described
elsewhere herein. As compensation for services on the Executive Committee, Mr.
Lynch receives an additional $15,000 per month.
THE 1995 STOCK OPTION PLAN
Unison's 1995 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors effective July 10, 1995 and approved by the stockholders on
August 8, 1995. The Board of Directors approved on September 6, 1996, and
Unison's stockholders approved at the Unison Special Meeting on October 28,
1996, an amendment to the Option Plan (the "Option Plan Amendment") which
increased the number of shares of Unison Common Stock authorized for issuance
under the Option Plan from 511,046 to 800,000. At Unison's Annual Meeting on
August 27, 1997, its stockholders approved another Option Plan Amendment which
increased the number of shares of Unison Common Stock authorized for issuance
under the Option Plan from 800,000 to 1,500,000.
The Option Plan is divided into two separate components: (i) a
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price determined by the Plan Administrator and (ii)
the Automatic Option Grant Program under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Unison Common Stock at an exercise price equal to 100% of their fair
market value on the grant date.
77
<PAGE> 82
The Discretionary Option Grant Program is administered by the Compensation
Committee. The Compensation Committee as Plan Administrator has complete
discretion to determine which eligible individuals are to receive option grants,
the time or times when such option grants are to be made, the number of shares
subject to each such grant, the status of any granted option as either an
incentive stock option or a non-qualified stock option under the Federal tax
laws, the vesting schedule to be in effect for the option grant and the maximum
term for which any granted option is to remain outstanding.
Upon an acquisition of Unison by merger, consolidation or reorganization,
each outstanding option may be substituted with shares of the acquiring company
or such option may be canceled in consideration for a cash payment to the
optionee of an amount per option share equal to the excess of the highest fair
market value of Unison Common Stock during the 60-day period preceding the
acquisition over the option exercise price. A similar cash payment will be made
to each optionee upon the dissolution or liquidation of Unison.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of Unison Common
Stock on the new grant date.
Under the Automatic Option Grant Program, each individual serving as a
non-employee member of the Board of Directors of Unison on the date of adoption
of the Option Plan by the Board of Directors received an option grant on such
date for 9,246 shares of Unison Common Stock, except that the Chairman of the
Board of Directors received an option for 10,496 shares. The Option Plan
Amendment increased these amounts. Nonemployee Directors are now entitled to
receive annual option grants in respect of 15,000 shares (17,500 shares in the
case of the Chairman of the Board) for 1996 and at each subsequent annual
meeting of stockholders.
Each automatic grant becomes exercisable 50% one year after the grant and
100% two years after the grant and has a term of 10 years, subject to earlier
termination following the optionee's removal from the Board of Directors for
cause.
The Board of Directors may amend or modify the Option Plan at any time. The
Option Plan will terminate on July 9, 2005, unless sooner terminated by the
Board of Directors.
Effective August 10, 1995, the Board of Directors granted options to
purchase 261,520 shares of Unison Common Stock in the aggregate under the 1995
Plan to certain employees of Unison, including each of the executive officers in
the following amounts: Messrs. Walker, Rollins, Clark and Contris, 33,924 shares
each, which vest over a two-year period from the grant date; and to Mr.
Oberfield and Ms. Troxell, 6,185 shares each, which vest over a four-year period
from the grant date. All of the options have an exercise price (after repricing
in January 1996) of $9.00 per share, the fair market value of the Common Stock
on the grant date, as determined by the Board of Directors.
In September 1996, the Compensation Committee of the Board of Directors
confirmed a special, one-time grant (originally promised in July 1996 subject to
Compensation Committee Approval) of options for 60,000 shares to Mr. Clark
having an exercise price of $9.50 per share, in conjunction with his assumption
of additional responsibilities as Unison's Chief Accounting Officer. On the same
date, the Compensation Committee recommended, and the full Board approved, the
issuance of options for an additional 324,350 shares to Unison employees at an
exercise price of $13.75 per share (subsequently repriced at $9.50 per share),
including options for 40,000 shares each to Messrs. Rollins, Contris and Clark,
options for 10,000 shares to each of Mr. Oberfield and Mr. Henderson, options
for 6,500 shares to Mr. Allen and options for 7,500 shares to Ms. Troxell. Mr.
Allen received an additional option grant in October 1996 for 10,000 shares at
an exercise price of $10.50 per share.
In August 1997, the Compensation Committee recommended and the Board
approved a further repricing of stock options under the Option Plan. The
repricing was prompted by the decline in Unison's stock price and the desire to
reward and retain selected employees. The Company's employees were provided the
opportunity to exchange stock options with exercise prices ranging from $9.00 to
$10.00 for stock options with an exercise price of $2.44, which was the market
value of Unison's stock at the date of grant. The number of shares issuable
under the replacement options is equal to 25% of the number of options
exchanged. Messrs. Oberfield
78
<PAGE> 83
and Allen and Ms. Troxell exchanged options for 16,185, 22,685 and 13,682
shares, respectively, for options to purchase 4,046, 5,671 and 3,420 shares,
respectively. The Board also approved the grant to employees (excluding Mr.
Rollins) of additional new options to purchase 174,700 shares of Unison stock at
an exercise price of $2.44 per share, including the following grants to
executive officers: Mr. Rice, 25,000 shares; Mr. Allen, 10,000 shares; Ms.
Troxell, 6,000 shares and Mr. Henderson, 4,000 shares. All of the aforementioned
options vest over a four-year period beginning August 27, 1997.
At the same time, Unison's Directors surrendered previously granted options
in the aggregate amount of 213,902 with exercise prices ranging from $9.00 to
$9.50. The Directors were granted options to purchase the following number of
shares at $2.44 per share: Mr. Rollins, 30,000 shares; Mr. Whitehead, 22,500
shares; and Messrs. Casey, Garth, Kremser, Lynch and White, 20,000 shares each.
These options vest 50% on September 6, 1997 and 100% on September 6, 1998. In
connection with Mr. Rollins' resignation, all of his options are immediately
exercisable. See "Principal Stockholders."
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with their resignations, in each case effective April 25,
1997, Messrs. Walker, Clark and Contris will receive severance payments in the
amounts of $67,373, $18,333 and $55,000, respectively, in full satisfaction of
the Company's monetary obligations to them under their (now terminated)
employment agreements. In connection with Mr. Rollins' resignation he will
receive a continuation of his base salary and benefits for a period of six
months.
Unison entered into an employment agreement with Mr. Oberfield for a
one-year term beginning in May 1995, subject to automatic renewal for successive
one-year terms unless either Unison or Mr. Oberfield has given notice of
non-renewal 30 days prior to expiration. The employment agreement provides for
an initial annual base salary of $96,000. The annual base salary increased to
$136,800 as of January 1996 because Quest became profitable during 1995. Mr.
Oberfield is also entitled to participate in Unison's incentive compensation
program for key employees, up to a maximum award of 15% of his base salary. If
the employment agreement is not renewed by Unison other than for cause, Unison
must pay Mr. Oberfield one year's base salary and his pro-rated incentive
compensation. The employment agreement contains a one-year nonsolicitation of
employees and customers provision.
In September 1997, Unison entered into an employment agreement with Mr.
Jeffries which will expire on August 31, 2000. The employment agreement provides
for an initial annual base salary of $315,000 and the right to earn annual
incentive compensation of 30% to 50% of his base salary if Unison achieves
pretax income of at least 90% of budget. Mr. Jeffries was also granted options
to purchase 320,000 shares of Unison Common Stock which vest over a three-year
period. The employment agreement provides that in the event of termination by
Unison other than for cause, Unison will pay Mr. Jeffries (i) his base salary
for six months if termination occurs in the first year of employment or (ii) his
base salary for one year if termination occurs after the first year of
employment. Mr. Jeffries would also be entitled to a pro-rated performance
bonus. The agreement contains a one-year nonsolicitation of employees and
customers provision.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Prior to August 1995, decisions concerning compensation of executive
officers were made by the Executive Committee of the Board of Directors, then
consisting of Messrs. Walker, Rollins and Contris. In August 1995, the Board of
Directors created a Compensation Committee consisting of Messrs. Garth, White
and Casey. See "-- Directors and Executive Officers."
At the time that Unison acquired BritWill in August 1995, Mr. Garth was
outside counsel, a former director and a shareholder of BritWill, and Mr. White
was a director and shareholder of BritWill. Mr. Garth and Mr. White have (or
had) direct or indirect material interests in the following recent or
anticipated transactions with BritWill or Unison.
79
<PAGE> 84
- As former shareholders of BritWill, Mr. Garth and Mr. White have
participated and will participate pro rata in all acquisition payments
made and acquisition obligations incurred by Unison in connection with
the BritWill Acquisition (the "BritWill Acquisition Obligations"). The
BritWill Acquisition Obligations are secured by stock pledge agreements
from Messrs. Walker, Rollins, Clark and Contris. See "Risk
Factors -- Concentration of Ownership." The BritWill Acquisition
Obligations paid through December 31, 1996 include $5.6 million of
principal, $853,000 of interest, $2.3 million of payment on monthly
contingent obligations and 561,815 shares of Unison Common Stock
delivered to the former BritWill shareholders. The proceeds from the sale
of the Original Notes were used (in part) to prepay in January 1997 the
remaining $8.0 million outstanding under the Subordinated Note and $1.75
million of contingent payment obligations (see "Use of Proceeds"), after
which the remaining BritWill Acquisition Obligations are solely
Additional Payment Obligations totaling approximately $9.8 million ($14.1
million including an interest component), primarily due on the earlier of
Unison's next public or private sale of debt or equity securities
exceeding $10 million or August 9, 2000.
- Mr. Garth had a $400,000 interest in a $2.5 million promissory note
payable by BritWill and bearing interest at the rate of 12% per annum
(the "Participation Note"). The Participation Note was refinanced by
BritWill when it was acquired by Unison, and the $3.4 million refinancing
note (the "Renewal Note") was ultimately repaid from the proceeds of
Unison's IPO in December 1995.
- Mr. Garth's company, Cheyenne Capital, received consulting fees of
$24,000 per year from Unison in connection with the start-up and
oversight of nine facilities acquired in the BritWill Acquisition which
were previously owned by Mr. Garth. The consulting agreement was
terminated on December 31, 1996.
CERTAIN TRANSACTIONS
When Unison acquired BritWill in August 1995, Mr. Whitehead indirectly
owned approximately 81.5% of BritWill's outstanding stock and served as its
Chairman and as a director. As a result of this interest in the BritWill
Acquisition Obligations, Mr. Whitehead currently is beneficially Unison's second
largest shareholder and one of its largest creditors. Mr. Clark was a BritWill
shareholder and served as BritWill's Executive Vice President and Chief
Financial Officer at the time Unison acquired BritWill. Messrs. Garth, Lynch and
White were also BritWill shareholders and directors. For information concerning
recent and anticipated transactions with BritWill or Unison in which Messrs.
Garth or White had or have a material direct or indirect interest, see
"Management -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions." Messrs. Clark, Lynch and Whitehead also have pro rata
interests in the BritWill Acquisition Obligations described therein.
Mr. Whitehead has (or had) a direct or indirect material interest in the
following additional recent or anticipated transactions with BritWill or Unison.
- Prior to Unison's acquisition of BritWill, Mr. Whitehead sold certain
healthcare facilities or related interests to BritWill and acquired
certain other direct and indirect financial interests and obligations
related to BritWill's healthcare facilities, some of which have continued
thereafter. Through BritWill Texas, Mr. Whitehead is the indirect owner
and lessor of six of the long-term healthcare facilities that Unison
leases in Texas (including three facilities that were subleased to an
unrelated party effective March 1, 1997) with 767 licensed beds and an
annual base rental of $1.1 million, which is approximately the amount of
the annual payment obligations on the related $10.2 million acquisition
mortgage loan secured by those facilities from Omega, an unrelated party,
plus payments due on certain seller subordinated notes incurred when
BritWill Texas acquired the facilities. The parties are currently in the
process of restructuring the ownership structure for three of the six
facilities to eliminate BritWill Texas from the chain of title. The
parties anticipate that BritWill Texas will convey fee title to the three
facilities to Omega and that Omega will then lease the facilities to
BritWill Investments - II, Inc., a subsidiary of Unison, on substantially
the same economic terms that existed under the BritWill Texas mortgage.
Mr. Whitehead, who had guaranteed the BritWill Texas loan, will remain
liable under his guaranty for all obligations owing under the new lease.
Mr. Whitehead is also
80
<PAGE> 85
the guarantor of BritWill's (now Unison's) obligations under the leases
of all fourteen other healthcare facilities that are leased from Omega.
- Mr. Whitehead directly or indirectly owned all of the interests in the
Participation Note and the Renewal Note (as described above) that were
not owned by Mr. Garth.
- From time to time both before and after Unison's acquisition of BritWill,
Mr. Whitehead has made loans and other financial accommodations to
BritWill (now Unison). In addition to the Renewal Note and a portion of
the BritWill Acquisition Obligations, $750,000 of loans from Mr.
Whitehead or his affiliates was repaid from the proceeds of the IPO. A
Unison subsidiary is obligated to repay to an affiliate of Mr. Whitehead
five unsecured promissory notes in the amounts at June 30, 1997 of $1.2
million, $374,000, $304,000, $188,000, and $384,000 with interest at
rates currently ranging from 9.0% to 10.75% per annum and with scheduled
maturities in November 2001 and October 2004. Aggregate monthly payments
on these five notes total approximately $39,000. In addition,
approximately $1.1 million of the proceeds from the $7.5 million Bank
Financing was used to repay a loan from Mr. Whitehead that bore interest
at the rate of 12% per annum. The Bank Financing was repaid from the
proceeds of the sale of the Original Notes. See "Use of Proceeds."
- On April 21, 1997, the Company obtained a $3.0 million loan for general
working capital purposes from Elk Meadows Investments, L.L.C., and
BritWill Investments Company, Ltd., as joint lenders. Elk Meadows
Investments, L.L.C., is controlled by Mr. Kremser and BritWill
Investments Company, Ltd. is controlled by Mr. Whitehead. The loan
matures on the earlier of August 1, 1997, or 30 days after written demand
from the lenders. Messrs. Kremser and Whitehead have agreed to extend the
maturity of this loan until November 1, 1997. In September 1997, the
Company borrowed an additional $1.0 million from Elk Meadows Investments,
L.L.C. and BritWill Investments Company, Ltd. for general working capital
purposes, which is due and payable on October 7, 1997. Interest accrues
on these loans at the Prime Rate plus 2%, subject to an increase in the
rate upon a default. Interim payments on the loans are not required prior
to maturity. The Company paid a loan fee of $29,500 at the closing of the
$3.0 million loan, and also agreed to pay all of the lenders' out of
pocket fees and costs, including attorneys fees and costs, in an amount
not yet determined or demanded by the lenders. Repayment of the loans is
secured by (i) a pledge from the Company of approximately $5 million of
accounts receivable generated by certain of the Company's affiliates and
assigned to the Company, and (ii) a pledge from the Company of its stock
in those affiliates of the Company that either assigned their accounts
receivable to the Company so they could be pledged by the Company as
security for the subject loan or control the entities that assigned such
accounts receivable. The collateral securing the loans also secures
repayment of other obligations owing from the Company and its affiliates
to Messrs. Whitehead and Kremser, and to individuals and entities related
to them.
In addition to his interests as a former director and shareholder of
BritWill, Mr. Lynch is a General Partner of Trouver. Trouver (a) earned
financial advisory fees of $675,000 in connection with Unison's acquisition of
BritWill, (b) assisted Unison in securing lease or management agreements in
respect of four long-term care facilities for which it is entitled to receive
fees of up to approximately $400,000 over the next seven years based on Unison's
management fees or earnings from those facilities over that period, and
(c)earned financial advisory fees of approximately $84,000 from Unison in
connection with the Ampro Acquisition. Trouver is not entitled to any
compensation in connection with the Signature Acquisition or the offering of the
Original Notes or the Exchange Notes.
The Board of Directors entered into a Services Agreement with Mr. Kremser
commencing March 31, 1997. As compensation for his services to the Company in
all capacities, Mr. Kremser is entitled to cash compensation of $7,500 per week
plus expenses as well as options for 50,000 shares of Unison common stock at an
exercise price of $2.875 per share, fully vested. Cash compensation ended in
September 1997 and the options will terminate on March 31, 2002. Mr. Kremser and
the Company are also parties to an indemnification agreement and a tolling
agreement in respect of claims he may have against the Company. The Company also
entered into an agreement with Woodhill Capital Corporation ("Woodhill"), an
entity of which Mr. Lynch is president and sole shareholder, providing for the
services of Mr. Lynch as a consultant beginning March 1, 1997. Under the terms
of this agreement, Woodhill is entitled to receive $15,000 per
81
<PAGE> 86
month plus expenses and Mr. Lynch is granted options to purchase 50,000 shares
of Common Stock at an exercise price of $3.125 per share, fully vested. The
agreement is terminable by either party with two weeks' notice.
Mr. Oberfield, one of Unison's executive officers, serves as the president
and is the minority shareholder of its Quest subsidiary. He receives
compensation based in part upon the earnings of the subsidiary. The Shareholders
Agreement between Mr. Oberfield and the Company contains a put and call feature
whereby, beginning May 1, 1998 and each May thereafter (a "Trigger Date"),
Unison may require Mr. Oberfield to sell his stock in the subsidiary (the "Quest
Stock") to Unison or Mr. Oberfield may require Unison to purchase his Quest
Stock. The price of the shares of Quest Stock will be determined as (a) 100% of
the price/earnings ratio of Unison's Common Stock as of the applicable Trigger
Date multiplied by (b) an annualized estimate of Quest's consolidated net income
(based on earnings for the three-month period immediately preceding the Trigger
Date) multiplied by (c) Mr. Oberfield's percentage share (currently 25%) of the
total outstanding Quest Stock (currently 10,000 shares). Consideration for the
Quest Stock may be in the form of cash, promissory note, or, at Mr. Oberfield's
option, shares of Unison Common Stock.
Effective February 1, 1996, Unison purchased 90% of the outstanding common
stock of Sunbelt from Mr. Henderson and Paige Plash. In consideration for the
stock of Sunbelt, Unison paid $800,000 in cash, issued term notes for $1.0
million in the aggregate and issued subordinated convertible debentures totaling
$1.8 million in the aggregate (collectively, the "Sunbelt Notes"). Approximately
56.2% of the purchase price was payable to Mr. Henderson. Interest on the
Sunbelt Notes was 10.0% payable quarterly. The Sunbelt Notes were converted in
January 1997 into 105,196 shares of Unison Common Stock with the aggregate
balance of $2.0 million paid in cash. In November 1996, Unison purchased the
remaining 10% of Sunbelt stock effective as of February 1, 1996. The aggregate
purchase price, payable 50% to each of Mr. Henderson and Mr. Plash, amounted to
$1.4 million plus a guaranteed payment of $709,000. Additional contingent
payments of up to $1.4 million will be due if specified income targets are
achieved. Consideration for the purchase (excluding the guaranteed payments) was
comprised of promissory notes in the aggregate amount of $1.2 million and 27,942
shares of Unison Common Stock.
82
<PAGE> 87
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Unison Common Stock at September 30, 1997 (December 31, 1996 in the
case of U.S. Bancorp) with respect to (i) each person known to Unison to own
beneficially more than five percent of the outstanding shares of Unison Common
Stock, (ii) each director of Unison, (iii) each of the executive officers listed
in the Summary Compensation Table set forth herein and (iv) all directors and
executive officers of Unison as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------------
IDENTITY OF STOCKHOLDER OR GROUP NUMBER PERCENT
- ------------------------------------------------------------------- --------- -------
<S> <C> <C>
David A. Kremser(2)................................................ 1,550,431 23.92%
Bruce H. Whitehead(3).............................................. 469,339 7.30
U.S. Bancorp(4)
111 SW Fifth Avenue
Portland, Oregon 97204........................................... 369,100 5.75
Jerry M. Walker(5)................................................. 287,946 4.48
Phillip R. Rollins(6).............................................. 340,174 5.27
Paul J. Contris(7)................................................. 107,000 1.67
John T. Lynch, Jr.(8).............................................. 207,585 3.20
Craig R. Clark(9).................................................. 38,022 *
Mark W. White(10).................................................. 13,042 *
Tyrrell L. Garth(11)............................................... 10,000 *
John T. Casey(12).................................................. 12,000 *
L. Robert Oberfield(13)............................................ 1,250 *
All executive officers and directors as a group (17 persons)(14)... 3,117,736 47.11
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. In accordance with Commission rules, shares which may be
acquired upon exercise of stock options which are currently exercisable or
which become exercisable within 60 days of the date of the table are deemed
beneficially owned by the optionee. Except as indicated by footnote, and
subject to community property laws where applicable, the persons or
entities named in the table above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them.
(2) Includes 1,490,431 shares of Unison Common Stock issued to Mr. Kremser in
the Signature Acquisition, including additional shares issued to him as
part of the Equity Adjustment Amount, and 60,000 shares issuable pursuant
to vested options. Does not include 10,000 shares of Unison Common Stock
issuable upon exercise of options which will vest in September 1998.
(3) Includes 458,089 shares of Unison Common Stock issued to Whitehead Family
Investments, Ltd. ("WFI") upon conversion of the Convertible Debenture
issued to the former shareholders of BritWill as partial payment of the
purchase price for the BritWill Acquisition. Mr. Whitehead has sole voting
and investment power with respect to the shares held by WFI. Does not
include 11,250 shares of Unison Common Stock issuable upon exercise of
outstanding options which will vest in September 1998. Includes 11,250
shares of Unison Common Stock issuable upon exercise of immediately
exercisable options.
(4) In a report on Schedule 13G filed in February 1997, U.S. Bancorp stated
that holdings as of December 30, 1996 included 367,000 shares as to which
U.S. Bancorp has sole voting power, no shares for which voting power is
shared, 198,800 shares as to which U.S. Bancorp has sole dispositive power
and 11,700 shares as to which U.S. Bancorp has shared dispositive power.
(5) Currently 265,518 of these shares are pledged to secure payment of the
deferred purchase price for the BritWill Acquisition.
83
<PAGE> 88
(6) Includes 30,000 shares of Unison Common Stock issuable upon exercise of
immediately exercisable options.
(7) Currently 86,294 of these shares are pledged to secure payment of the
deferred purchase price for the BritWill Acquisition.
(8) Includes 10,140 shares of Unison Common Stock as to which he currently
shares investment power with Bruce H. Whitehead. Excludes 10,000 shares of
Unison Common Stock issuable upon exercise of options which will vest in
September 1998. Includes 60,000 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options.
(9) Mr. Clark currently shares investment power over these shares with Bruce H.
Whitehead, which are pledged to secure payment of the deferred purchase
price for the BritWill Acquisition.
(10) Does not include 10,000 shares of Common Stock issuable upon exercise of
options which will vest in September 1998. Includes 10,000 shares of Unison
Common Stock issuable upon exercise of immediately exercisable options.
(11) Does not include 10,000 shares of Unison Common Stock issuable upon
exercise of options which will vest in September 1998. Includes 10,000
shares of Unison Common Stock issuable upon exercise of immediately
exercisable options.
(12) Includes 10,000 shares of Unison Common Stock issuable upon the exercise of
immediately exercisable options, but does not include another 10,000 shares
issuable upon exercise of options that will vest in September 1998.
(13) Does not include 4,046 shares of Unison Common Stock issuable upon exercise
of options which will vest in August 1998 and thereafter.
(14) Includes a total of 195,250 shares of Unison Common Stock issuable upon
exercise of immediately exercisable options (including those described in
the preceding footnotes).
DESCRIPTION OF THE SENIOR NOTES
The Original Notes were issued, and the Exchange Notes will be issued,
under an Indenture dated as of October 31, 1996 (the "Indenture") among Unison,
the Guarantors and First Bank National Association, St. Paul, Minnesota, as
trustee (the "Trustee"). The terms of the Exchange Notes and of the Original
Notes (which are sometimes referred to collectively as the "Senior Notes") will
be substantially identical to each other, except for transferability. Under the
terms of the Indenture, the covenants and events of default will apply equally
to the Original Notes and the Exchange Notes, and the Original Notes and
Exchange Notes will be treated as one class for all actions to be taken by the
holders thereof and for determining their respective rights under the Indenture.
The terms of the Senior Notes (including both the Original Notes and the
Exchange Notes) include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), as in effect from time to time. The Senior Notes are
subject to all such terms, and holders of the Senior Notes are referred to the
Indenture and the Trust Indenture Act for a statement of them. The following is
a summary of certain terms and provisions of the Indenture and the Senior Notes.
This summary does not purport to be a complete description of the Indenture or
the Senior Notes and is subject to the detailed provisions of, and qualified in
its entirety by reference to, the Senior Notes and the Indenture (including the
definitions contained therein). A copy of the Indenture has been filed as an
exhibit to the registration statement of which this Prospectus is a part, and
also may be obtained from Unison by any holder or prospective investor upon
request. Definitions relating to certain capitalized terms are set forth under
"Certain Definitions" and throughout this description.
GENERAL
The Senior Notes are limited in aggregate principal amount to $100.0
million. The Senior Notes are senior unsecured obligations of Unison ranking
senior in right of payment to all existing and future Subordinated Indebtedness
of Unison and pari passu in right of payment with all other existing and future
84
<PAGE> 89
senior indebtedness of Unison. The Senior Notes are effectively subordinated to
all secured Indebtedness of Unison to the extent of the value of the assets
securing such Indebtedness.
Unison is a holding company and has no material assets or operations other
than its investment in its subsidiaries. The Senior Notes are fully and
unconditionally guaranteed on a senior unsecured and joint and several basis
(the "Guarantees") by all of Unison's present subsidiaries and will be similarly
guaranteed by its future subsidiaries (collectively, the "Guarantors"). The term
Subsidiaries does not include Unrestricted Subsidiaries; however, as of the date
hereof there are no Unrestricted Subsidiaries. The Guarantees rank senior to all
Subordinated Indebtedness of the Guarantors and rank pari passu in right of
payment to all other indebtedness of the Guarantors. As of June 30, 1997, the
aggregate outstanding principal amount of senior indebtedness of Unison and its
subsidiaries was approximately $155.0 million (including the Senior Notes), of
which approximately $33.1 million was secured indebtedness that effectively
ranked senior to the Senior Notes.
The Senior Notes have been and will be issued only in fully registered
form, without coupons, in denominations of $1,000 and any integral multiple of
$1,000. No service charge will be made for any registration of transfer or
exchange of Senior Notes, but Unison may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
Principal, premium, if any, and interest on the Senior Notes is payable at
the office or agency of Unison maintained for such purpose within the City and
State of New York or, at the option of Unison, payment of interest may be made
by check mailed to the holders of the Senior Notes at their respective addresses
set forth in the register of holders of Senior Notes; provided that all payments
with respect to Senior Notes, the holders of which have given wire transfer
instructions to the paying agent on or prior to the relevant record date will be
required to be made by wire transfer of immediately available funds to the
accounts specified by such holders. Until otherwise designated by Unison,
Unison's office or agency in New York will be the office of the Trustee
maintained for such purpose.
MATURITY, INTEREST AND PRINCIPAL
The Senior Notes will mature on November 1, 2006. The Original Notes bear
interest at a rate of 12 1/4% per annum from the date of original issuance until
maturity, except that they bore additional interest ("Additional Interest") at
the rate of 50 basis points per annum from December 15, 1996 until ,
1997. The Exchange Notes will bear interest at the same rate from the issue date
of the Original Notes for which they are exchanged or from the last date as to
which interest has been paid on such Original Notes. Interest is payable
semi-annually in arrears on May 1 and November 1, commencing May 1, 1997, to
holders of record of the Senior Notes at the close of business on the
immediately preceding April 15 and October 15, respectively (whether or not a
business day). Interest is computed on the basis of a 360-day year consisting of
twelve 30-day months. The interest rate on the Senior Notes is subject to
increase, and such Additional Interest (as defined herein) will be payable on
the payment dates set forth above, in certain circumstances, including if the
Original Notes or the Exchange Notes are not registered with the Commission and
if the Registration Statement covering the Exchange Notes is not declared
effective within certain prescribed time periods. See "The Registration Rights
Agreement."
85
<PAGE> 90
OPTIONAL REDEMPTION
The Senior Notes will be redeemable at the option of Unison, in whole or in
part, at any time on or after November 1, 2001 at the following redemption
prices (expressed as a percentage of principal amount), together, in each case,
with accrued and unpaid interest to the redemption date, if redeemed during the
twelve-month period beginning on November 1 of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2001...................................................... 106.125%
2002...................................................... 104.594%
2003...................................................... 103.063%
2004...................................................... 101.531%
2005 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, Unison may redeem in the aggregate up to 25%
of the original principal amount of Senior Notes at any time and from time to
time prior to November 1, 1999 at a redemption price equal to 110% of the
aggregate principal amount so redeemed, plus accrued and unpaid interest to the
redemption date, out of the Net Proceeds of one or more Public Equity Offerings,
provided, however, that at least $75 million of the principal amount of Senior
Notes originally issued remains outstanding immediately after the occurrence of
any such redemption and that any such redemption occurs within 60 days following
the closing of any such Public Equity Offering.
In the event of redemption of fewer than all of the Senior Notes, the
Trustee shall select pro rata, by lot or in such other manner as it shall deem
fair and equitable, the Senior Notes to be redeemed. The Senior Notes will be
redeemable in whole or in part upon not less than 30 nor more than 60 days'
prior written notice, mailed by first class mail to a holder's last address as
it shall appear on the register maintained by the Registrar of the Senior Notes.
If any Senior Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note, in a principal amount equal to the
unredeemed portion thereof, will be issued in the name of the holder thereof
upon cancellation of the original Senior Note. After any redemption date, unless
Unison shall default in the payment of the redemption price, interest will cease
to accrue on the Senior Notes or portions thereof called for redemption.
MANDATORY REDEMPTION
Except as set forth under "-- Change of Control Offer" and "-- Certain
Covenants -- Limitation on Certain Asset Sales," Unison is not obligated to make
any mandatory redemption of or sinking fund payments with respect to the Senior
Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Additional Indebtedness
Unison and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, incur (as defined) any Indebtedness
(including Acquired Indebtedness) other than Permitted Indebtedness, provided,
however, that Unison may incur Indebtedness (including Acquired Indebtedness) if
(a) after giving effect on a pro forma basis to the incurrence of such
Indebtedness and to the extent set forth in the definition of Consolidated Fixed
Charge Coverage Ratio the receipt and application of the proceeds thereof,
Unison's Consolidated Fixed Charge Coverage Ratio would be greater than (i) 2.0
to 1 if such Indebtedness is to be incurred on or before December 31, 1997 and
(ii) 2.25 to 1 if such Indebtedness is to be incurred after December 31, 1997;
and (b) no Default or Event of Default shall have occurred and be continuing at
the time or as a consequence of the incurrence of such Indebtedness.
86
<PAGE> 91
The Indenture provides that Unison and the Guarantors will not, directly or
indirectly, incur any Indebtedness that is subordinated to any other
Indebtedness of Unison or any Guarantor unless such Indebtedness is also
expressly subordinated to the Senior Notes, provided, however, that no
Indebtedness of Unison or any Guarantor shall be deemed to be subordinated to
any other Indebtedness of Unison or any Guarantor solely because such other
Indebtedness is secured.
Limitation on Indebtedness of Subsidiaries
Unison and the Guarantors will not permit any of their Subsidiaries to
incur any Indebtedness except (i) Indebtedness to and held by Unison or a
Wholly-Owned Subsidiary of Unison or a Guarantor, provided, however, that any
subsequent issuance or transfer of any Equity Interest that results in such
Subsidiary ceasing to be a Wholly-Owned Subsidiary of Unison or a Guarantor or
any transfer of such Indebtedness to any Person other than Unison or a Guarantor
shall be deemed to be the incurrence of such Indebtedness by Unison, (ii)
Permitted Secured Indebtedness, (iii) Acquired Indebtedness, provided, however,
that such Acquired Indebtedness was not incurred in connection with, or in
anticipation of, such Person becoming a Subsidiary, and (iv) Indebtedness
incurred by a Guarantor which Unison would be permitted to incur in compliance
with the restrictions under "-- Limitation on Additional Indebtedness."
Limitation on Restricted Payments
Unison and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, make any Restricted Payment unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, Unison could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under "Limitation on
Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
through and including the date of such Restricted Payment (the "Base
Period") does not exceed the sum of (1) 50% of Unison's Consolidated Net
Income (or in the event such Consolidated Net Income shall be a deficit,
minus 100% of such deficit) during the Base Period, (2) 100% of the
aggregate Net Proceeds, including the fair market value of securities or
other property received by Unison from the issue or sale, during the Base
Period, of Equity Interests (other than Disqualified Equity Interests or
Equity Interests of Unison issued to any Subsidiary of Unison) of Unison or
any Indebtedness or other securities of Unison convertible into or
exercisable or exchangeable for Equity Interests (other than Disqualified
Equity Interests) of Unison which have been so converted or exercised or
exchanged, as the case may be, and (3) $1.0 million. For purposes of
determining under this clause (c) the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its fair market value.
The provisions of this covenant shall not prohibit (i) the agreement or
commitment to make any payment or distribution permitted under the Indenture or
the payment or distribution so agreed or committed to be made as long as such
payment or distribution is made on the date of such agreement or commitment or
within 60 days thereof, provided, however, that on the date of such agreement or
commitment such payment would comply with the foregoing provisions, it being
understood that the agreement or commitment to make such payment or distribution
shall constitute Permitted Indebtedness, (ii) the retirement of any Equity
Interests of Unison or Subordinated Indebtedness of Unison by conversion into,
or by or in exchange for, Equity Interests (other than Disqualified Equity
Interests), or out of, the Net Proceeds of the substantially concurrent sale
(other than to a Subsidiary of Unison) of other Equity Interests of Unison
(other than Disqualified Equity Interests); provided, that the Net Proceeds of
such Equity Interests so used shall not be included under clause (2) of
paragraph (c) above, (iii) the redemption or retirement of Subordinated
Indebtedness of Unison that is subordinated to the Senior Notes in exchange for,
by conversion into, or out of the Net Proceeds of, a substantially concurrent
sale or incurrence of Indebtedness (other than any Indebtedness owed to a
Subsidiary) of Unison that is contractually subordinated in right of payment to
the Senior Notes to at least the
87
<PAGE> 92
same extent as the Subordinated Indebtedness being redeemed or retired, (iv) the
retirement of any Disqualified Equity Interests by conversion into, or by
exchange for, shares of Disqualified Equity Interests, or out of the Net
Proceeds of the substantially concurrent sale (other than to a Subsidiary of
Unison) of other Disqualified Equity Interests and (v) the purchase of minority
interests from shareholders of Quest and the subsidiaries of Sunbelt and the
purchase of the warrant to purchase shares of Unison Common Stock from
HealthPartners Funding, L.P. pursuant to agreements outstanding on the Issue
Date or on terms no less favorable to the holders of the Senior Notes, provided,
however, that in the case of the immediately preceding clauses (ii), (iii) and
(v), no Default or Event of Default shall have occurred and be continuing at the
time of such Restricted Payment or would occur as a result thereof.
The Indenture provides that in determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date for purposes of
subparagraph (c) above, amounts expended pursuant to clauses (i), (ii) and (v)
of the immediately preceding paragraph shall be included, but without
duplication, in such calculation.
The Indenture provides that for purposes of calculating the Net Proceeds
received by Unison from the issuance or sale of its Equity Interests either upon
the conversion of, or exchange for, Indebtedness of Unison or any Subsidiary,
such amount will be deemed to be an amount equal to the difference of (a) the
sum of (i) the principal amount or accreted value (whichever is less) of such
Indebtedness on the date of such conversion or exchange and (ii) the additional
cash consideration, if any, received by Unison upon such conversion or exchange,
less any payment on account of fractional shares, minus (b) all expenses
incurred in connection with such issuance or sale. In addition, for purposes of
calculating the Net Proceeds received by Unison from the issuance or sale of its
Equity Interests upon the exercise of any options or warrants of Unison, such
amount will be deemed to be an amount equal to the difference of (a) the
additional cash consideration, if any, received by Unison upon such exercise,
minus (b) all expenses incurred in connection with such issuance or sale.
Not later than the date of making any Restricted Payment, Unison shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed, which calculations may be based upon
Unison's latest available financial statements, and, where required, that no
Default or Event of Default exists and is continuing and no Default or Event of
Default will occur immediately after giving effect to such Restricted Payment.
Limitation on Subsidiaries and Unrestricted Subsidiaries
The Indenture provides that Unison may by written notice to the Trustee
designate any Subsidiary (including a newly acquired or a newly formed
Subsidiary) to be an Unrestricted Subsidiary, provided, however, that (i) no
Default or Event of Default shall have occurred and be continuing or would arise
therefrom, (ii) such designation is at that time permitted under the covenant
described under "Limitation on Restricted Payments" and (iii) immediately after
giving effect to such designation, Unison could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "Limitation on Additional Indebtedness." For purposes of the
covenant described under "Limitation on Restricted Payments" above, (i) an
"Investment" shall be deemed to have been made at the time any Subsidiary is
designated as an Unrestricted Subsidiary in an amount (proportionate to Unison's
percentage Equity Interest in such Subsidiary) equal to the net worth of such
Subsidiary at the time that such Subsidiary is designated as an Unrestricted
Subsidiary; (ii) at any date the aggregate of all Restricted Payments made as
Investments since the Issue Date shall exclude and be reduced by an amount
(proportionate to Unison's percentage Equity Interest in such Subsidiary) equal
to the net worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Subsidiary, not to exceed, in the case
of any such redesignation of an Unrestricted Subsidiary as a Subsidiary, the
amount of Investments previously made by Unison and its Subsidiaries in such
Unrestricted Subsidiary (in each case (i) and (ii) "net worth" to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date of designation); and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
88
<PAGE> 93
The Indenture provides that notwithstanding the foregoing, the Board of
Directors of Unison may not designate any Subsidiary of Unison to be an
Unrestricted Subsidiary if, after such designation, (a) Unison or any Subsidiary
of Unison provides credit support for, or a guarantee of, any Indebtedness or
other obligation (contingent or otherwise) of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness or obligation)
or is otherwise subject to recourse or obligated thereunder or therefor, (b) a
default with respect to any Indebtedness of such Subsidiary (including any right
which the holders thereof may have to take enforcement action against such
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of Unison or any Subsidiary of Unison to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity, (c) such Subsidiary owns any
Equity Interests in, or owns or holds any Lien on any property of, any
Subsidiary which is not a Subsidiary of the Subsidiary to be so designated, (d)
such Subsidiary has any contract, arrangement, agreement or understanding with
Unison, or any Subsidiary of Unison, whether written or oral, other than a
transaction having terms no less favorable to Unison or such Subsidiary of
Unison than those which might be obtained at the time from persons who are not
Affiliates of Unison, or (e) Unison or any Subsidiary of Unison has any
obligation to subscribe for any Equity Interest in such Subsidiary or to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve specified levels of operating results.
Limitations on Investments
Unison will not, and will not permit any of its Subsidiaries to, make any
Investment except (i) Permitted Investments or (ii) an Investment that is made
in compliance with the covenant described under "Limitation on Restricted
Payments."
Limitations on Liens
Unison will not, and will not permit any of its Subsidiaries to, create,
incur or otherwise cause or suffer to exist or become effective any Liens of any
kind (other than Permitted Liens) upon any property or asset of Unison or any
Subsidiary or any shares of stock or debt of any Subsidiary which owns property
or assets, now owned or hereafter acquired, or any income or profits therefrom,
unless (i) if such Lien secured Indebtedness which is pari passu with the Senior
Notes, then the Senior Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligation is no longer secured
by a Lien or (ii) if such Lien secures Subordinated Indebtedness, any such Lien
shall be subordinated to a Lien on such property or asset or shares of stock or
debt granted to the holders of the Senior Notes to the same extent as such
Subordinated Indebtedness is subordinated to the Senior Notes.
Limitation on Transactions with Affiliates
Unison will not, and will not permit any of its Subsidiaries to, directly
or indirectly, enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of Unison
(including any Affiliate in which Unison or any Subsidiary thereof owns a
minority interest) or holder of 10% or more of Unison's Equity Interests (each
such transaction, an "Affiliate Transaction") or extend, renew, waive or
otherwise modify the terms of any Affiliate Transaction entered into prior to
the Issue Date unless (i) such Affiliate Transaction is solely between or among
Unison and its Wholly-Owned Subsidiaries; (ii) such Affiliate Transaction is
solely between or among Wholly-Owned Subsidiaries of Unison; (iii) such
Affiliate Transaction is for reasonable fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees or consultants
of Unison or any Subsidiary thereof as reasonably determined in good faith by
the Board of Directors (when required as described below) or senior management
of Unison or of such Subsidiary having no interest in such Affiliate
Transaction; or (iv) the terms of such Affiliate Transaction are fair and
reasonable to Unison or such Subsidiary, as the case may be, and the terms of
such Affiliate Transaction are at least as favorable as the terms which could be
obtained by Unison or such Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis between unaffiliated parties. In any
Affiliate Transaction involving an amount or having a value in excess of $1.0
million in any one year which is not permitted under clause (i) or (ii) above,
Unison or such Subsidiary, as the case may be, must obtain a resolution of its
Board of Directors certifying that such Affiliate Transaction complies with
clause (iii) or (iv) above, as the case may be. In transactions with a value in
excess of $3.0 million which are not permitted
89
<PAGE> 94
under clause (i) or (ii) above, Unison or such Subsidiary, as the case may be,
must obtain a written opinion as to the fairness of such a transaction, from a
financial point of view, from an Independent Financial Advisor.
The foregoing provisions will not apply to (i) the payment of reasonable
annual compensation to directors or executive officers of Unison, (ii) dividends
on Equity Interests made in compliance with the covenant described under
"Limitation on Restricted Payments," (iii) purchase in the ordinary course of
business of, supplies, services and the like from Unison or any Subsidiary; and
(iv) the continued performance of transactions with Affiliates disclosed in this
Prospectus.
Limitation on Certain Asset Sales
Unison will not, and will not permit any of its Subsidiaries to, consummate
an Asset Sale unless (i) Unison or such Subsidiary, as the case may be, receives
consideration at the time of such sale or other disposition at least equal to
the fair market value thereof (as reasonably determined for Asset Sales other
than eminent domain, condemnation or similar governmental proceedings in good
faith by its Board of Directors); and (ii) not less than 75% of the
consideration received (which shall not include any assumed liabilities or
obligations) by Unison or the Subsidiary, as the case may be, from such Asset
Sale is in the form of cash or cash equivalents (those equivalents allowed under
"Temporary Cash Investments") provided, that any Asset Sale or related series of
Asset Sales involving securities, property or assets with an aggregate fair
market value of less than $3 million per Asset Sale or series of related Asset
Sales, but in any case not to exceed $10 million in the aggregate for all
transactions in any consecutive 12-month period, shall be exempt from the
provisions of this clause (ii) (but any consideration received from any such
Asset Sales shall be deemed to be Asset Sale Proceeds for purposes of this
paragraph when reduced to cash or cash equivalents), and (iii) the Asset Sale
Proceeds received by Unison or such Subsidiary are applied, to the extent Unison
elects, (A) to repay and permanently reduce outstanding Permitted Secured
Indebtedness and to permanently reduce the commitments in respect thereof,
provided, however, that such repayment and commitment reduction occurs within
180 days following the receipt of such Asset Sale Proceeds or (B) to an
investment in assets (including Equity Interests or other securities purchased
in connection with the acquisition of Equity Interests or property of another
person) used or useful in businesses similar or ancillary to the business of
Unison or such Subsidiary as conducted at the time of such Asset Sale, provided,
however, that such investment occurs or Unison or such Subsidiary enters into
contractual commitments to make such investment, subject only to customary
conditions (other than the obtaining of financing), on or prior to the 180th day
following receipt of such Asset Sale Proceeds (the "Reinvestment Date") (and
notifies the Trustee of the same in writing) and Asset Sale Proceeds
contractually committed are so applied within 270 days following the receipt of
such Asset Sale Proceeds. Any Asset Sale Proceeds that are not applied as
permitted by clause (iii) of the preceding sentence shall constitute "Excess
Proceeds." If at any time the aggregate amount of Excess Proceeds exceeds $5
million, Unison shall offer (an "Excess Proceeds Offer") to purchase from all
holders of Senior Notes, pursuant to procedures set forth in the Indenture, the
maximum principal amount of Senior Notes that may be purchased with such Excess
Proceeds at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued interest, if any, to the date of the purchase. To the
extent that the aggregate amount of Senior Notes tendered pursuant to such
Excess Proceeds Offer is less than the amount of Excess Proceeds, Unison may use
such portion of the Excess Proceeds that is not used to purchase Senior Notes so
tendered for general corporate purposes not inconsistent with the Senior Notes
or the Indenture. If the aggregate principal amount of Senior Notes tendered
pursuant to such Excess Proceeds Offer is more than the amount of the Excess
Proceeds, the Senior Notes tendered will be repurchased on a pro rata basis or
by such other method as the Trustee shall deem fair and appropriate. Upon the
completion of any Excess Proceeds Offer and the closing of any repurchase of
Senior Notes tendered pursuant to such Excess Proceeds Offer, the amount of
Excess Proceeds shall be deemed to be zero.
If Unison is required to make an Excess Proceeds Offer, Unison shall mail,
within 30 days following the Reinvestment Date, a notice to the holders of the
Senior Notes stating, among other things: (1) that such holders have the right
to require Unison to apply the Excess Proceeds to repurchase such Senior Notes
at a purchase price in cash equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase; (2) the purchase
date, which shall be no earlier than 30 days and not later than 60 days from the
date such notice is mailed; (3) the instructions, determined by Unison, that
each holder of
90
<PAGE> 95
Senior Notes must follow in order to have such Senior Notes repurchased; and (4)
the calculations used in determining the amount of Excess Proceeds to be applied
to the repurchase of such Senior Notes.
In the event of the transfer of substantially all (but not all) of the
assets of Unison or any Subsidiary of Unison or substantially all (but not all)
of the assets of any division or line of business of Unison or any Subsidiary of
Unison as an entirety to a Person in a transaction or series of related
transactions permitted under "-- Mergers, Consolidations and Sales of Assets,"
the successor corporation shall be deemed to have sold the assets of Unison, the
Subsidiary or the division or line of business, as the case may be, not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such assets of Unison, the Subsidiary or
the division or line of business, as the case may be, deemed to be sold shall be
deemed to be Asset Sale Proceeds for purposes of this covenant.
Any Excess Proceeds Offer will be made in substantially the same manner as
a Change of Control Offer. Unison will comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations to
the extent such laws and regulations are applicable to an Excess Proceeds Offer.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries
Unison will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction of any kind on the ability of any of
its Subsidiaries to (a) pay dividends or make any other distributions in cash or
otherwise to Unison or any Subsidiary on its Equity Interests, (b) pay any
Indebtedness owed to Unison or any Subsidiary, (c) make loans or advances to
Unison or any Subsidiary thereof, (d) transfer any of its properties or assets
to Unison or any Subsidiary thereof (other than customary restrictions on
transfer of property subject to a Permitted Lien under the term of the
agreements creating such Permitted Lien (other than a Lien on cash not
constituting proceeds of non-cash property subject to a Permitted Lien) which
would not materially adversely affect Unison's ability to satisfy its
obligations under the Senior Notes) or (e) guarantee any Indebtedness of Unison
or any Subsidiary of Unison, except, in each case, for such encumbrances or
restrictions existing under or contemplated by or by reason of (i) the Senior
Notes or the Indenture, (ii) any restrictions existing under or contemplated by
agreements evidencing any Permitted Secured Indebtedness, (iii) any restrictions
which are in existence on the Issue Date or which exist with respect to a Person
that becomes a Subsidiary on or after the Issue Date, which are in existence at
the time such Person becomes a Subsidiary of Unison (but not created in
connection with or contemplation of such Person becoming a Subsidiary of Unison
and which encumbrance or restriction is not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired) and any agreement that refinances or replaces
the same, provided, however, that the terms and conditions of any such
restrictions are not materially less favorable in the aggregate to the holders
of the Senior Notes than those under or pursuant to the agreement being replaced
or the agreement evidencing the Indebtedness refinanced or replaced and (iv)
customary non-assignment provisions in any contract or licensing agreement
entered into by Unison or any Subsidiary of Unison in the ordinary course of
business or in any lease governing any leasehold interest of Unison or a
Subsidiary.
Restriction on Sale and Issuance of Subsidiary Equity Interests
The Indenture provides that Unison and its Subsidiaries will not issue or
sell, and will not permit any of their Subsidiaries to issue or sell, any Equity
Interests of any Subsidiary to any person other than Unison or a Wholly-Owned
Subsidiary of Unison, except for Common Equity Interests with no preferences or
special rights or privileges and with no redemption or prepayment provisions.
Limitation on Sale and Lease-Back Transactions
Unison will not, and will not permit any of its Subsidiaries to, enter into
any Sale and Lease-Back Transaction unless (i) the consideration received in
such Sale and Lease-Back Transaction is at least equal to the fair market value
of the property sold and (ii) immediately prior to and after giving effect to
the Attributable Indebtedness in respect of such Sale and Lease-Back
Transaction, Unison could incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the covenant described under
"Limitation on Additional Indebtedness."
91
<PAGE> 96
Payments for Consent
Neither Unison nor any of its Subsidiaries shall, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any Senior Notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the Indenture
or the Senior Notes unless such consideration is offered to be paid or agreed to
be paid to all holders of the Senior Notes which so consent, waive or agree to
amend within any time period set forth in the solicitation documents relating to
such consent, waiver or agreement.
Line of Business
Unison will not, and will not permit any of its Subsidiaries to, engage in
any business other than the provision of healthcare and health fitness services,
including without limitation, the ownership, operation or management of
healthcare facilities, the provision of services or supplies to the healthcare
business, providing care and/or housing for the elderly (including independent
living, assisted living or home healthcare), managed care or any other business
determined by Unison's Board of Directors, in good faith, to be reasonably
related to the foregoing.
Limitation on Status as Investment Company
The Indenture prohibits Unison and its Subsidiaries from being required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or from otherwise becoming subject to
regulation as an investment company.
CHANGE OF CONTROL OFFER
Within 30 days of the occurrence of a Change of Control, Unison shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Senior Notes at a
purchase price equal to 101% of the principal amount thereof plus any accrued
and unpaid interest thereon to the Change of Control Payment Date (as
hereinafter defined) (such applicable purchase price being hereinafter referred
to as the "Change of Control Purchase Price") in accordance with the procedures
set forth in this covenant.
Within 30 days of the occurrence of a Change of Control, Unison also shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to the Trustee and to each
holder of the Senior Notes, at the address appearing in the register maintained
by the Registrar of the Senior Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Senior Notes tendered will be accepted for payment,
and otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days from the date such
notice is mailed (the "Change of Control Payment Date");
(3) that any Senior Note not tendered will continue to accrue
interest;
(4) that, unless Unison defaults in the payment of the Change of
Control Purchase Price, any Senior Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the Change
of Control Payment Date;
(5) that holders accepting the offer to have their Senior Notes
purchased pursuant to a Change of Control Offer will be required to
surrender the Senior Notes to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day preceding the
Change of Control Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount
92
<PAGE> 97
of the Senior Notes delivered for purchase, and a statement that such
holder is withdrawing its election to have such Senior Notes purchased;
(7) that holders whose Senior Notes are being purchased only in part
will be issued new Senior Notes equal in principal amount to the
unpurchased portion of the Senior Notes surrendered, provided that each
Senior Note purchased and each such new Senior Note issued shall be in an
original principal amount in denominations of $1,000 and integral multiples
thereof;
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, Unison shall, to the extent lawful,
(i) accept for payment all Senior Notes or portions thereof or beneficial
interests under a Global Note tendered pursuant to the Change of Control Offer,
(ii) deposit with the Paying Agent money sufficient to pay the purchase price of
all Senior Notes or portions thereof or beneficial interests, so tendered and
(iii) deliver or cause to be delivered to the Trustee Senior Notes so accepted
together with an Officers' Certificate stating the Senior Notes or portions
thereof tendered to Unison. The Paying Agent shall promptly (1) mail to each
holder of Senior Notes so accepted and (2) cause to be credited to the
respective accounts of the Holders under a Global Note of beneficial interests
so accepted payment in an amount equal to the Change of Control Purchase Price
for such Senior Notes, and Unison shall execute and issue, and the Trustee shall
promptly authenticate and mail to such holder, a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Notes surrendered and
shall issue a new Global Note equal in principal amount to any unpurchased
portion of beneficial interest so surrendered; provided, however, that each such
new Senior Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof.
The Indenture requires that if any Permitted Secured Indebtedness is
outstanding, at the time of the occurrence of a Change of Control, prior to the
mailing of the notice to holders described in the preceding paragraphs, but in
any event within 30 days following any Change of Control, Unison covenants to
(i) repay in full all obligations and terminate all commitments under such
Permitted Secured Indebtedness or offer to repay in full all obligations and
terminate all commitments under such Permitted Secured Indebtedness of each
lender who has accepted such offer or (ii) obtain the requisite consent under
such Permitted Secured Indebtedness to permit the repurchase of the Senior Notes
as described above. Unison must first comply with the covenant described in the
preceding sentence before it shall be required to purchase Senior Notes in the
event of a Change of Control, provided, however, that Unison's failure to comply
with the covenant described in the preceding sentence constitutes an Event of
Default described in clause (iii) under "Events of Default" below. As a result
of the foregoing a holder of the Senior Notes may not be able to compel Unison
to purchase the Senior Notes unless Unison is able at the time to refinance any
of the Permitted Secured Indebtedness or obtain requisite consents thereunder.
Failure by Unison to make a Change of Control Offer when required by the
Indenture constitutes an Event of Default under the Indenture. The Indenture
provides that, (A) if Unison or any Subsidiary thereof has issued any
outstanding (i) Subordinated Indebtedness or (ii) Preferred Equity Interests,
and Unison or such Subsidiary is required to make a Change of Control Offer or
to make a distribution with respect to such Subordinated Indebtedness or
Preferred Equity Interests in the event of a change of control, Unison and such
Subsidiary shall not consummate any such offer or distribution with respect to
such Subordinated Indebtedness or Preferred Equity Interests until such time as
Unison shall have paid the Change of Control Purchase Price in full to the
holders of Senior Notes that have accepted Unison's Change of Control Offer and
shall otherwise have consummated the Change of Control Offer made to holders of
the Senior Notes and (B) Unison will not issue Subordinated Indebtedness or
Preferred Equity Interests with change of control provisions requiring the
payment of such Subordinated Indebtedness or Preferred Equity Interests prior to
the payment of the Senior Notes in the event of a Change in Control under the
Indenture.
In the event that a Change of Control occurs and the holders of Senior
Notes exercise their right to require Unison to purchase Senior Notes, if such
purchase constitutes a "tender offer" for purposes of Rule 14e-1 under the
Exchange Act at that time, Unison will comply with the requirements of Rule
14e-1 as
93
<PAGE> 98
then in effect with respect to such repurchase. Unison's ability to purchase the
Senior Notes will be limited by Unison's then available financial resources and,
if such financial resources are insufficient, its ability to arrange financing
to effect such purchases. There can be no assurance that Unison will have
sufficient funds to repurchase the Senior Notes upon a Change of Control or that
Unison will be able to arrange financing for such purpose.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Unison will not and will not permit any of its Subsidiaries to consolidate
with, merge with or into, or sell, assign, lease, convey, transfer or otherwise
dispose of (a "transfer") all or substantially all of its assets (as an entirety
or substantially as an entirety in one transaction or a series of related
transactions), to any Person unless: (i) Unison or such Subsidiary, as the case
may be, shall be the continuing Person, or the Person (if other than Unison or
such Subsidiary) formed by such consolidation or into which Unison or such
Subsidiary, as the case may be, is merged or to which the properties and assets
of Unison or such Subsidiary, as the case may be, are transferred shall be a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of the obligations of Unison or such
Subsidiary, as the case may be, under the Senior Notes and the Indenture, and
the obligations under the Indenture shall remain in full force and effect; (ii)
immediately before and immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis Unison
or such Person could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under "Limitation on
Additional Indebtedness"; and (iv) immediately thereafter, Unison, such
Subsidiary or the other surviving entity, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
Unison or such Subsidiary, as the case may be, immediately prior to such
transaction.
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, Unison shall deliver, or cause to be delivered,
to the Trustee, in form and substance reasonably satisfactory to the Trustee, an
Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision of the Indenture and that all conditions
precedent provided for in the Indenture relating to such transaction or
transactions have been complied with.
FUTURE GUARANTEES
The Original Notes are, and the Exchange Notes will be fully and
unconditionally guaranteed on a senior unsecured and joint and several basis by
the Guarantors. The Guarantees will rank senior to all Subordinated Indebtedness
of the Guarantors and will rank pari passu in right of payment to all other
indebtedness of the Guarantors.
The obligations of each Guarantor will be limited to the maximum amounts as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of Indebtedness) and
after giving effect to any collections from or payments made by or on behalf of
any other Guarantor in respect of the obligations of such other Guarantor under
its Guarantee or pursuant to its contribution obligations under the Indenture,
result in the obligations of such Guarantor under the Guarantee not constituting
a fraudulent conveyance or fraudulent transfer under federal or state law. Each
Guarantor that makes a payment or distribution under a Guarantee will be
entitled to a contribution from each other Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Subsidiary Guarantor.
A Guarantor will be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Equity Interests is sold, in each case in a transaction in compliance with the
covenant described under "Certain Covenants -- Limitation on Certain Asset
Sales," or the Guarantor merges with or into or consolidates with, or transfers
all or substantially all of its assets to, the Company or another Guarantor in a
transaction in compliance with "Merger, Consolidation or Sale of Assets," and
such Guarantor has delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent herein provided
for relating to such transaction have been complied with.
94
<PAGE> 99
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Senior Notes when such principal becomes due and payable;
(ii) default for 30 days in the payment of any interest on the Senior
Notes after such interest becomes due and payable:
(iii) the failure of Unison to comply with any of the terms or
provisions of "Change of Control Offer" or "Certain Covenants -- Limitation
on Certain Asset Sales" or "Merger, Consolidation or Sale of Assets";
(iv) default by Unison in the observance or performance of any other
provision in the Senior Notes or the Indenture for 30 days after written
notice from the Trustee or the holders of not less than 25% in aggregate
principal amount of the Senior Notes then outstanding;
(v) failure to pay when due principal, interest or premium in an
aggregate amount of $3 million or more with respect to any Indebtedness of
Unison or any Subsidiary thereof, or the acceleration prior to its express
maturity of any such Indebtedness aggregating $3 million or more:
(vi) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $3 million (which are not paid or
covered by third party insurance by financially sound insurers that have
not disclaimed or threatened to disclaim coverage) shall be rendered
against Unison or any Subsidiary thereof, and shall not be discharged for
any period of 60 consecutive days during which a stay of enforcement shall
not be in effect,
(vii) certain events involving bankruptcy, insolvency or
reorganization of Unison or any Subsidiary of Unison.
The Indenture provides that the Trustee may withhold notice to the holders
of the Senior Notes of any default (except in payment of principal or premium,
if any, or interest on the Senior Notes or that resulted from the failure of
Unison to comply with the provisions of "Change of Control Offer" or "Certain
Covenants -- Limitation on Certain Asset Sales") if the Trustee considers it to
be in the best interest of the holders of the Senior Notes to do so.
The Indenture provides that if an Event of Default (other than an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Senior Notes
then outstanding may declare to be immediately due and payable the entire
principal amount of all the Senior Notes then outstanding plus accrued interest
to the date of acceleration, provided, however, that after such acceleration but
before a judgment or decree based on such acceleration is obtained by the
Trustee, the holders of a majority in aggregate principal amount of outstanding
Senior Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than nonpayment of accelerated
principal, premium or interest, have been cured or waived as provided in the
Indenture. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization shall occur, the principal, premium and
interest amount with respect to all of the Senior Notes shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or the holders of the Senior Notes.
The holders of a majority in principal amount of the Senior Notes then
outstanding shall have the right to waive any existing default or compliance
with any provision of the Indenture or the Senior Notes and to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, subject to certain limitations specified in the Indenture.
No holder of any Senior Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice (if a
continuing Event of Default) and unless also the holders of at least 25% in
aggregate principal amount of the outstanding Senior Notes shall have made
written request and offered reasonable indemnity to the Trustee to institute
such proceeding as a trustee, and unless the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
Senior Notes a direction inconsistent with such
95
<PAGE> 100
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted on such Senior Note
on or after the respective due dates expressed in such Senior Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that Unison may elect either (a) to defease and be
discharged (and discharge the obligations of the Guarantors under the
Guarantees) from any and all obligations with respect to the Senior Notes
(except for the obligations to register the transfer or exchange of such Senior
Notes, to replace temporary or mutilated, destroyed, lost or stolen Senior
Notes, to maintain an office or agency in respect of the Senior Notes and to
hold monies for payment in trust) ("defeasance") or (b) to be released from its
and its Subsidiaries' obligations with respect to the Senior Notes under certain
covenants contained in the Indenture and described above under "Covenants"
("covenant defeasance"), upon the deposit with the Trustee (or other qualifying
trustee), in trust for such purpose, of money and/or U.S. Government Obligations
which through the payment of principal and interest in accordance with their
terms will provide money, in an amount sufficient to pay the principal of,
premium, if any, and interest on the Senior Notes, on the scheduled due dates
therefor or on a selected date of redemption in accordance with the terms of the
Indenture. Such a trust may only be established if, among other things, Unison
shall have delivered to the Trustee an Opinion of Counsel (as specified in the
Indenture) (i) to the effect that neither the trust nor the Trustee will be
required to register as an investment company under the Investment Company Act
of 1940, as amended, and (ii) describing either a private ruling concerning the
Senior Notes, a published ruling of the Internal Revenue Service or a change in
applicable federal income tax law, to the effect that holders of the Senior
Notes or persons in their positions will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount and in
the same manner and at the same times, as would have been the case if such
deposit, defeasance and discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, Unison and/or one or more Guarantors and the Trustee
may, without the consent of holders of the Senior Notes, modify, amend, waive or
supplement the provisions of the Indenture or the Senior Notes for certain
specified purposes, including providing for uncertificated Senior Notes in
addition to certificated Senior Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that, in each case, does not
materially and adversely affect the rights of any holder. The Indenture contains
provisions permitting Unison and/or one or more Guarantors and the Trustee, with
the consent of holders of at least a majority in principal amount of the
outstanding Senior Notes, to modify, amend, waive or supplement the Indenture,
the Senior Notes or Guarantees, except that no such modification shall, without
the consent of each holder affected thereby, (i) reduce the amount of Senior
Notes whose holders must consent to an amendment, supplement, or waiver to the
Indenture or the Senior Notes, (ii) reduce the rate of or change the time for
payment of interest on any Senior Note, (iii) reduce the principal of or premium
on or change the stated maturity of any Senior Note, (iv) make any Senior Note
payable in money other than that stated in the Senior Note or change the place
of payment from New York, New York, (v) change the amount or time of any payment
required by the Senior Notes or reduce the premium payable upon any redemption
of Senior Notes or change the time before which no such redemption may be made,
(vi) waive a default on the payment of the principal of, interest on, or
redemption payment with respect to any Senior Note, (vii) subordinate in right
of payment, or otherwise subordinate, the Senior Notes or the Guarantees to any
other Indebtedness or obligation of Unison or the Guarantors, (viii) amend,
alter, change or modify the obligation of Unison to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate an
Excess Proceeds Offer or waive any Default in the performance of any such offers
or modify any of the provisions or definitions with respect to any such offers
or (ix) take any other action otherwise prohibited by the Indenture to be taken
without the consent of each holder affected thereby.
REPORTS TO HOLDERS
So long as any of the Senior Notes are outstanding, whether or not Unison
is required to be subject to Section 13(a) or 15(d) of the Exchange Act, Unison
will furnish the information required thereby to the Commission, the holders of
the Senior Notes and to the Trustee. The Indenture provides that even if Unison
is
96
<PAGE> 101
entitled under the Exchange Act not to furnish such information to the
Commission or to the holders of the Senior Notes, it will nonetheless continue
to furnish such information to the Commission, the holders of the Senior Notes
and the Trustee.
COMPLIANCE CERTIFICATE
Unison will deliver to the Trustee on or before 120 days after the end of
Unison' fiscal year and on or before 50 days after the end of each of the first,
second and third fiscal quarters in each year an Officers' Certificate stating
whether or not the signers know of any Default or Event of Default that has
occurred. If they do, the certificate will describe the Default or Event of
Default and its status.
THE TRUSTEE
The Trustee under the Indenture initially is the Registrar and Paying Agent
with regard to the Senior Notes. The Indenture provides that, except during the
continuance of an Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Senior Notes may transfer or exchange Senior Notes (other
than in accordance with the exchange of Original Notes for Exchange Notes
pursuant to this Prospectus) in accordance with the Indenture. The Registrar
under such Indenture may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar is not required to
transfer or exchange any Senior Note selected for redemption. Also, the
Registrar is not required to transfer or exchange any Senior Note for a period
of 15 days before selection of the Senior Notes to be redeemed.
The Original Notes were issued in a transaction exempt from registration
under the Act and are therefore subject to certain restrictions on transfer as
required by law. The Exchange Notes will be issued pursuant to the Registration
Statement of which this Prospectus is a part and so will not be subject to such
restrictions on transfer except as described in "Plan of Distribution."
The registered holder of a Senior Note may be treated as the owner of it
for all purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or assumed in connection with an Asset
Acquisition from such Person.
"Acquisition Indebtedness" means Indebtedness incurred by Unison or by a
Subsidiary after the Issue Date the proceeds of which are used for an Asset
Acquisition not prohibited by the covenant under "Line of Business."
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
(including, without limitation, any guarantees of Indebtedness)), but excluding
liabilities under the Guarantee, of such Guarantor at such date and (y) the
present fair salable value of the assets of such Guarantor at such date exceeds
the total amount of its debts (after giving effect to all other fixed and
contingent liabilities (including, without limitation, any guarantees of
Indebtedness) and after giving effect to any collection from any Subsidiary of
such Guarantor in respect of the obligations of such Subsidiary under the
Guarantee), excluding Indebtedness in respect of the Guarantee, as they become
absolute and matured.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For
97
<PAGE> 102
the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by," and "under common control
with"), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise.
"Asset Acquisition" means (a) an Investment by Unison or any Subsidiary of
Unison in any other Person pursuant to which such Person shall become a
Subsidiary of Unison, or shall be merged with or into Unison or any Subsidiary
of Unison, (b) the acquisition by Unison or any Subsidiary of Unison of the
assets of any Person (other than a Subsidiary of Unison) which constitute all or
substantially all of the assets of such Person or (c) the acquisition by Unison
or any Subsidiary of Unison of any division or line of business of any Person
(other than a Subsidiary of Unison).
"Asset Sale" means the direct or indirect sale, transfer, issuance,
conveyance, lease (other than operating leases entered into in the ordinary
course of business pursuant to ordinary business terms, it being understood that
the lease of a healthcare facility shall not be considered to be in the ordinary
course but that leases of portions of a healthcare facility to service providers
shall be considered to be in the ordinary course), assignment or other
disposition (including, without limitation, by eminent domain, condemnation or
similar governmental proceeding) and any merger or consolidation of any
Subsidiary of Unison with or into another Person (other than Unison or any
Wholly-Owned Subsidiary of Unison whereby such Subsidiary shall cease to be a
Wholly-Owned Subsidiary) in any single transaction or series of related
transactions (separate eminent domain, condemnation or similar governmental
proceedings to each be considered a single transaction but not to be considered
together as a series of related transactions) involving property or assets with
a fair market value in excess of $250,000 of (a) any Equity Interest in any
Subsidiary, (b) real property owned by Unison or any Subsidiary thereof, or a
division, line of business or healthcare facility or comparable business segment
of Unison or any Subsidiary thereof or (c) other property, assets or rights
(including, without limitation leasehold rights) of Unison, any Subsidiary
thereof or any division, line of business or healthcare facility of Unison or
any Subsidiary thereof, provided, however, that Asset Sales shall not include
(i) sales, leases, conveyances, transfers or other dispositions to Unison or to
a Subsidiary thereof or to any other Person if after giving effect to such sale,
lease, conveyance, transfer or other disposition such other Person becomes a
Wholly-Owned Subsidiary of Unison, (ii) transactions complying with "Merger,
Consolidation or Sale of Assets" above (except as otherwise provided in the
penultimate paragraph set forth under "Certain Covenants -- Limitation on
Certain Asset Sales" above), and (iii) sales, transfers, issuances, conveyances,
leases, assignments or other dispositions to Unison or any Wholly-Owned
Subsidiary of Unison.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by Unison or any Subsidiary thereof from such Asset Sale (including
cash received as consideration for the assumption of liabilities incurred in
connection with or in anticipation of such Asset Sale), after (a) provision for
all income or other taxes measured by or resulting from such Asset Sale, (b)
payment of all brokerage commissions, underwriting and other fees and expenses
related to such Asset Sale, (c) provision for minority interest holders in any
Subsidiary as a result of such Asset Sale, (d) payments made to retire
Indebtedness secured by the assets subject to such Asset Sale and (e) deduction
of appropriate amounts to be provided by Unison or a Subsidiary thereof as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or disposed of in such Asset Sale and retained by Unison or a
Subsidiary thereof after such Asset Sale including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale and (ii) promissory notes and
other noncash consideration received by Unison or any Subsidiary thereof from
such Asset Sale or other disposition upon the liquidation or conversion of such
notes or noncash consideration into cash.
"Attributable Indebtedness" when used with respect to any Sale-Lease-Back
Transaction or an operating lease with respect to a long-term care facility
means, as at the time of determination, the present value (discounted at a rate
equivalent to the interest rate implicit in the lease, compounded on a
semi-annual basis) of the total obligations of the lessee for rental payments
(after excluding all amounts required to be paid on account of maintenance and
repairs, insurance, taxes, utilities and other similar expenses payable by the
lessee pursuant to the terms of the lease) during the remaining term of the
lease included in any such Sale-Lease-
98
<PAGE> 103
Back Transaction or such operating lease or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty (in
which case the rental payments shall include such penalty); provided, that the
Attributable Indebtedness with respect to a Sale-Lease-Back Transaction shall be
no less than the fair market value (as determined reasonably and in good faith
by the Board of Directors of the Person incurring the Attributable Indebtedness)
of the property subject to such Sale-Lease-Back Transaction.
"Board of Directors" means, as to any Person, the board of directors or any
duly authorized committee thereof of such Person or, if such Person is a
partnership (or other non-corporate Person), of the managing general partner or
partners (or Persons serving an analogous function) of such Person.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"Change of Control" means (i) any sale, merger or consolidation with or
into any Person or any transfer or other conveyance, whether direct or indirect,
of all or substantially all of the assets of Unison, on a consolidated basis, in
one transaction or a series of related transactions, if, immediately after
giving effect to such transaction, any "person" or "group" other than an
Excluded Person is or becomes the "beneficial owner" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), directly or indirectly, of more than 50% of the total voting power
in the aggregate normally entitled to vote in the election of the Board of
Directors, of the transferee or surviving entity, (ii) any "person" or "group"
other than an Excluded Person is or becomes the "beneficial owner" (as such
terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act,
whether or not applicable), directly or indirectly, of more than 50% of the
total voting power in the aggregate of all classes of Equity Interests of Unison
then outstanding normally entitled to vote in elections of the Board of
Directors or (iii) during any period of 12 consecutive months after the Issue
Date, individuals who at the beginning of any such 12-month period constituted
the Board of Directors of Unison (together with any new directors whose election
by such Board or whose nomination for election by the shareholders of Unison was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Common Equity Interest" of any Person means all Equity Interests of such
Person that are generally entitled to (i) vote in the election of directors of
such Person or (ii) if such Person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that will control the management and policies of such Person.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
any Person for any period, on a consolidated basis in accordance with GAAP, the
sum of, without duplication, the amounts for such period, taken as a single
accounting period, of (A) (a) Consolidated Net Income, (b) Consolidated Non-cash
Charges, (c) Consolidated Interest Expense, (d) Consolidated Income Tax Expense,
and (e) one-third of Consolidated Rental Payments less (B) any non-cash items
increasing Consolidated Net Income for such period.
"Consolidated Fixed Charge Coverage Ratio" means with respect to any
Person, the ratio of the aggregate amount of Consolidated Cash Flow Available
for Fixed Charges of such Person for the four full fiscal quarters immediately
preceding the date of the transaction (the "Transaction Date") giving rise to
the need to calculate the Consolidated Fixed Charge Coverage Ratio (such four
full fiscal quarter period being referred to herein as the "Four Quarter
Period") to the aggregate amount of Consolidated Fixed Charges of such Person
for the Four Quarter Period. In addition to and without limitation of the
foregoing, for purposes of this definition, "Consolidated Cash Flow Available
for Fixed Charges" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma basis for the period of such calculation to,
without duplication, (a) the incurrence of any Indebtedness of such Person or
any of its Subsidiaries (and the application of the net proceeds thereof) during
the period commencing on the first day of the Four Quarter Period to and
including the Transaction Date (the "Reference Period"), including, without
limitation, the incurrence of the Indebtedness giving rise to the need to make
such calculation (and the application of the net
99
<PAGE> 104
proceeds thereof), as if such incurrence (and application) occurred on the first
day of the Four Quarter Period (it being understood that with respect to
Indebtedness incurred under a revolving facility used primarily to finance
working capital, the average daily principal amount outstanding during the
Reference Period shall be deemed to be the amount incurred during the Reference
Period), and (b) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness) occurring during
the Four Quarter Period, as if such Asset Sale or Asset Acquisition occurred on
the first day of the Four Quarter Period. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (i)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; and (ii) if interest on
indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period. In calculating the Consolidated Fiscal Charge Coverage
Ratio and giving pro forma effect to the incurrence of Indebtedness during a
Reference Period, pro forma effect shall be given to use of proceeds thereof to
permanently repay or retire Indebtedness. If such Person or any of its
Subsidiaries directly or indirectly guarantees Indebtedness of a third Person,
for purposes of determining the "Consolidated Fixed Charge Coverage Ratio,"
effect shall be given to the incurrence of such guaranteed Indebtedness as if
such Person or such Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness.
"Consolidated Fixed Charges" means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense, (ii) the product of (a) the aggregate amount of
dividends and other distributions paid or accrued during such period in respect
of Disqualified Equity Interests of such Person and its Subsidiaries on a
consolidated basis and (b) a fraction, the numerator which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory income tax rate of such Person, expressed as a decimal and (iii)
one-third of Consolidated Rental Payments.
"Consolidated Income Tax Expense" means, with respect to any Person for any
period, the provision for federal, state, local and foreign income taxes of such
Person and its Subsidiaries for each period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person, on a
consolidated basis in accordance with GAAP, for any period, the sum of, without
duplication, (a) the aggregate amount of interest which, in conformity with
GAAP, would be set forth opposite the caption "interest expense" or any like
caption on an income statement for such Person and its Subsidiaries on a
consolidated basis, (b) imputed interest included in Capitalized Lease
Obligations, (c) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (d) the net
costs associated with Interest Rate Agreements, (e) amortization of other
financing fees and expenses, (f) the interest portion of any deferred payment
obligation, (g) amortization of discount or premium, if any, (h) all other
non-cash interest expense (other than interest amortized to cost of sales), (i)
the interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by such Person and its Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP and (j) all
interest incurred or paid under any guarantee of Indebtedness (including a
guarantee of principal, interest or any combination thereof) of any Person.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP, plus
the amount of any dividends or distributions received by such Person from
Unrestricted Subsidiaries; provided, however, that (a) the Net Income of any
Person (the "other Person") in which the Person in question or any of its
Subsidiaries has less than a 100% interest (which interest does not cause the
net income of such other Person to be consolidated into the net income of the
Person in question in
100
<PAGE> 105
accordance with GAAP) shall be included only to the extent of the amount of
dividends or distributions paid to the Person in question or the Subsidiary, (b)
the Net Income of any Subsidiary of the Person in question that is subject to
any restriction or limitation (whether by terms of its charter, agreement or
applicable law) on the payment of dividends or the making of other distributions
shall be excluded to the extent such restriction or limitation would prevent
such Subsidiary from being able to pay dividends or make other distributions out
of its Net Income, (c)(i) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition and
(ii) any net gain (but not loss) resulting from an Asset Sale by the Person in
question or any of its Subsidiaries other than in the ordinary course of
business shall be excluded, (d) extraordinary gains and losses (including any
related tax effects) shall be excluded and (e) the cumulative effect of changes
in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to Disqualified Equity Interests of such
Person and its Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries reducing Consolidated Net Income of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an extraordinary
item or loss or any such charge which required an accrual of or a reserve for
cash charges for any future period).
"Consolidated Rental Payments" of any Person means, for any period, the
aggregate rental obligations of such Person and its consolidated Subsidiaries
(not including taxes, utilities, insurance, maintenance and repairs and other
similar expenses that the lessee is obligated to pay under the terms of the
relevant leases), determined on a consolidated basis in accordance with GAAP,
payable in respect of such period (net of income from subleases thereof, not
including taxes, utilities, insurance, maintenance and repairs and other similar
expenses that the sublessee is obligated to pay under the terms of such
sublease), whether or not such obligations are reflected as liabilities or
commitments on a consolidated balance sheet of such Person and its Subsidiaries
or in the notes thereto, excluding, however, in any event, (i) that portion of
Consolidated Interest Expense of such person representing payments by such
Person or any of its consolidated Subsidiaries in respect of Capitalized Lease
Obligations (net of payments to such Person or any of its consolidated
Subsidiaries under subleases qualifying as capitalized lease subleases to the
extent that such payments would be deducted in determining Consolidated Interest
Expense) and (ii) the aggregate amount of amortization of obligations of such
Person and its consolidated Subsidiaries in respect of such Capitalized Lease
Obligations for such period (net of payments to such Person or any of its
consolidated Subsidiaries and subleases qualifying as capitalized lease
subleases to the extent that such payments could be deducted in determining such
amortization amount).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Equity Interests" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the maturity date of the Senior Notes, for
cash or securities constituting Indebtedness. Without limitation of the
foregoing, Disqualified Equity Interests shall be deemed to include (i) any
Preferred Equity Interests of a Subsidiary of Unison and (ii) any Preferred
Equity Interests of Unison, with respect to either of which, under the terms of
such Preferred Equity Interests, by agreement or otherwise, such Subsidiary or
Unison is obligated to pay current dividends or distributions in cash during the
period prior to the maturity date of the Senior Notes, provided, however, that
Preferred Equity Interests of Unison or any Subsidiary thereof that are issued
with the benefit of provisions requiring a change of control offer to be made
for such Preferred Equity Interest in the event of a change of control of Unison
or such Subsidiary, which provisions have substantially the same effect as the
provisions of the Indenture described under "Change of Control," shall not be
deemed to be Disqualified Equity Interests solely by virtue of such provisions.
101
<PAGE> 106
"Equity Interests" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interests in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into or exchangeable for any of the foregoing; provided that the Contingent
Obligations to the former BritWill shareholders shall not be deemed to be an
Equity Interest.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Person" means all or any of Bruce H. Whitehead, Jerry M. Walker,
Phillip R. Rollins, Craig R. Clark or Paul J. Contris and their Related Parties.
"fair market value" or "fair value" means, with respect to any assets or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a fully informed, willing
and able buyer, neither of whom is under undue pressure or compulsion to
complete the transaction, all as reasonably determined by a majority of the
Board of Directors acting in good faith, such determination to be evidenced by a
board resolution delivered to the Trustee. No such determination need be
supported by an appraisal or expert opinion.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become, directly or indirectly, liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such person (and "incurrence," "incurred, "incurable," and "incurring" shall
have meanings correlative to the foregoing); provided, however, that a change in
GAAP that results in an obligation of such Person that exists at such time
becoming Indebtedness shall not be deemed an incurrence of such Indebtedness.
Any Indebtedness or Equity Interests of a Person existing at the time such
person becomes a Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be incurred by such person at the time it becomes
a Subsidiary. Indebtedness consisting of reimbursement obligations in respect of
a letter of credit will be deemed to be incurred when the letter of credit is
issued or renewed.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other liabilities arising in the ordinary course
of business) and shall also include, to the extent not otherwise included (i)
any Capitalized Lease Obligations, (ii) obligations secured by a lien to which
the property or assets owned or held by such Person is subject, whether or not
the obligation or obligations secured thereby shall have been assumed, (iii) all
Indebtedness of others of the type described in the other clauses of this
definition (including all dividends of other Persons) the payment of which is
guaranteed, directly or indirectly, by such Person or that is otherwise its
legal liability or which such Person has agreed to purchase or repurchase or in
respect of which such Person has agreed contingently to supply or advance funds
(whether or not such items would appear upon the balance sheet of the
guarantor), (iv) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction, (v)
Disqualified Equity Interests, (vi) obligations of any such Person under any
Interest Rate Agreement applicable to any of the foregoing and (vii)
Attributable Indebtedness. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided, however, that (i) the amount outstanding at any time of any
Indebtedness issued with original issue discount, including the Senior Notes, is
the principal amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time as determined
in conformity with GAAP, and (ii) Indebtedness shall not include any liability
for federal, state, local or other taxes. Notwithstanding any other provision of
the foregoing definition, any trade payable arising from the purchase of goods
or materials or for services obtained in the
102
<PAGE> 107
ordinary course of business shall not be deemed to be "Indebtedness" of Unison
or any Subsidiaries for purposes of this definition. Furthermore, guarantees of
(or obligations with respect to letters of credit supporting) Indebtedness
otherwise included in the determination of such amount shall not also be
included.
"Independent Financial Advisor" means an accounting, appraisal, investment
banking or consulting firm of nationally recognized standing that is, in the
reasonable and good faith judgment of the Board of Directors of Unison,
qualified to perform the task for which such firm has been engaged and is
disinterested and independent with respect to Unison and its Affiliates.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business, including accounts receivable arising in the ordinary course of
business and acquired as a part of the assets acquired by Unison in connection
with an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of property
to others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or stock or other
evidence of beneficial ownership of, any Person, the guarantee or assumption of
the Indebtedness of any other Person (except for an assumption of Indebtedness
for which the assuming Person receives consideration with a fair market value at
least equal to the principal amount of the Indebtedness assumed), the
designation of a Subsidiary as an Unrestricted Subsidiary or the making of any
investment in any Person and all other items that would be classified as
investments on a balance sheet of such Person prepared in accordance with GAAP.
Investments shall exclude extensions of trade credit on commercially reasonable
terms in accordance with normal trade practices.
"Issue Date" means the closing date for the sale and original issuance of
the Original Notes, which was October 31, 1996.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Investments" means the excess of (i) the aggregate of all Investments
made by Unison or a Subsidiary thereof on or after the Issue Date (in the case
of an Investment made other than in cash, the amount shall be the fair market
value of such Investment as determined in good faith by the Board of Directors
of Unison) over (ii) the sum of (A) the aggregate amount returned in cash on
such Investments whether through interest payments, principal payments,
dividends or other distributions and (B) the net cash proceeds received by
Unison or such Subsidiary from the disposition of all or any portion of such
Investments (other than to a Subsidiary of Unison), provided, however, that with
respect to all Investments made in Unrestricted Subsidiaries the sum of clauses
(A) and (B) above with respect to such Investments shall not exceed the
aggregate amount of all Investments made in all Unrestricted Subsidiaries.
"Net Proceeds" means (a) in the case of any sale of Equity Interests by
Unison, the aggregate net proceeds received by Unison, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the Board of Directors of Unison, at the
time of receipt) and (b) in the case of any exchange, exercise, conversion or
surrender of outstanding securities of any kind for or into Equity Interests of
Unison which are not Disqualified Equity Interests, the net book value of such
outstanding
103
<PAGE> 108
securities on the date of such exchange, exercise, conversion or surrender (plus
any additional amount required to be paid by the holder to Unison upon such
exchange, exercise, conversion or surrender, less any and all payments made to
the holders, e.g., on account of fractional shares and less all expenses
incurred by Unison in connection therewith).
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer of such Person (or, in the case of
a Person that is a partnership (or other non-corporate Person), of a general
partner (or analogous individuals) of such Person in such capacity) that shall
comply with applicable provisions of the Indenture.
"Permitted Indebtedness" means:
(i) Indebtedness (plus interest, premium, fees and other obligations
associated therewith) of Unison or any Subsidiary thereof arising under or
in connection with Permitted Secured Indebtedness;
(ii) Indebtedness under the Senior Notes;
(iii) Interest Rate Agreements;
(iv) Additional Indebtedness of Unison, including Indebtedness
incurred in connection with or arising out of Capitalized Lease
Obligations, in an aggregate principal amount outstanding not to exceed the
greater of (x) $10.0 million and (y) 10% of the Company's Consolidated Net
Worth;
(v) Indebtedness of a Subsidiary issued to and held by Unison or a
Subsidiary or Indebtedness of Unison to a Subsidiary in respect of
intercompany advances or transactions;
(vi) Indebtedness outstanding on the Issue Date after giving effect to
the application of the proceeds of the sale of the Original Notes; and
(vii) Refinancing Indebtedness.
"Permitted Investments" means, for any Person, Investments made on or after
the date of the Indenture consisting of:
(i) Temporary Cash Investments;
(ii) (A) Investments in the Company or a Subsidiary of the Company,
(B) Investments in any Person, if (1) as a result of such Investment (y)
such Person becomes a Wholly-Owned Subsidiary of Unison or (z) such Person
is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, Unison
or a Wholly-Owned Subsidiary thereof and (2) after giving effect to such
Investment Unison is in compliance with the covenant described under "Line
of Business" above and (C) Net Investments in any Person, provided,
however, that the aggregate amount of all such Net Investments made
pursuant to this clause (C) shall not exceed $1 million at any one time
outstanding;
(iii) Investments represented by accounts receivable created or
acquired in the ordinary course of business;
(iv) Advances to employees in the ordinary course of business not to
exceed an aggregate of $250,000 outstanding at any one time;
(v) Investments under or pursuant to Interest Rate Agreements;
(vi) An investment that is made by Unison or a Subsidiary thereof in
the form of any Equity Interests, Indebtedness or securities that are
issued by any Person solely as partial consideration for the consummation
of an Asset Sale that is otherwise permitted under the covenant described
under "Limitation of Certain Asset Sales;"
(vii) Investments in the Senior Notes; and
(viii) Investments existing on the Issue Date (or incurred in
conjunction with the Signature Acquisition and the Ampro Acquisition).
104
<PAGE> 109
"Permitted Liens" means, without duplication, (i) Liens existing on the
date of the Indenture, (ii) Liens in favor of Unison or any Subsidiary thereof,
(iii) Liens on property of a Person existing at the time such Person becomes a
Subsidiary of, or is acquired by, merged into or consolidated with Unison or any
Subsidiary thereof, provided, however, that such Liens (a) were not created in
connection with or in anticipation of such acquisition, merger or consolidation
or such Person becoming a Subsidiary and (b) are not applicable to any other
property of Unison or any of the other Subsidiaries of Unison, (iv) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted, provided, however, that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor, (v) landlords', carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business and with respect to amounts which are not yet delinquent or are being
contested in good faith by appropriate proceedings, (vi) pledges or deposits
made in the ordinary course of business in connection with (a) leases,
performance bonds and similar obligations, (b) workers' compensation,
unemployment insurance and other social security legislation, or (c) securing
the performance of surety bonds and appeal bonds required (1) in the ordinary
course of business or in connection with the enforcement of rights or claims of
Unison or a Subsidiary thereof or (2) in connection with judgments that do not
give rise to an Event of Default and which do not exceed $3 million in the
aggregate, (vii) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar encumbrances which, in the aggregate,
do not materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of Unison or any
Subsidiary in connection therewith, (viii) Liens to secure Purchase Money
Indebtedness that is otherwise permitted under the Indenture, provided, however,
that (a) any such Lien is created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the cost
(including sales and excise taxes, installation and delivery charges and other
direct costs of, and other direct expenses paid or charged in connection with,
such purchase or construction) of such Property, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such costs, and (c)
such Lien does not extend to or cover any Property other than such item of
Property and any improvements on such item, (ix) Liens securing Permitted
Secured Indebtedness, (x) Liens securing Capitalized Lease Obligations permitted
to be incurred under clause (iv) of the definition of "Permitted Indebtedness,"
provided, however, that such Lien does not extend to any property other than
that subject to the underlying lease, (xi) Liens pursuant to leases and
subleases of real property which do not interfere with the ordinary conduct of
the business of Unison or any of its Subsidiaries and which are made on
customary and usual terms applicable to similar properties and in the case of
any lease of a healthcare facility do not extend to any property of the Company
or a Subsidiary other than the personal property located at such facility, (xii)
Liens securing reimbursement obligations under commercial letters of credit, but
only in or upon the goods the purchase of which were financed by such letters of
credit, (xiii) Liens securing Acquisition Indebtedness, provided that such Liens
do not extend to or cover any property other than the property directly or
indirectly acquired with the proceeds of such Acquisition Indebtedness and any
improvements thereto (unless such Liens are otherwise Permitted Liens), and
(xiv) Liens securing Refinancing Indebtedness, provided, however, that such
Liens extend only to the assets securing the Indebtedness being extended,
refinancing, renewed or replaced, and such Indebtedness was previously secured
by such assets and provided, further, the terms of such Liens are no less
favorable to the holders of the Senior Notes than the Liens being extended,
refinanced, renewed or replaced.
"Permitted Secured Indebtedness" means any Indebtedness (plus interest,
premium, fees and other obligations associated therewith), and any refinancing,
refunding, replacement, renewal or extension of, under agreements evidencing any
Indebtedness which is secured by assets of Unison or its Subsidiaries, provided,
however, that the aggregate amount of all such Indebtedness outstanding (or
committed to be advanced under the agreements to which such Indebtedness
relates) at any time other than Indebtedness outstanding on the Issue Date,
after giving effect to the sale of the Original Notes and the application of the
proceeds therefrom, shall not exceed the greater of (i) $30 million or (ii) the
sum of 60% of the Company's inventory and 90% of the Company's accounts
receivable as set forth in the Company's consolidated financial statements most
recently delivered pursuant to the Indenture.
105
<PAGE> 110
"Person" means any individual, corporation, partnership, limited liability
company or partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government (including any agency or political
subdivision thereof).
"Preferred Equity Interest" means any Equity Interest of a Person, however
designated, which entitles the holder thereof to a preference with respect to
dividends, distributions or liquidation proceeds of such Person over the holders
of any other Equity Interest issued by such Person.
"Property" or "property" of any Person means all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person and its
Subsidiaries under GAAP.
"Public Equity Offering" means, with respect to any Person, a public
offering by such Person of some or all of its Common Equity Interests other than
Disqualified Equity Interests (however designated and whether voting or
non-voting) and any and all rights, warrants or options to acquire such Equity
Interests.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
The acquisition of a healthcare facility shall not be considered to be in the
ordinary course.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
renews, replaces or extends any Indebtedness of Unison or its Subsidiaries
outstanding on the Issue Date or other Indebtedness permitted to be incurred by
Unison or its Subsidiaries pursuant to the terms of the Indenture, whether
involving the same or any other lender or creditor or group of lenders or
creditors, but only to the extent that (i) the Refinancing Indebtedness is
subordinated to the Senior Notes to at least the same extent as the Indebtedness
being refunded, refinanced or extended, if at all, (ii) the Refinancing
Indebtedness is scheduled to mature either (a) no earlier than the Indebtedness
being refunded, refinanced or extended, or (b) after the maturity date of the
Senior Notes, (iii) except where such Refinancing Indebtedness is Attributable
Indebtedness, such Refinancing Indebtedness has a weighted average life to
maturity at the time such Refinancing Indebtedness is incurred that is equal to
or greater than the weighted average life to maturity of the Indebtedness being
refunded, refinanced or extended, (iv) except where such Refinancing
Indebtedness is Attributable Indebtedness, such Refinancing Indebtedness is in
an aggregate principal amount that is less than or equal to the aggregate
principal or accreted amount (in the case of any Indebtedness issued with
original issue discount, as such) then outstanding under the Indebtedness being
refunded, refinanced or extended and (v) such Refinancing Indebtedness is
incurred by the same Person that initially incurred the Indebtedness being
refunded, refinanced or extended, except that Unison may incur Refinancing
Indebtedness to refund, refinance or extend Indebtedness of any Wholly-Owned
Subsidiary of Unison.
"Related Party" with respect to an Excluded Person means (i) any
Wholly-Owned Subsidiary, or spouse or immediate family member of such Excluded
Person or (ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding a
controlling interest of which consist of such Excluded Person and/or such other
Persons referred to in the immediately preceding clause (i).
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Equity Interests
of Unison or any Subsidiary thereof (including, without limitation, any payment
in connection with any merger or consolidation including Unison) or any payment
made to the direct or indirect holders (in their capacities as such) of Equity
Interests of Unison or any Subsidiary thereof (other than (a) dividends or
distributions payable solely in Equity Interests (other than Disqualified Equity
Interests) or in options, warrants or other rights to purchase Equity Interests
(other than Disqualified Equity Interests) or (b) in the case of Subsidiaries of
Unison, dividends or distributions payable to Unison or to a Wholly-Owned
Subsidiary of Unison), (ii) the purchase, redemption or other acquisition or
retirement for value of any Equity Interests of Unison or any Subsidiary thereof
(other than Equity Interests owned by Unison or a Wholly-Owned Subsidiary,
excluding Disqualified Equity Interests), (iii) the making of any principal
payment on, or the purchase, defeasance, repurchase, redemption or other
acquisition or
106
<PAGE> 111
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of any Subordinated Indebtedness, (iv) the
making of any Investment or guarantee of any Investment in any Person other than
a Permitted Investment or (v) forgiveness of any Indebtedness of an Affiliate of
Unison to Unison or a Subsidiary of Unison. For purposes of determining the
amount expended for Restricted Payments, cash distributed or invested shall be
valued at the face amount thereof and property other than cash shall be valued
at its fair market value.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by Unison or any Subsidiary of Unison of any real or
tangible personal property, which property (i) has been or is to be sold,
conveyed or transferred by Unison or such Subsidiary to such Person in
contemplation of such leasing and (ii) would constitute an Asset Sale if such
property had been sold in an outright sale thereof.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Equity Interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such first-named Person or
any of its Subsidiaries; or (ii) in the case of a partnership, joint venture,
association or other business entity, with respect to which such first-named
Person or any of its Subsidiaries has the power to direct or cause the direction
of the management and policies of such entity by contract or otherwise or if in
accordance with generally accepted accounting principles such entity is
consolidated with the first-named Person for financial statement purposes.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be deemed a
Subsidiary of Unison other than for purposes of the definition of Unrestricted
Subsidiary, unless Unison shall have designated such Unrestricted Subsidiary as
a "Subsidiary" by written notice to the Trustee. An Unrestricted Subsidiary may
be designated as a Subsidiary at any time by Unison by written notice to the
Trustee, provided, however, that (i) no Default or Event of Default shall have
occurred and be continuing or would arise therefrom and (ii) if such
Unrestricted Subsidiary is an obligor of any Indebtedness, any such designation
shall be deemed to be an incurrence as of the date of such designation by Unison
of such Indebtedness and immediately after giving effect to such designation,
Unison could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "Limitation on Additional
Indebtedness".
"Subordinated Indebtedness" means Indebtedness of any Person which is
expressly subordinated in right of payment to any other Indebtedness of such
Person.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or fully guaranteed by the United States of America, or of
any governmental agency or political subdivision thereof, backed by the full
faith and credit of the United States and maturing within one year of the date
of purchase; (ii) Investments in time deposits, certificates of deposit, bankers
acceptances or commercial paper issued by a bank (or any parent company of such
bank) organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500 million and rated at least A by
Standard & Poor's Corporation ("S&P") and A-2 by Moody's Investors Service, Inc.
("Moody's"), maturing within one year of purchase; (iii) commercial paper that
is rated at least A-1 by S&P or P-1 by Moody's, issued by a company that is
incorporated under the laws of the United States or of any State and directly
issues its own commercial paper, and has a remaining term to maturity of not
more than one year; (iv) a repurchase agreement with (A) any commercial bank
that is organized under the laws of any State or any national banking
association and that has total assets of at least $500 million, or (B) any
investment bank that is organized under the laws of any State and that has total
assets of at least $500 million, which agreement is secured by any one or more
of the securities and obligations described in clauses (i), (ii) or (iii) of
this definition of Temporary Cash Investments, which shall have a market value
(exclusive of accrued interest and valued at least monthly) at least equal to
the principal amount of such investment; or (v) Investments in money market
funds that invest substantially all of such funds' assets in the Investments
described in the preceding clauses (i), (ii), (iii) and (iv).
"Unrestricted Subsidiary" means, (i) any Subsidiary of an Unrestricted
Subsidiary and (ii) any Subsidiary of Unison which shall have been designated as
an Unrestricted Subsidiary in accordance with the
107
<PAGE> 112
Indenture. An Unrestricted Subsidiary may be designated as a Subsidiary at a
later date in the manner provided in the definition of "Subsidiary" above.
"Wholly-Owned Subsidiary" means any Subsidiary, all of the outstanding
Equity Interests (other than directors' qualifying shares) of which are owned,
directly or indirectly, by Unison.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Notes to be offered
as set forth herein will each be issued in the form of one "Global Note." The
Global Note will be deposited on the date of the closing of the Exchange Offer
of Exchange Notes for Original Notes pursuant to this Prospectus (the "Closing
Date") with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of a nominee of the DTC. The Global Note (and any Global
Note issued in exchange therefor) will be subject to certain restrictions on
transfer set forth therein and will bear the legend regarding such restrictions
set forth under the heading "Notice to Investors" herein.
Senior Notes (i) originally purchased by or transferred to Accredited
Investors who are not qualified institutional buyers, or (ii) held by qualified
institutional buyers which elect to take physical delivery of their certificates
instead of holding their interest through the Global Note (and which are thus
ineligible to trade through DTC) (collectively referred to herein as the
"Non-Global Purchasers") will be issued, in registered form, without interest
coupons ("Certificated Securities"). Upon the transfer to a qualified
institutional buyer of such Certificated Securities initially issued to a
Non-Global Purchaser, such Certificated Securities will, unless the transferee
requests otherwise or the Global Note has previously been exchanged in whole for
such Certificated Securities, be exchanged for an interest in the Global Note.
The Global Note. Unison expects that pursuant to procedures established by
the DTC (i) upon deposit of the Global Note, the DTC will credit the accounts of
persons who have accounts with DTC ("participants") or persons who hold
interests through participants designated by such person with portions of the
Global Note and (ii) ownership of the Senior Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Qualified institutional buyers may hold their interests in the
Global Note directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Senior Notes, DTC or such nominee will be considered the sole owner or holder of
the Senior Notes represented by the Global Note for all purposes under the
Indenture. No beneficial owner of an interest in the Global Note will be able to
transfer such interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the Indenture.
Payments of the principal of, premium (if any) and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of Unison, the Trustee or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Unison expects that DTC or its nominee, upon receipt of any payment of the
principal of, premium (if any) and interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note, as
shown on the records of DTC or its nominee. Unison also expects that payments by
participants to owners of beneficial interests in such Global Note held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Senior Notes to persons in states which require physical
delivery of such securities
108
<PAGE> 113
or to pledge such securities, such holder must transfer its interest in the
Global Note in accordance with the normal procedures of DTC and including the
procedures set forth in the Indenture.
DTC has advised Unison that it will take any action permitted to be taken
by a holder of Senior Notes (including the presentation of Senior Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interest in the Global Note is credited and only in
respect of such portion of the aggregate principal amount of Senior Notes as to
which such participant or participants have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Note for Certificated Securities, which it will distribute to its participants.
DTC has advised Unison as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither Unison nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depository for the Global Note and a successor depository is not
appointed by Unison within 90 days, Unison will issue Certificated Securities in
exchange for the Global Note.
THE REGISTRATION RIGHTS AGREEMENT
On October 31, 1996, Unison entered into the Registration Rights Agreement
pursuant to which it agreed, for the benefit of the holders of the Original
Notes, that it would, at its sole expense, (i) use its best efforts to file as
soon as practicable, but in no event, later than within 45 days after the Issue
Date, file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer to exchange
the Original Notes for notes (the "Exchange Notes") which will have terms
substantially identical in all material respects to the Original Notes (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions), (ii) within 135 days after the Issue Date, use its best efforts
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act and (iii) use its best efforts to consummate the
Exchange Offer within 31 days after the effective date of the Exchange Offer
Registration Statement (or, if not a business day, on the next business day
thereafter). Unison did not satisfy these requirements within the times alloted
and so has been required to pay Additional Interest as described below.
Nevertheless, Unison has proposed an amendment to the Registration Rights
Agreement (the "Amendment") that is intended to confirm that the Exchange Offer
being made pursuant to this Prospectus will satisfy this obligation. The
Amendment is attached as Appendix A to this Prospectus. Unison's obligation to
consummate the Exchange Offer is subject to certain conditions, including
approval or consent to the Amendment by the Initial Purchasers and by the
holders of a majority of the outstanding principal amount of the Original Notes.
Unison will keep this Exchange Offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Original Notes. For each Original Note surrendered
to Unison pursuant to this Exchange Offer, the holder of such Original Note will
receive an Exchange Note having a principal amount at maturity equal to that of
the surrendered Original Note. Interest on the Exchange Notes will accrue from
the later of (i) the last interest payment date on which interest was paid on
the Original Notes surrendered in exchange therefor or (ii) if the
109
<PAGE> 114
Original Notes are surrendered for exchange on a date in a period which includes
the record date for an interest payment date to occur on or after the date of
such exchange and as to which interest will be paid, the date of such interest
payment date. Under existing Commission interpretations, the Exchange Notes will
in general be freely transferable after the Exchange Offer without further
registration under the Securities Act, provided, however, that in the case of
broker-dealers, a prospectus meeting the requirements of the Securities Act must
be delivered as required. Unison has agreed for a period of up to 180 days after
consummation of this Exchange Offer (or longer if required by the Registration
Right Agreement) to make available a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any resale of any
such Exchange Notes acquired as described below. A broker-dealer which delivers
such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act and will
be bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations).
Each holder of Original Notes that wishes to exchange such Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and (iii) it is not an "affiliate," as
defined in Rule 405 of the Securities Act, of Unison, or if it is an affiliate,
it will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
In the event that (i) applicable interpretations of the staff of the
Commission do not permit Unison to effect this Exchange Offer, or if for any
other reason the Amendment is not approved, or (ii) in the case of any holder of
the Original Notes that participates in this Exchange Offer, such holder does
not receive Exchange Notes on the date of exchange that may be sold without
restriction under state and federal securities laws (other than due solely to
the status of such holder as an affiliate of Unison within the meaning of the
Securities Act) or (iii) under certain other circumstances described in the
Registration Rights Agreement, Unison will, at its own expense, (a) as promptly
as practicable, file a shelf registration statement covering resales of the
affected Senior Notes (the "Shelf Registration Statement"), (b) use its
respective best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act within 60 days of filing the same and (c) use
its best efforts to keep effective the Shelf Registration Statement until the
earlier of the disposition of the Senior Notes covered by the Shelf Registration
Statement or three years after its effective date. Unison will provide to each
holder of the affected Senior Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement for the affected Senior Notes has become effective and
take certain other actions as are required to permit unrestricted resales of the
affected Senior Notes. A holder of the Senior Notes that sells such Senior Notes
pursuant to the Shelf Registration Statement generally would be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification rights and
obligations).
If Unison fails to comply with the above provisions, then, as liquidated
damages, additional interest shall become payable in respect of the affected
Senior Notes as follows:
If (i) notwithstanding that Unison has consummated or will
consummate this Exchange Offer, Unison is required to file a
Shelf Registration Statement and such Shelf Registration
Statement is not filed on or prior to the date required by the
Registration Rights Agreement;
110
<PAGE> 115
(ii) notwithstanding that Unison has consummated or will
consummate this Exchange Offer, Unison is required to file a
Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or
prior to the 60th day following the date such Shelf Registration
Statement was filed; or
(iii) either (A) Unison has not exchanged the Exchange Notes for
all Original Notes validly tendered in accordance with the terms
of the Exchange Offer on or prior to 31 days after the effective
date of the Exchange Offer Registration Statement (or, if not a
business day, on the next business day thereafter) or (B) the
Exchange Offer Registration Statement ceases to be effective at
any time prior to the time that the Exchange Offer is
consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior
to the earlier of the disposition of the Senior Notes covered by
the Shelf Registration Statement or the third anniversary of its
effective date;
(each such event referred to in clauses (i) through (iii) above is a
"Registration Default"), the sole remedy available to holders of the affected
Senior Notes as to which there is a Registration Default will be the immediate
assessment of additional interest ("Additional Interest") as follows: the per
annum interest rate on the affected Senior Notes will increase by 50 basis
points; and the per annum interest rate will increase by an additional 25 basis
points for each subsequent 90-day period during which the Registration Default
remains uncured, up to a maximum additional interest rate of 200 basis points
per annum in excess of the interest rate on the cover of this Prospectus. All
Additional Interest will be payable to holders of the affected Senior Notes in
cash on the same original interest payment dates as the Senior Notes, commencing
with the first such date occurring after any such Additional Interest commences
to accrue, until such Registration Default is cured. After the date on which
such Registration Default is cured, the interest rate on the affected Senior
Notes will revert to the interest rate originally borne by the Senior Notes (as
shown on the cover of this Prospectus).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and also will be available upon
request to Unison.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of up to 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale.
Unison will not receive any proceeds from any sales of the Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of the Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by
111
<PAGE> 116
delivering a prospectus a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of up to 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. Unison has agreed to pay certain expenses incident
to the Exchange Offer, other than commissions or concession of any brokers or
dealers, and will indemnify the holders of the Exchange Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make the
statements herein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of this
Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the period
referred to above by the number of days during the period from and including the
date of the giving of such notice to and including the date when broker-dealers
shall have received copies of the supplemented or amended Prospectus necessary
to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for Unison by Quarles & Brady.
EXPERTS
The consolidated financial statements of Unison HealthCare Corporation at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and Registration Statement and
the related financial statement schedule appearing elsewhere herein have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein which, as to the years 1995 and 1994,
are based in part on the reports of Ronald H. Ridgers, P.C., independent
auditor. The financial statements referred to above are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
The consolidated statements of operations and cash flows of BritWill
HealthCare Company for the one month ended July 31, 1995 appearing in this
Prospectus and Registration Statement, and the related financial statement
schedule appearing elsewhere herein have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of BritWill HealthCare Company as of
June 30, 1995 and for the year ended December 31, 1994 and the six months ended
June 30, 1995 included in this Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Signature Health Care Corporation
as of December 31, 1995 and 1994 and for each of the years then ended, and the
combined financial statements of Arkansas, Inc., Cornerstone Care, Inc., Douglas
Manor, Inc., and Safford Care, Inc. as of December 31, 1995 and for the period
from inception at May 9, 1995 through December 31, 1995 appearing herein have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of RehabWest, Inc. for the years ended December
31, 1995 and 1994 included in this Prospectus and Registration Statement have
been audited by Anderson and Whitney, P.C., indepen-
112
<PAGE> 117
dent public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
The combined financial statements of Henderson and Associates
Rehabilitation and Sunbelt Therapy Management Services, Inc. for the years ended
December 31, 1995 and 1994 and for each of the two years in the period ended
December 31, 1995 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of Franciscan Health Care Centers at
Enumclaw and Walla Walla at June 30, 1996 and 1995 and for each of the three
years in the period ended June 30, 1996 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
Unison is subject to the informational requirements of the Exchange Act and
in accordance therewith files reports, proxy and information statements and
other information with the Securities Exchange Commission (the "Commission").
Unison Common Stock is listed on the Nasdaq National Market under the symbol
UNHC. Reports, proxy statements and other information filed by Unison can be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 10006 and can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Midwest Regional Office, Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Additionally, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, and the address of the
Commission's site is: http//www.sec.gov.
113
<PAGE> 118
APPENDIX A
"Notwithstanding anything to the contrary in the Registration Rights
Agreement, the Registration Default caused by the Company's failure to file the
Exchange Registration Statement by the Filing Date or to cause it to become
effective by the Effectiveness Date, or by its failure to file and cause a Shelf
Registration Statement to become effective, is hereby cured and terminated, and
the Additional Interest related to such Registration Default shall cease to
accrue, effective upon the effective date of the Exchange Registration
Statement."
A-1
<PAGE> 119
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
1. FINANCIAL STATEMENTS
UNISON HEALTHCARE CORPORATION
Report of Independent Auditors................................................................ F-3
Report of Independent Auditor................................................................. F-4
Report of Independent Auditor................................................................. F-5
Consolidated Balance Sheets as of December 31, 1996 and 1995.................................. F-6
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994.... F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31,
1996, 1995 and 1994......................................................................... F-8
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.... F-9
Notes to Consolidated Financial Statements.................................................... F-10
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996......................... F-30
Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996......... F-31
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996......... F-32
Notes to Consolidated Financial Statements.................................................... F-33
BRITWILL HEALTHCARE COMPANY
Report of Independent Auditors................................................................ F-35
Report of Independent Accountants............................................................. F-36
Consolidated Balance Sheet June 30, 1995...................................................... F-37
Consolidated Statements of Operations for the year ended December 31, 1994, six months ended
June 30, 1995 and one month ended July 31, 1995............................................. F-38
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1994 and the
six months ended June 30, 1995.............................................................. F-39
Consolidated Statements of Cash Flows for the year ended December 31, 1994, six months ended
June 30, 1995 and one month ended July 31, 1995............................................. F-40
Notes to Consolidated Financial Statements.................................................... F-41
SIGNATURE HEALTH CARE CORPORATION
Report of Independent Public Accountants...................................................... F-51
Consolidated Balance Sheets as of September 30, 1996, December 31, 1995 and 1994.............. F-52
Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1995
and the years ended December 31, 1995 and 1994.............................................. F-53
Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994.............................................. F-54
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995
and the years ended December 31, 1995 and 1994.............................................. F-55
Notes to Consolidated Financial Statements.................................................... F-56
ARKANSAS, INC., CORNERSTONE CARE, INC., DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
Report of Independent Public Accountants...................................................... F-61
</TABLE>
F-1
<PAGE> 120
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Combined Balance Sheet as of September 30, 1996, and December 31, 1995........................ F-62
Combined Statement of Operations for the nine months ended September 30, 1996, from inception
to September 30, 1995 and year ended December 31, 1995...................................... F-63
Combined Statement of Stockholders' Equity for the nine months ended September 30, 1996 and
the year ended December 31, 1995............................................................ F-64
Combined Statement of Cash Flows for the nine months ended September 30, 1996, from inception
to September 30, 1995 and year ended December 31, 1995...................................... F-65
Notes to Combined Financial Statements........................................................ F-66
REHABWEST, INC.
Report of Independent Public Accountants...................................................... F-69
Balance Sheets as of December 31, 1995 and 1994............................................... F-70
Statements of Operations for the years ended December 31, 1995 and 1994....................... F-71
Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994............. F-72
Statements of Cash Flows for the years ended December 31, 1995 and 1994....................... F-73
Notes to Financial Statements................................................................. F-74
Balance Sheets as of September 30, 1996 and 1995.............................................. F-77
Statements of Operations for the nine months ended September 30, 1996 and 1995................ F-78
Statements of Stockholders' Equity for the nine months ended September 30, 1996............... F-79
Statements of Cash Flows for the nine months ended September 30, 1996 and 1995................ F-80
HENDERSON AND ASSOCIATES REHABILITATION AND SUNBELT THERAPY MANAGEMENT SERVICES, INC.
Report of Independent Auditors................................................................ F-81
Combined Statements of Operations and Stockholders' Equity for the years ended December 31,
1995 and 1994............................................................................... F-82
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1994.............. F-83
Notes to Financial Statements................................................................. F-84
FRANCISCAN HEALTH CARE CENTER AT ENUMCLAW AND WALLA WALLA
Report of Independent Auditors................................................................ F-87
Combined Statements of Operations for the years ended June 30, 1994, 1995 and 1996............ F-88
Combined Statements of Cash Flows for the years ended June 30, 1994, 1995 and 1996............ F-89
Notes to Combined Financial Statements........................................................ F-90
</TABLE>
F-2
<PAGE> 121
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Unison HealthCare Corporation:
We have audited the accompanying consolidated balance sheets of Unison
HealthCare Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the index at
Item 21(b). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
consolidated financial statements of American Professional Holding, Inc. (Ampro)
and Memphis Clinical Laboratory, Inc. (Memphis), which statements reflect total
assets constituting 5% at December 31, 1995 of the related consolidated totals,
and which reflect net operating revenues constituting approximately 11% and 33%
and net income constituting approximately 123% and 121% of the consolidated
totals for each of the two years in the period ended December 31, 1995,
respectively. Those statements and the data relating to Ampro and Memphis
included in the schedules as they relate to December 31, 1995 and each of the
two years in the period ended December 31, 1995, listed in the index at Item
21(b) were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to data included for Ampro and Memphis, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1995 and 1994, the report of
other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Unison
HealthCare Corporation and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and, for 1995 and 1994, the report of other auditors, the related
financial statement schedules, as they relate to December 31, 1996 and 1995 and
each of the three years in the period ended December 31, 1996, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Phoenix, Arizona
May 16, 1997
F-3
<PAGE> 122
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
American Professional Holding, Inc.
We have audited the accompanying consolidated balance sheets of American
Professional Holding, Inc. as of December 31, 1994 and 1995 and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Professional Holding, Inc. at December 31, 1994 and 1995 and the results of
their operations and their cash flows for each of three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Ronald H. Ridgers, P.C.
Richardson, Texas
March 30, 1996
F-4
<PAGE> 123
REPORT OF INDEPENDENT AUDITOR
The Board of Directors
Memphis Clinical Laboratory, Inc.
We have audited the accompanying consolidated balance sheets of Memphis
Clinical Laboratory, Inc. as of December 31, 1994 and 1995 and the related
statements of income and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Memphis
Clinical Laboratory, Inc. at December 31, 1994 and 1995 and the results of its
operations and cash flows for each of three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
Ronald H. Ridgers, P.C.
Richardson, Texas
February 10, 1996
F-5
<PAGE> 124
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 17,409,000 $ 6,169,000
Accounts receivable (Notes 2, 5, 10 and 13).................... 28,608,000 18,324,000
Prepaid expenses and other current assets (Note 6)............. 5,885,000 2,319,000
------------ -----------
Total current assets........................................ 51,902,000 26,812,000
Property and equipment, net
(Notes 7 and 13)............................................... 30,830,000 3,688,000
Lease operating rights and other intangible assets, net (Note
8)............................................................. 113,781,000 39,160,000
Goodwill, net (Note 2)........................................... 28,431,000 8,452,000
Security deposits and other assets (Note 9)...................... 5,977,000 3,189,000
------------ -----------
$230,921,000 $81,301,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 10)....................................... $ -- $ 789,000
Accounts payable (Note 11)..................................... 10,505,000 9,968,000
Accrued expenses (Note 12)..................................... 21,437,000 9,238,000
Current portion of notes payable and long-term debt due to
related parties (Notes 13 and 17)........................... 12,312,000 636,000
Current portion of other notes payable and long-term debt (Note
13)......................................................... 21,603,000 6,229,000
Deferred taxes (Note 18)....................................... -- 879,000
------------ -----------
Total current liabilities................................... 65,857,000 27,739,000
Notes payable and long-term debt due to related parties, less
current portion (Notes 13 and 17).............................. 15,882,000 13,691,000
Other notes payable and long-term debt (Note 13)................. 107,341,000 5,392,000
Deferred taxes (Note 18)......................................... 24,791,000 8,173,000
Leasehold liability, net (Note 16)............................... 4,434,000 4,622,000
Other liabilities................................................ 927,000 781,000
------------ -----------
Total liabilities........................................... 219,232,000 60,398,000
Stockholders' equity (Note 14):
Preferred stock, $.001 par value; authorized 1,000,000 shares;
no shares issued or outstanding............................. -- --
Common stock, $.001 par value; authorized 25,000,000 shares in
1996 and 10,000,000 shares in 1995; issued and outstanding
6,078,000 shares in 1996 and 4,214,000 shares in 1995....... 5,000 3,000
Additional paid-in capital..................................... 34,723,000 20,501,000
Retained earnings (accumulated deficit)........................ (23,039,000) 399,000
------------ -----------
Net stockholders' equity.................................... 11,689,000 20,903,000
------------ -----------
$230,921,000 $81,301,000
============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 125
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Net patient service revenues..................... $146,379,000 $64,947,000 $17,070,000
Other operating revenues......................... 2,295,000 3,541,000 1,336,000
------------ ---------- -----------
Total operating revenues................. 148,674,000 68,488,000 18,406,000
Expenses:
Wages and related................................ 85,789,000 35,047,000 9,593,000
Other operating.................................. 64,771,000 24,032,000 6,462,000
Rent............................................. 15,658,000 6,673,000 1,406,000
Interest......................................... 5,824,000 1,176,000 147,000
Depreciation and amortization.................... 4,561,000 1,311,000 286,000
Impairment losses (Note 23)...................... 3,865,000 -- --
------------ ---------- -----------
Total expenses........................... 180,468,000 68,239,000 17,894,000
------------ ---------- -----------
Income (loss) before income taxes.................. (31,794,000) 249,000 512,000
Income tax expense (benefit)....................... (8,356,000) 132,000 172,000
------------ ---------- -----------
Net income (loss).................................. $(23,438,000) $ 117,000 $ 340,000
============ ========== ===========
Net income (loss) per share........................ $ (5.01) $ 0.05 $ 0.19
Common shares used in per share calculation........ 4,676,037 2,280,213 1,806,164
</TABLE>
See accompanying notes.
F-7
<PAGE> 126
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------ ADDITIONAL EARNINGS
NUMBER OF PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993
As previously reported............. 1,250,000 $ -- $ -- $ (103,000) $ (103,000)
Pooling adjustments................ 540,000 1,000 410,000 45,000 456,000
--------- ------ ----------- ------------ -----------
Balance as restated................ 1,790,000 1,000 410,000 (58,000) 353,000
Stock warrants issued................ -- -- 43,000 -- 43,000
Net income........................... -- -- -- 340,000 340,000
--------- ------ ----------- ------------ -----------
Balance at December 31, 1994......... 1,790,000 1,000 453,000 282,000 736,000
Sale of common stock in public
offering, net of stock issuance
costs.............................. 2,000,000 2,000 14,612,000 -- 14,614,000
Conversion of debenture.............. 424,000 -- 5,286,000 -- 5,286,000
Stock warrants issued................ -- -- 150,000 -- 150,000
Net income........................... -- -- -- 117,000 117,000
--------- ------ ----------- ------------ -----------
Balance at December 31, 1995......... 4,214,000 3,000 20,501,000 399,000 20,903,000
Costs of initial public offering..... -- -- (93,000) -- (93,000)
Stock warrants exercised............. 178,000 -- -- -- --
Conversion of debenture.............. 138,000 -- 1,714,000 -- 1,714,000
Common stock issued for
acquisitions....................... 1,537,000 2,000 12,701,000 -- 12,703,000
Stock options exercised.............. 11,000 -- 102,000 -- 102,000
Tax benefit associated with exercise
of stock options................... -- -- 11,000 -- 11,000
Repurchase of stock warrants......... -- -- (213,000) -- (213,000)
Net loss............................. -- -- -- (23,438,000) (23,438,000)
--------- ------ ----------- ------------ -----------
Balance at December 31, 1996......... 6,078,000 $5,000 $34,723,000 $(23,039,000) $ 11,689,000
========= ====== =========== ============ ===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 127
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................... $(23,438,000) $ 117,000 $ 340,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Impairment losses............................................. 3,865,000 -- --
Depreciation and amortization................................. 4,561,000 1,311,000 286,000
Provision for doubtful accounts............................... 2,742,000 29,000 128,000
Change in deferred taxes...................................... (9,238,000) (21,000) 8,000
Minority interest expense..................................... 138,000 21,000 --
Leasehold liability amortization.............................. (188,000) (78,000) --
Other charges and credits, net................................ (69,000) -- --
Changes in operating assets and liabilities, net of
acquisitions:
Increase in net accounts receivable --..................... (5,310,000) (8,694,000) (2,749,000)
(Increase) decrease in prepaids and other.................. 825,000 (607,000) (575,000)
Increase in accounts payable and accrued expenses.......... 2,454,000 6,990,000 2,519,000
------------ ----------- -----------
Net cash used in operating activities........................... (23,658,000) (932,000) (43,000)
------------ ----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements................ (3,587,000) (1,333,000) (995,000)
Increase in intangibles and other assets........................ (2,707,000) (1,397,000) (155,000)
Increase in lease deposits...................................... (1,204,000) (272,000) (180,000)
Acquisitions, net of cash acquired.............................. (41,225,000) (677,000) (300,000)
------------ ----------- -----------
Net cash used in investing activities........................... (48,723,000) (3,679,000) (1,630,000)
------------ ----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in revolving line of credit............. (789,000) (2,916,000) 950,000
Proceeds from sale of accounts receivable....................... -- 2,515,000 197,000
Proceeds from long-term borrowings.............................. 113,567,000 2,448,000 1,130,000
Payments on long-term borrowings................................ (24,808,000) (6,187,000) (482,000)
Repayment of other long-term liabilities........................ (2,779,000) -- --
Proceeds from public stock offering............................. -- 14,614,000 --
Bank overdrafts................................................. 3,043,000 -- --
Repurchase of stock warrants.................................... (213,000) -- --
Exercise of stock options....................................... 102,000 -- --
Increase in deferred financing costs............................ (4,502,000) -- --
------------ ----------- -----------
Net cash provided by financing activities....................... 83,621,000 10,474,000 1,795,000
------------ ----------- -----------
Net increase in cash.......................................... 11,240,000 5,863,000 122,000
Cash and cash equivalents at beginning of period................ 6,169,000 306,000 184,000
------------ ----------- -----------
Cash and cash equivalents at end of period...................... $ 17,409,000 $ 6,169,000 $ 306,000
============ =========== ===========
Supplemental disclosure:
Income taxes paid............................................. $ 124,000 $ 92,000 $ 172,000
Interest expense paid......................................... 3,014,000 1,127,000 130,000
Supplemental disclosure of noncash investing and financing
activities
Acquisitions:
Fair value of assets acquired................................. 122,420,000 58,744,000 --
Liabilities incurred and assumed.............................. 68,492,000 59,421,000 --
Common stock issued........................................... 12,703,000 -- --
------------ -----------
41,225,000 677,000 --
Conversion of debentures into shares of common stock............ 1,714,000 5,286,000 --
Acquisition of leasehold rights ($237,000) and equipment and
leasehold improvements ($126,000) through issuance of note
payable....................................................... -- -- 363,000
Common stock warrants issued (Note 16).......................... -- 150,000 --
Property and equipment purchased under capital leases........... 7,205,000 -- --
</TABLE>
See accompanying notes
F-9
<PAGE> 128
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS
Unison HealthCare Corporation ("Unison") is a provider of long-term and
specialty healthcare services. At December 31, 1996, Unison operated and managed
62 facilities, including long-term care and specialty care and
independent/assisted living facilities. Unison's operations are located in 13
states, principally in the midwest and southwest regions of the United States.
Unison changed its name from SunQuest HealthCare Corporation in November
1995. In August 1995, Unison acquired all of the common stock of BritWill
HealthCare Company ("BritWill"). In March 1996, Unison acquired 90% of the
Common Stock of four rehabilitation therapy centers (collectively "Sunbelt
Therapy") and in November 1996 retroactively acquired the remaining 10%. In
October 1996, Unison acquired all of the common stock of Signature Health Care
Corporation and four affiliated companies ("Signature"). In October 1996, Unison
completed a merger with two clinical laboratory companies, American Professional
Holding, Inc. ("Ampro") and Memphis Clinical Laboratory, Inc. ("Memphis"). (Note
4). Unison also operates a pharmacy operation and a Medicare Part B billing and
supply company.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Unison, its subsidiaries, and all of its leased facilities. Significant
intercompany transactions and balances have been eliminated in consolidation.
Revenues and expenses related to the operations acquired from BritWill,
Sunbelt Therapy, Signature and other acquisitions are included in Unison's
results of operations for periods subsequent to the date of acquisition. The
mergers with Ampro and Memphis have been accounted for as poolings of interests.
Accordingly the consolidated financial statements of Unison have been restated
to include the accounts of Ampro and Memphis for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Operating Revenues
Revenues are recognized when services are provided and products are
delivered.
Unison's revenues are derived primarily from providing long-term healthcare
services. Contractual adjustments resulting from agreements with various
organizations to provide services for amounts which differ from billed charges,
including services under Medicare and Medicaid, are recorded as deductions from
gross patient service revenue. The estimated third party payor settlements under
Medicare and Medicaid programs are recorded in the period the related services
are rendered and are subject to audit and final settlement by the fiscal
intermediary. Differences between the net amounts accrued and subsequent
settlement, if any, are recorded in operations at the time the final settlement
is determined. As of December 31, 1996 and 1995, Unison has approximately
$2,260,000 and $1,800,000, respectively, of Medicare routine cost limit
exceptions which are subject to audit and final approval by the fiscal
intermediary. Based on consultation with outside reimbursement specialists, it
is management's opinion that the ultimate resolution of third party payor
F-10
<PAGE> 129
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
settlements will not have a material adverse impact on the consolidated
financial position or results of operations of Unison.
Unison receives management fees for the management of long-term care
facilities on behalf of the owners. Other operating revenues include management
fees amounting to $1.2 million in 1996, $1.7 million in 1995, and $1.1 million
in 1994.
Provision for doubtful accounts is made when the related revenue is
recorded and is included in other operating expense. The provisions totaled
$2,742,000 in 1996, $29,000 in 1995 and $128,000 in 1994. Accounts, when
determined to be uncollectible, are charged against the allowance for doubtful
accounts. The allowance for doubtful accounts is determined by management using
estimates of potential losses based on an analysis of current and past due
accounts, collection experience in relation to amounts billed, prior settlements
experience and other relevant information. The allowance for doubtful accounts
totaled $3,776,000 and $783,000 at December 31, 1996 and 1995, respectively.
Cash and cash equivalents
Cash and cash equivalents include amounts held in demand deposits at
financial institutions and all highly liquid investments that have an original
maturity of three months or less.
Inventories
Inventories are comprised primarily of nursing facility supplies and
pharmaceutical products and are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
for financial statement purposes are computed using the straight-line method
over the lesser of the respective lease term or the estimated useful life of the
respective asset.
Intangible Assets
Certain costs incurred in the acquisition of facilities such as assembled
workforce and covenants not to compete are amortized on a straight line basis
over five years. Lease operating rights (net of leasehold liabilities) have been
recorded in connection with the acquisitions of BritWill and Signature (Note 4)
and represent the difference between the aggregate consideration given for all
of the acquired companies' assets, less the value of those assets which were
identified and discretely valued as defined by an independent valuation. Lease
operating rights are being amortized on a straight line basis over the
respective initial lease term, including probable renewal periods, not to exceed
thirty years.
Management believes that goodwill related to nursing home acquisitions has
an unlimited useful life and, therefore, assigned a forty-year amortization
period to goodwill resulting from such acquisitions. In determining its
unlimited useful life, management considered factors such as: policies of
similar public healthcare and long-term care companies, nature of the long-term
care industry which is positively impacted by the increasing age of the American
population as well as the continual transfer of patients from a high cost acute
care setting to a lower cost long-term care setting, profitability of companies
in the long-term care industry, and the fact that nursing care services provided
in nursing home facilities will be continuously needed in the future and are not
subject to obsolescence.
F-11
<PAGE> 130
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Goodwill resulting from various acquisitions is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION --------------------------
PERIOD (YEARS) 1996 1995
-------------- ----------- ----------
<S> <C> <C> <C>
BritWill............................................ 40 $ 7,000,000 $7,000,000
Pharmacy............................................ 20 1,197,000 545,000
Gamma Labs.......................................... 15 1,087,000 1,087,000
Sunbelt............................................. 20 5,425,000 --
Signature........................................... 40 9,300,000 --
RehabWest........................................... 20 5,029,000 --
----------- ----------
29,038,000 8,632,000
Accumulated amortization............................ (607,000) (180,000)
----------- ----------
$28,431,000 $8,452,000
=========== ==========
</TABLE>
Unison periodically assesses the recoverability of intangible assets by
comparing the carrying amount of the intangible assets to the future benefits or
undiscounted cash flows derived from that asset. Impairments are recognized in
operating results if it is probable that the carrying value of the asset will
not be recovered from future cash flows derived from that asset (Note 23).
Income Taxes
Unison accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the use of an asset and liability approach for measuring deferred
taxes based on temporary differences between financial statement and tax bases
of assets and liabilities existing at each balance sheet date using enacted tax
rates for years in which the related taxes are expected to be paid or recovered.
Net Income (Loss) Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common and dilutive equivalent shares
outstanding.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 presentation.
3. LIQUIDITY
Unison incurred a loss from operations during 1996, and at December 31,
1996, has a working capital deficiency of $13,955,000 and is in default on
$18,640,000 of debt (Note 13). The 1996 loss resulted primarily from
non-recurring expenses including impairment losses on long-lived assets, costs
of failed acquisitions and related financing efforts, write-offs of non patient
receivables, penalties and fines, and similar items. The debt in default is
collateralized by nursing facilities with market values significantly in excess
of the debt. Management believes that the debt can be refinanced if payment on
the debt is accelerated, but has no reason to believe that the debt payments
will be accelerated.
In February 1997, members of Unison's Board of Directors formed an
Executive Committee which replaced members of senior management and which now
has responsibility for overseeing Unison's operations until new management is
secured. The Executive Committee subsequently initiated various revenue
F-12
<PAGE> 131
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
3. LIQUIDITY -- (CONTINUED)
enhancement and cost containment initiatives. Additionally, Unison has other
assets, such as its pharmacy and therapy companies, which could be sold to
generate additional cash flow if needed, and has access to a $10,000,000 line of
credit. The Company is attempting to develop lending relationships that will use
the Company's available accounts receivable and other available assets to reduce
overall borrowing costs and, if necessary, supply additional working capital.
The Company also intends to explore opportunities for a secured or unsecured
term loan or for equity financings, should that prove necessary or desirable.
There can be no assurance that such financings will be available or, if
available, that necessary funds will be available on terms favorable to Unison
and its shareholders.
The Executive Committee believes that the revenue enhancement and cost
containment initiatives and access to cash flows from draws on its line of
credit or, if necessary, proceeds from sales of unencumbered assets and
additional borrowings, will provide Unison with the liquidity necessary to meet
its obligations during 1997.
4. SIGNIFICANT BUSINESS TRANSACTIONS, ACQUISITIONS AND DISPOSITIONS
In August 1995, Unison acquired all of the common stock of BritWill,
another long-term care company operating approximately 28 facilities located in
Texas and Indiana. The terms of the BritWill acquisition were modified in April
1996, effective August 10, 1995, such that Unison acquired all of the
outstanding stock of BritWill for a total fixed purchase amount of $20,600,000
plus, to the extent applicable, monthly contingent payments if Unison's monthly
consolidated net patient revenues exceeded specified monthly amounts ranging
from $8,000,000 to $11,989,000 for the period from September 9, 1995 through
July 31, 2000. An additional lump sum contingent payment was payable on the
earlier of (i) August 9, 2000 if Unison had consolidated net patient revenues of
not less than $150,000,000 for the twelve-month period ended June 30, 2000 or
(ii) the sale by Unison of debt or equity securities exceeding $10,000,000. The
purchase price was comprised of a $5,602,000 term note (the "Term Note"), an
$8,000,000 subordinated promissory note (the "Subordinated Note"), and a
$7,000,000 noninterest bearing convertible subordinated debenture (the
"Convertible Debenture") (Note 13). During August 1996, as a result of the
proposed acquisition of the common stock of Signature, the contingent payments
became assured and Unison accrued the present value of the remaining contingent
payments related to the BritWill acquisition in an amount totaling $11,500,000
(the "Additional Payment Obligation") (Note 13). In connection with the BritWill
acquisition, Unison paid a financial advisory fee to Trouver Capital Partners,
L.P. ("Trouver") amounting to $675,000. One of Unison's directors is a partner
in Trouver. The acquisition was accounted for as a purchase. The contingent
portions of the purchase price were initially added to lease operating rights
when paid, and then in August 1996 when accrued. At December 31, 1996 and 1995,
contingent payments and accruals amounting to $19,523,000 and $567,000,
respectively, had been added to lease operating rights.
Effective February 1, 1996, Unison acquired 90% of the common stock of
Sunbelt Therapy, paying $800,000 in cash, and issuing term notes aggregating
$1,000,000 (the "Notes") and subordinated convertible debentures aggregating
$1,800,000 (the "Debentures"). The transaction was accounted for as a purchase.
In November 1996, Unison purchased the remaining 10% of Sunbelt Therapy
effective February 1, 1996. The aggregate purchase price amounted to $1,418,000
plus a guaranteed payment amounting to $709,000. Consideration for the purchase
was comprised of promissory notes in the aggregate amount of $1,876,000 and
27,942 shares of Unison common stock (Note 13). Additional contingent payments
of up to $1,418,000 will be due if specified income targets are achieved. The
additional consideration will be added to goodwill when and if such income
targets are achieved.
F-13
<PAGE> 132
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
4. SIGNIFICANT BUSINESS TRANSACTIONS, ACQUISITIONS AND
DISPOSITIONS -- (CONTINUED)
On October 31, 1996, Unison, through a newly formed wholly owned
subsidiary, simultaneously completed mergers with Ampro and Memphis for an
aggregate consideration of $4,942,000. The outstanding shares of Ampro common
stock were converted into the right to receive 521,000 shares of Unison common
stock. Three shareholders who owned approximately 35% of the outstanding shares
of Memphis received pro rata portions of 19,000 shares of Unison common stock
and the holder of the remaining shares of Memphis received cash in the amount of
$237,000 and a promissory note in the amount of $250,000. The total amount
assigned to the 540,000 shares of Unison Common Stock issued was $4,455,000,
based on the closing market price on October 31, 1996 of $8.25. The transaction
has been recorded as a pooling of interests.
Summarized results of operations of the separate companies for the period
from January 1, 1996 through October 31, 1996 are as follows (unaudited):
<TABLE>
<CAPTION>
UNISON AMPRO MEMPHIS
------------ ---------- --------
<S> <C> <C> <C>
Total revenues................................ $109,862,000 $5,137,000 $686,000
Net income (loss)............................. (12,728,000) 163,000 50,000
</TABLE>
Following is a reconciliation of restated revenues and net income (loss) to
amounts previously reported for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Total operating revenues:
As previously reported.................................. $61,285,000 $12,406,000
Merged companies (Ampro and Memphis).................... 7,203,000 6,000,000
----------- -----------
As restated............................................. $68,488,000 $18,406,000
=========== ===========
Net income (loss):
As previously reported.................................. $ (26,000) $ (80,000)
Merged companies (Ampro and Memphis).................... 143,000 420,000
----------- -----------
As restated............................................. $ 117,000 $ 340,000
=========== ===========
</TABLE>
On October 31, 1996, Unison acquired Signature, comprised of Signature
Health Care Corporation ("Signature Health Care") and four affiliated companies,
Douglas Manor, Inc. ("Douglas"), Safford Care, Inc. ("Safford"), Arkansas, Inc.
("Arkansas"), and Cornerstone, Inc. ("Cornerstone"). Signature operates 13
long-term care facilities in Colorado and Arizona. The initial aggregate
purchase price of Signature amounted to approximately $50,653,000, comprised of
cash and promissory notes totaling approximately $38,200,000 and 1,509,434
shares of Unison's Common Stock. The amount assigned to the shares of Unison
Common Stock issued was $12,453,000, based on the closing market price on
October 31, 1996 of $8.25. In accordance with an adjustment provision of the
Signature merger agreements relating to stockholders' equity, in March 1997 the
former shareholders of Signature received additional consideration of
$2,511,000, paid in convertible promissory notes ($1,827,000) and 238,052 shares
of Unison Common Stock with a market value of $2.875 per share ($684,000). The
adjustment was recorded as an addition to the purchase price of Signature and
added to lease operating rights. In connection with the Signature acquisition,
Unison also acquired all of the outstanding stock of RehabWest, Inc.
("RehabWest"), a related rehabilitation services company, for a cash purchase
price of $6,100,000. These acquisitions were accounted for as purchases. The
former majority shareholder of Signature is currently serving as a Director of
Unison.
On September 30, 1996, Unison announced a disposition plan designed to
improve its long-term financial strength and operating performance. The original
plan included the disposition of seven nursing facilities and
F-14
<PAGE> 133
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
4. SIGNIFICANT BUSINESS TRANSACTIONS, ACQUISITIONS AND
DISPOSITIONS -- (CONTINUED)
was subsequently modified to include an aggregate of eight facilities (the
"Disposition Facilities"). On March 1, 1997, Unison subleased four of the
Disposition Facilities to an unrelated party. The provision for disposal of
these facilities is included in impairment losses (Note 23). Of the remaining
four Disposition Facilities, one is closed and three remain in operation with an
aggregate of 522 licensed beds.
Summarized below are the unaudited pro forma consolidated results of
operations of Unison for the periods indicated, assuming the acquisitions, lease
agreements and dispositions described above and the private placement of the
Senior Notes described in Note 13 were consummated as of January 1, 1995. The
unaudited pro forma consolidated results of operations have been prepared for
comparative purposes only and are not necessarily indicative of what would have
occurred had these transactions occurred at January 1, 1995 or of results which
may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $182,104,000 $148,182,000
Net loss............................................ 18,511,000 5,652,000
Net loss per share.................................. $3.00 $1.66
</TABLE>
5. ACCOUNTS RECEIVABLE
In April 1995, Unison entered into a sales agreement with HealthPartners
Funding, L.P. ("Health Partners") to routinely sell eligible accounts
receivable, consisting primarily of Medicare and Medicaid receivables, up to
$3,000,000 for a discount fee of up to 1.583% of outstanding eligible
receivables purchased under the agreement. As of December 31, 1995, Unison had
sold approximately $2,515,000 of eligible accounts receivable to HealthPartners.
The proceeds from the sale were in the form of cash of $1,982,000 and
collateralization of accounts receivable of $533,000 (included in other current
assets) (Note 6). Under the terms of the sales agreement, Unison was required to
repurchase from HealthPartners all Medicare and Medicaid receivables which were
uncollected after 60 days, management receivables which were uncollected after
90 days and cost report settlement receivables which were uncollected after 120
days. As additional consideration, Unison granted to HealthPartners warrants to
purchase common stock equal to at least $150,000 (Note 14). In March 1996, the
sales agreement was terminated.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Prepaid expenses.......................................... $1,615,000 $1,146,000
Deferred taxes (Note 18).................................. 3,332,000 --
Inventories............................................... 938,000 640,000
HealthPartners receivable (Note 5)........................ -- 533,000
---------- ----------
$5,885,000 $2,319,000
========== ==========
</TABLE>
F-15
<PAGE> 134
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
7. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
LIFE (YEARS) 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Land and building.............................. 15-25 $21,757,000 $ 205,000
Equipment...................................... 5-15 11,806,000 3,408,000
Leasehold improvements......................... 12-15 2,386,000 1,148,000
----------- ----------
35,949,000 4,761,000
Less accumulated depreciation.................. (5,119,000) (1,073,000)
----------- ----------
$30,830,000 $ 3,688,000
=========== ==========
</TABLE>
Property and equipment includes assets acquired under capitalized leases of
approximately $7,205,000, net of $159,000 accumulated depreciation.
8. LEASE OPERATING RIGHTS AND OTHER INTANGIBLE ASSETS
Lease operating rights and other intangible assets as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD (YEARS) 1996 1995
-------------- ------------ -----------
<S> <C> <C> <C>
Lease operating rights.................... 25-30 $108,050,000 $36,999,000
Capitalized assembled workforce........... 3 1,845,000 1,250,000
Debt and bond issue costs................. 3-10 5,200,000 194,000
Covenant not to compete................... 2-5 850,000 100,000
Other..................................... 5-20 1,076,000 1,270,000
------------ -----------
117,021,000 39,813,000
Less amortization......................... (3,240,000) (653,000)
------------ -----------
$113,781,000 $39,160,000
============ ===========
</TABLE>
Of the increase in lease operating rights during 1996, $55,234,000 was a
result of the acquisition of Signature and $18,500,000 represents the Additional
Payment Obligation of $11,500,000 and $7,000,000 of related deferred tax
liabilities relating to the BritWill acquisition (Note 4).
The significant increase in debt and bond issue costs is due to issue costs
capitalized in connection with the Senior Notes described in Note 13.
9. SECURITY DEPOSITS AND OTHER ASSETS
Security deposits and other assets as of December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Security deposits........................................... $ 5,077,000 $2,735,000
Other....................................................... 900,000 454,000
---------- ----------
$ 5,977,000 $3,189,000
========== ==========
</TABLE>
In connection with certain lease agreements with Omega Healthcare
Investors, Inc. ("Omega"), Unison is required to maintain security deposits with
Omega. Omega invests these funds in a money market fund on behalf of Unison at
an approximate rate of 5% at December 31, 1996.
10. LINE OF CREDIT
In March 1996, Unison's revolving lines of credit were replaced by a
$10,000,000 credit facility. Borrowings under this credit facility bear interest
at the prime rate plus 2.0%, mature in 1998 and are collateralized by Unison's
eligible accounts receivable. A commitment fee of .5% is payable on the unused
F-16
<PAGE> 135
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
10. LINE OF CREDIT -- (CONTINUED)
portion. The agreement requires Unison to comply with certain financial and
operational covenants including limitations on additional borrowings and sale of
assets and alteration of Unison's existing capital structure. There were no
amounts outstanding under the line of credit at December 31, 1996.
11. ACCOUNTS PAYABLE
Accounts payable as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Trade payables............................................. $ 7,462,000 $9,968,000
Checks drawn in excess of bank balance..................... 3,043,000 --
----------- ----------
$10,505,000 $9,968,000
=========== ==========
</TABLE>
12. ACCRUED EXPENSES
Accrued expenses as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Accrued compensation and benefits.......................... $ 8,487,000 $4,814,000
Purchase accounting liabilities............................ 2,688,000 879,000
Due to State Medicaid...................................... -- 470,000
Accrued interest........................................... 2,879,000 8,000
Accrued professional fees.................................. 1,090,000 --
Income and gross receipt taxes payable..................... 3,106,000 --
Other...................................................... 3,187,000 3,067,000
----------- ----------
Accrued expenses........................................... $21,437,000 $9,238,000
=========== ==========
</TABLE>
The purchase accounting liabilities at December 31, 1996 represent
additional consideration payable to the former shareholders of Signature
amounting to $2,511,000 (Note 4) and an accrual of $177,000 for severance, exit
and lease terminations. As of December 31, 1995, the accrual represents
estimated severance, exit and lease termination costs incurred in connection
with the BritWill acquisition (Note 4).
F-17
<PAGE> 136
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
13. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Senior Notes...................................................... $100,000,000 $ --
Mortgage Note..................................................... 18,640,000 --
Notes in escrow................................................... 1,146,000 --
Additional Payment Obligation (Note 4)............................ 11,500,000 --
Subordinated Note (Note 4)........................................ 8,000,000 8,000,000
Term Note (Note 4)................................................ -- 5,602,000
Convertible Debenture (Note 4).................................... -- 1,714,000
Subordinated notes payable to related party....................... 2,547,000 4,199,000
Other notes payable to related parties............................ 4,676,000 --
Payable to State of Indiana Medicaid.............................. -- 3,741,000
Capital lease obligations (Note 16)............................... 7,759,000 --
Note payable in annual installments of $200,000 plus interest
at the prime rate, due January 1998............................. 400,000 --
Note payable in annual installments of $133,000 plus interest
at the published federal rate, due February 1998................ 267,000 400,000
10.0% subordinated note, payable monthly to 1998.................. 219,000 234,000
Noninterest bearing note payable to lessor due 1999,
net of unamortized discount..................................... 383,000 393,000
Notes payable to banks, interest at 8.0% to 10.5%, due 1997 to
2000, collateralized by certain assets of subsidiaries.......... 345,000 727,000
Unsecured notes payable to banks, variable interest rates, due
1997 to 1998.................................................... 433,000 --
Note payable to an individual, payable monthly with interest at
10.0%,
due 1998, collateralized by receivables of subsidiary........... 211,000 342,000
11.5% notes payable to lessor due 1997............................ 283,000 --
Other............................................................. 329,000 596,000
------------ -----------
157,138,000 25,948,000
Less current portion.............................................. (33,915,000) (6,865,000)
------------ -----------
$123,223,000 $19,083,000
============ ===========
</TABLE>
On October 31, 1996, Unison completed the private placement of $100,000,000
of 12 1/4% Senior Notes due 2006 (the "Senior Notes"). The net proceeds to
Unison in the amount of $94,550,000 were used to: (i) complete the acquisitions
of Signature and RehabWest (Note 4); (ii) repay certain debt and contingent
obligations and; for general corporate purposes. In January 1997, a portion of
the proceeds from the Senior Notes were used to (i) repay the Subordinated Note
and (ii) prepay $1,750,000 of the Additional Payment Obligation. Interest on the
Senior Notes is payable semiannually. The stated interest rate of 12 1/4% per
annum is subject to temporary increase if the Senior Notes (or Exchange Notes
with the same terms) are not registered with the Securities and Exchange
Commission within specified time periods. As of December 31, 1996, the interest
rate on the Senior Notes was 12.75% and as of May 16, 1997 the interest rate is
13.00%. The interest rate is subject to further increases of 0.25% on June 13,
1997 and every 90 days thereafter (up to a maximum rate of 14 1/4%) until such
registration becomes effective. The Senior Note indenture contains certain
covenants, including limitations on additional indebtedness, investments,
transactions with affiliates, asset sales, payment of dividends and certain
other transactions. The Senior Notes are guaranteed by all of the Company's
current and future subsidiaries on a full, unconditional, joint and several
basis. All of Unison's
F-18
<PAGE> 137
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
13. NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
subsidiaries are wholly owned with the exception of Quest Pharmacies, Inc., of
which Unison owns 75%. Unison is a holding company with no material assets or
operations other than its investments in its subsidiaries. Accordingly, separate
audited financial statements for the individual subsidiary guarantors would not
be meaningful to investors and so are not included herein.
In connection with the Signature acquisition, Unison assumed a 10.5%
mortgage loan (the "Mortgage Note") collateralized by property and equipment of
six of the Signature facilities. Principal and interest of $180,000 is payable
monthly with a balloon payment due in April 2004. The Mortgage Note requires
Unison to maintain consolidated net worth of at least $39,000,000, a minimum
current ratio (current assets to current liabilities) consolidated for the six
properties of at least 1.45 to 1 during 1996 and a debt service coverage ratio
(as defined) for the four preceding quarters consolidated for the six properties
of at least 1.5 to 1. While the minimum current ratio and debt service ratios
consolidated for the six properties were in compliance with the debt covenants,
the consolidated Unison net worth at December 31, 1996 was $11,689,000 and
accordingly, the Company was not in compliance with the net worth covenant.
Unison did not receive a waiver of this covenant violation and accordingly,
classified the entire obligation of $18,640,000 as current. In addition, the
Company has not met the financial reporting requirements of the Mortgage Note.
Also in connection with the Signature acquisition (Note 4) Unison placed
promissory notes in the aggregate amount of $1,146,000 in escrow. Of this
amount, and subject to any outstanding claims, $500,000 and $646,000 will be
released from escrow and paid to the former owners of Signature on October 31,
1997 and 1998, respectively.
In connection with the BritWill acquisition (Note 4), Unison incurred the
following indebtedness to the former shareholders of BritWill: (i) the Term Note
in the amount of $5,602,000; (ii) the Subordinated Note in the amount of
$8,000,000, (iii) the $7,000,000 noninterest-bearing Convertible Debenture
convertible into 561,815 shares of common stock and, (iv) the Additional Payment
Obligation of $11,500,000 which became assured during August 1996 (Note 4). The
Additional Payment Obligation represents the present value of the remaining
monthly payments, ranging from $99,000 to $166,000 at interest rates ranging
from 12% to 14% through the term of the loan with a balloon payment of $8.1
million due August 9, 2000. The Term Note, as amended, was repaid in January
1996. The Subordinated Note is payable in monthly installments of interest only
at 8% and was repaid in January 1997 with proceeds from the Senior Notes. The
holder of the Convertible Debenture converted a portion of the Convertible
Debenture in December 1995 into 424,251 shares of Unison common stock and
converted the remainder on March 28, 1996 into 137,564 shares of Unison common
stock.
The terms of the Subordinated Note require Unison to meet certain financial
covenants, including current and cash flow ratios.
Subordinated notes payable to a related party are payable to BritWill
Investments Texas, Ltd. ("BritWill Texas"), an affiliate of BritWill. The notes
are payable monthly with interest at 9% to 10% with the balance due in October
2004. As of December 31, 1995, the aggregate balance included a $1,400,000
advance from BritWill Texas for a lease security deposit. In 1996, this
liability was forgiven and the balance was recorded as a reduction of lease
operating rights in the consolidated balance sheet.
Other notes payable to related parties represent obligations to the former
owners of Sunbelt Therapy. In connection with the purchase of Sunbelt Therapy
(Note 4), Unison issued Notes and Debentures in the aggregate amount of
$2,800,000 with interest payable quarterly at 10.0% and convertible into Unison
common stock at a conversion price equal to 100% and 85% of the average closing
price of Unison's common stock for the 20 day trading period preceding the date
of conversion. In January 1997, the Notes and Debentures were
F-19
<PAGE> 138
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
13. NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
converted into 105,196 shares of Unison common stock with the balance of
$2,000,000 paid in cash. Effective February 1, 1996, Unison purchased the
remaining 10% minority ownership in Sunbelt Therapy (Note 4). The purchase price
included notes payable in the aggregate amount of $1,876,000. Interest on the
notes is payable quarterly beginning January 1997 at a rate of 9.0% per year,
with scheduled principal reductions due annually through January 1999.
In March 1995, BritWill received an erroneous Medicaid reimbursement
payment of approximately $4,300,000 related to one of its Indiana facilities.
Negotiations with the State of Indiana's agent regarding such overpayment
resulted in BritWill retaining the funds subject to BritWill's payment of
interest thereon to the State of Indiana at the higher of the prime rate plus
3.25% or 12%. In April 1996, Unison agreed to repayment of the remaining
$3,741,000 balance by: (i) a $1,100,000 payment to the State of Indiana in April
1996; and (ii) withholding of Medicaid reimbursement payments due five of
Unison's facilities in Indiana to offset the amount due to the State until the
balance was paid in full in September 1996. Interest was payable at 14%.
Future maturities of notes payable and long-term debt at December 31, 1996
are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997............................................. $ 33,915,000
1998............................................. 4,761,000
1999............................................. 2,951,000
2000............................................. 9,768,000
2001............................................. 1,607,000
Thereafter............................................ 104,136,000
------------
$157,138,000
============
</TABLE>
As of December 31, 1996, Unison was not in compliance with certain debt
covenants for the Mortgage Note, Subordinated Note, and certain capitalized
equipment leases. Because holders of these debt instruments have the right to
accelerate payment of the debt, these notes and leases have been classified as
current liabilities in the accompanying consolidated balance sheet.
14. STOCKHOLDER'S EQUITY
In December 1995 and January 1996, Unison completed an initial public
offering ("the IPO") resulting in the issuance of 2,000,000 shares of common
stock at $9.00 per share. Proceeds from the IPO amounted to $14,614,000, net of
expenses, of which $9,727,000 was used to repay debt (Notes 13 and 17). In
connection with the IPO, Unison issued warrants to the representatives of the
underwriters to purchase up to 120,000 shares of common stock, at an exercise
price of $11.70 per share (market value at the date of grant), which
approximates the fair value of consideration received at the date of issuance,
in exchange for certain advisory services to be provided to Unison during the
twelve-month period following the IPO. The warrants are exercisable for a
five-year period beginning in December 1996.
On August 10, 1995, Unison entered into a stock purchase warrant agreement
with HealthPartners. The agreement entitled HealthPartners to purchase shares of
Unison's common stock with an aggregate market value of $150,000, or
approximately 16,667 shares based on the IPO price of $9.00 per share. The
$150,000 has been capitalized as a deferred financing cost and is being
amortized over two years. In December 1996, HealthPartners exercised its option
which required Unison to repurchase the warrants for $213,000 in cash, which has
been recorded as a reduction of additional paid-in capital.
F-20
<PAGE> 139
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
14. STOCKHOLDER'S EQUITY -- (CONTINUED)
Effective December 31, 1994, Unison completed a stock purchase warrant
agreement to satisfy amounts due to an individual who actively negotiated
several of Unison's management and operating lease agreements. The warrants were
exercised in 1996, whereby 178,000 shares of Unison common stock were purchased
for $200. Since the warrants were granted at less than fair market value,
leasehold rights totaling $43,000 have been capitalized and are being amortized
over the respective initial lease term.
In August and October 1996, warrants to purchase an aggregate of 300,464
shares of common stock were issued to a commercial bank in connection with a
short-term loan agreement. The exercise prices of the warrants are $12.80 and
$13.00 (market value at the date of grant), which approximates the fair value of
consideration received at the date of issuance, and the warrants expire on
October 31, 2001.
Unison's common stock has been traded on the Nasdaq Stock Market's National
Market System since December 19, 1995. As of December 31, 1996, Unison does not
currently satisfy the minimum tangible net worth criteria for maintaining the
listing of its common stock on the Nasdaq Stock Market.
15. STOCK OPTIONS
In July 1995, the Board of Directors approved the 1995 Stock Option Plan
(the "1995 Plan"). The 1995 Plan offers two types of options: (i) a
discretionary option grant program (the "Discretionary Program") under which
eligible individuals may, at the discretion of the Board of Directors, be
granted options to purchase shares of common stock at an exercise price
determined by the Board of Directors, and (ii) the automatic option grant
program (the "Automatic Program") under which grants of options will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of common stock at an exercise price equal to 100% of
their fair market value on the grant date. Each grant under the Automatic
Program vests over two years and is exercisable for ten years. Options granted
in 1995 under the Discretionary Program vest over periods of two to four years.
In January 1996, the 1995 Plan was amended by the Board of Directors to change
the exercise price of all outstanding options from $10.00 to $9.00 per share,
which was the IPO price (Note 14). The 1995 Plan was further amended in October
1996 to increase the number of shares of common stock authorized for issuance
under the 1995 Plan from 511,046 to 800,000.
Unison has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of Unison's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Unison had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 5.0% and 5.0%; dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .64 and .64; and a weighted-average expected life of
the option of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Unison's employee stock options have characteristics
significantly different from those of traded options, and
F-21
<PAGE> 140
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
15. STOCK OPTIONS -- (CONTINUED)
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Unison's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C> <C>
Pro forma net loss......................................... $ 24,157,000 $ 72,000
Pro forma net loss per share............................... $ 5.16 $ 0.03
</TABLE>
Information regarding the 1995 Plan is as follows:
<TABLE>
<CAPTION>
DISCRETIONARY PROGRAM AUTOMATIC PROGRAM
----------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Shares under option:
Outstanding at December 31, 1994...... -- --
Granted............................. 261,520 $ 9.00 47,480 $ 9.00
Canceled............................ (8,684) 9.00 -- 9.00
------- -------
Outstanding at December 31, 1995...... 252,836 9.00 47,480 9.00
Granted............................. 412,412 9.47 92,500 9.50
Canceled............................ (40,664) 9.24 --
Exercised........................... (11,307) 9.00 --
------- -------
Outstanding at December 31, 1996...... 613,277 9.30 139,980 9.33
======= =======
Exercisable at December 31,
1995................................ -- --
1996................................ 127,998 9.00 23,740 9.00
Weighted-average fair value of options
granted:
1995................................ $ 6.18
1996................................ $ 6.39
</TABLE>
Exercise prices for options outstanding at December 31, 1996 ranged from
$9.00 to $10.50. The weighted-average remaining contractual life of those
options is 9.5 years.
At December 31, 1996, 35,436 shares of common stock were available under
the 1995 Plan for future awards.
16. LEASES
As of December 31, 1996, Unison operated 51 facilities under noncancelable
operating leases with lease terms ranging from five to twenty years plus renewal
options. The lease agreements provide for contingent rental provisions based on
increases in the consumer price index, Medicaid reimbursement rates, and number
of licensed beds. Certain of the leases have purchase options determined by a
specified formula. Unison is responsible for all taxes, maintenance and other
executory costs.
F-22
<PAGE> 141
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
16. LEASES -- (CONTINUED)
Unison leases 14 facilities from Omega, of which nine facilities are in
Indiana and five are in Texas. Each of the Omega leases expires in 2005 and
allows Unison up to three five-year renewal options. The Omega leases require
Unison to pay stated rent, with annual increases based upon the greater of 5% of
incremental revenues or the Consumer Price Index, but limited to a maximum
annual increase of 5%. The Omega leases grant Unison the right, but not the
obligation, to purchase the Omega facilities upon the expiration of the initial
lease term.
At December 31, 1996, Unison was obligated to Omega as a tenant under three
master lease agreements covering 14 facilities having an aggregate minimum rent
of approximately $34.9 million (subject to increase) during the remainder of
their initial terms. The master leases require the Company to maintain specified
cash flow to rent ratios, cash flow to debt service ratios, minimum cash,
current ratio and tangible net worth. Unison also leases six facilities located
in Texas from BritWill Texas (the "BritWill Texas Leases") for an initial term
that expires in December 2005. The lease agreement with BritWill Texas requires
the Company to pay to Omega monthly amounts equal to (i) the amount of loan
payments due to Omega from BritWill Texas pursuant to a loan agreement between
those parties, which provided the financing for BritWill Texas' acquisition of
the facilities, and (ii) lease payments on the facilities that are subleased by
BritWill Texas to Unison. The BritWill Texas Leases contain cross default
provisions with the Omega leases by which if Unison is in default with any Omega
indebtedness or lease obligation, the Company is also in default under the
BritWill Texas Leases. Unison was not in compliance with these covenants at
December 31, 1996. Omega has waived all existing covenant violations through
April 11, 1997. The Company may not be in compliance with these covenants
subsequent to April 11, 1997 and, accordingly, is negotiating with Omega to
restructure the aforementioned covenants. Management is attempting to
renegotiate the leases; however, there can be no assurance that such
restructuring will be completed or that Omega will not exercise their remedies
of default under the master lease agreements.
The Company leases six facilities formerly affiliated with Signature for an
initial term which expires in 2005 and which allows Unison the option to renew
for three additional 10-year terms and the option to purchase the facilities
through the end of the initial term or any renewal periods. The leases provide
for certain restrictions on the maintenance and operation of the facilities and
an annual 2.5% increase in rent.
In connection with the BritWill acquisition (Note 4), Unison recorded a
leasehold liability in the amount of $4,700,000. This adjustment was based on an
independent appraisal which valued the present value of the BritWill lease
obligations based on market lease rates. The leasehold liability is being
amortized over the aggregate lease term of approximately 25 years.
F-23
<PAGE> 142
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
16. LEASES -- (CONTINUED)
Future minimum lease payments at December 31, 1996, by year and in the
aggregate, under noncancelable lease arrangements with initial or remaining
terms of one year or more consist of the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL OPERATING
-------------------------------------------------- ----------- ------------
<S> <C> <C>
1997.............................................. $ 1,661,000 $ 15,492,000
1998.............................................. 1,714,000 15,591,000
1999.............................................. 1,700,000 15,362,000
2000.............................................. 1,352,000 14,727,000
2001.............................................. 1,294,000 13,975,000
Thereafter........................................ 5,894,000 89,596,000
---------- ------------
Total minimum lease payments...................... 13,615,000 $164,743,000
============
Less amount representing interest................. (5,856,000)
----------
Present value of net minimum lease payments....... 7,759,000
Less current portion.............................. (793,000)
----------
Long-term obligations............................. $ 6,966,000
==========
</TABLE>
Unison's lease payments are senior to all unsecured debt.
17. RELATED PARTY TRANSACTIONS
The Term Note, Subordinated Note and Convertible Debenture issued as
consideration for the BritWill acquisition were issued to the former
shareholders of BritWill (Note 13). The primary BritWill shareholder receiving
payments was Whitehead Family Investments, Ltd. ("WFI"), which owned 81.5% of
the stock of BritWill prior to the BritWill acquisition. Bruce H. Whitehead,
Chairman of the Board of Unison, is the president of the general partner of WFI
and, together with a family trust, owns 100% of WFI.
In connection with the BritWill acquisition, a note payable to WFI in the
amount of $3,375,000 was repaid with the proceeds from the IPO. Subsequent to
the BritWill acquisition, Unison also incurred notes payable to WFI in the
aggregate amount of $750,000 bearing interest at the rate of 12%. These notes
were repaid with the proceeds from the IPO.
Unison's lease payments to Omega, the owner of 14 facilities that the
Company leases in Indiana and Texas, are personally guaranteed to $13,500,000 by
the Chairman of the Board of Unison as well as collateralized by substantially
all the personal property of Unison. Unison also leases six facilities in Texas
from BritWill Texas. Lease expense on these facilities for the five months ended
December 31, 1995 and the year ended December 31, 1996 amounted to $505,000 and
$2,661,000, respectively (Note 16).
With the BritWill acquisition, Unison also assumed unsecured notes payable
to BritWill Texas with an aggregate balance at December 31, 1996 of $2,547,000
(Note 13). Interest expense on these notes amounted to $83,993 and $264,000 for
the five months ended December 31, 1995 and the year ended December 31, 1996,
respectively.
On April 21, 1997, the Company obtained a $2,950,000 loan for general
working capital purposes from Elk Meadows Investments, L.L.C. and BritWill
Investments Company, Ltd., as joint lenders. Elk Meadows Investments, L.L.C. is
controlled by David Kremser and BritWill Investments Company, Ltd. is controlled
by Bruce Whitehead. The loan matures on the earlier of August 1, 1997, or 30
days after written demand from the lenders, subject to earlier maturity in the
event of acceleration upon a default. Interest accrues on the loan
F-24
<PAGE> 143
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
17. RELATED PARTY TRANSACTIONS -- (CONTINUED)
at the Prime Rate plus 2%, subject to an increase in the rate upon a default.
Interim payments on the loan are not required prior to maturity. The Company
paid a loan fee of $29,500 at the closing, and also agreed to pay all of the
lenders' out of pocket fees and costs, including attorneys fees and costs, in an
amount not yet determined or demanded by the lenders. Repayment of the loan is
secured by (i) a pledge from the Company of approximately $5.0 million of
accounts receivable generated by certain of the Company's affiliates and
assigned to the Company and (ii) a pledge from the Company of its stock in those
affiliates of the Company that either assigned their accounts receivable to the
Company so they could be pledged by the Company as security for the subject loan
or control the entities that assigned such accounts receivable. The collateral
securing the loan also secures repayment of other obligations owing from the
Company and its affiliates to Messrs. Whitehead and Kremser, and to individuals
and entities related to them.
18. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 698,000 $153,000 $128,000
State.......................................... 61,000 -- 1,000
Deferred:
Federal........................................ (7,777,000) (28,000) 43,000
State.......................................... (1,338,000) 7,000 --
----------- -------- --------
$(8,356,000) $132,000 $172,000
=========== ======== ========
</TABLE>
The difference between Unison's effective income tax rates and statutory
rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit).......... $(10,810,000) $ 85,000 $174,000
Increases (decreases) resulting from:
Change in effective tax rate.......................... (495,000) -- --
Amortization of intangibles and nondeductible
expenses........................................... 1,060,000 91,000 --
State tax expense (benefit), net of federal benefit... (876,000) 5,000 1,000
Valuation allowance................................... 1,528,000 (56,000) 25,000
Current federal income taxes of subsidiaries not
consolidated for tax purposes...................... 698,000 -- --
Other................................................. 539,000 7,000 (28,000)
------------ -------- --------
Income tax expense (benefit)............................ $ (8,356,000) $132,000 $172,000
============ ======== ========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Temporary differences are
primarily attributable to reporting for income tax purposes certain items of
income and expense using a cash basis of accounting and recognition of
depreciation using the accelerated cost recovery system.
F-25
<PAGE> 144
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
18. INCOME TAXES -- (CONTINUED)
Significant components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Deferred liabilities:
Intangibles............................... $ -- $(31,165,000) $ -- $(9,937,000)
Accelerated depreciation.................. -- 171,000 -- (30,000)
Cash to accrual adjustment................ (208,000) -- (1,085,000) --
---------- ------------ -------- -----------
Total liabilities........................... (208,000) (30,994,000) (1,085,000) (9,967,000)
Deferred assets:
Allowance for doubtful accounts........... 1,388,000 -- 206,000 --
Reserve for loss on disposition of
assets................................. 1,460,000 -- -- --
Vacation accruals......................... 692,000 -- -- --
Net operating loss
carryforward........................... -- 7,604,000 -- 1,794,000
Valuation allowance....................... -- (1,528,000) -- --
Other, net................................ -- 127,000 -- --
---------- ------------ -------- -----------
Total assets................................ 3,540,000 6,203,000 206,000 1,794,000
---------- ------------ -------- -----------
Total net asset (liability)................. $3,332,000 $(24,791,000) $ (879,000) $(8,173,000)
========== ============ ======== ===========
</TABLE>
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets which are not likely to be realized. The valuation reserve at December
31, 1996 relates to tax benefits arising from net operating losses and
depreciation of certain of the Company's subsidiaries. Due to the uncertainty of
their ultimate realization based upon past performance and expiration dates, the
Company has established a full valuation allowance against these carryforward
benefits and will recognize the benefits only as reassessment demonstrates that
they are realizable. At December 31, 1996, Unison has consolidated net operating
loss carryforwards which approximate $20,316,000 and begin to expire in 2009 for
federal income tax purposes and 1999 for state income tax purposes. Certain of
the net operating loss carryforwards could be subject to annual limitations.
Approximately $2,950,000 of certain subsidiaries' net operating losses must be
offset by taxable income of the same company. The increase in deferred taxes and
the elimination of the valuation reserve in 1995 was due to the application of
the provisions of SFAS 109 with respect to the treatment of basis differences
between assets acquired and liabilities assumed in the BritWill acquisition.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of Unison's financial instruments as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Notes payable and long-term debt, excluding capital
lease obligations..................................... $149,379,000 $153,664,000
</TABLE>
The carrying amounts reported in the consolidated balance sheet for cash,
accounts receivable, lease deposits, accounts payable and borrowings under
revolving lines of credit approximate their fair value. The fair value of
Unison's long-term borrowings is estimated by discounting future cash flows at
current rates offered to
F-26
<PAGE> 145
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
19. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Unison for debt of comparable types and maturities. Because no market exists for
these financial instruments, considerable judgment is necessary in interpreting
the data to develop estimates of fair value. The use of different market
assumptions may have a material effect on the estimated fair value amounts.
20. INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims that are customary risks inherent in the operation of
health facilities and are generally covered by insurance. Unison maintains
property, liability and professional malpractice insurance policies through
commercial carriers on a claims made basis in amounts and with such coverages
and deductibles that are deemed appropriate by management, based upon historical
claims, industry standards and the nature and risks of its business. There can
be no assurance that a future claim will not exceed available insurance
coverages or that such coverages will continue to be available for the same
scope of coverages at reasonable premium rates. Any substantial increase in the
cost of such insurance or the unavailability of any such coverages could have an
adverse effect on Unison's business. However, based upon the evaluation of
Unison's historical asserted and unasserted claim experience, management
believes that the ultimate liability, if any, resulting from the settlement of
any future claim will not have a material impact on Unison's financial position,
operations or liquidity.
Unison maintains workers compensation coverage on its facilities with the
exception of certain facilities located in Texas. Management believes that the
reserve for incurred but not reported claims is adequate based on historical
results.
21. COMMITMENTS
Unison has entered into an agreement with Trouver to provide financial
advisory services in connection with Unison's financing and business acquisition
plans. Trouver is compensated by Unison based on a percentage, ranging from 1.5%
to 10.0%, dependent upon the type of transaction consummated (Note 4).
22. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Unison acquires or leases and operates long-term health care facilities,
and uses such facilities to develop networks offering a range of other
healthcare services. Unison and others in the healthcare industry are subject to
certain inherent risks, including the following:
- Substantial dependence on revenues derived from reimbursement under the
Medicare and Medicaid programs;
- Government regulation, budgetary constraints, and proposed legislative
and regulatory changes; and
- Lawsuits alleging malpractice and related claims.
Approximately 83% in 1996, 83% in 1995, and 70% in 1994 of Unison's
long-term care net patient service revenues were derived from reimbursement
under Medicare and Medicaid programs, and approximately 84% and 82% of Unison's
patient accounts receivable at December 31, 1996 and 1995, respectively, are due
from such programs.
Changes in Medicare and Medicaid reimbursement funding mechanisms, related
government budgetary constraints and differences between final settlements and
estimated settlements receivable under the Medicare and Medicaid programs, which
are subject to audit and retroactive adjustment, could have a significant
F-27
<PAGE> 146
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
22. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)
adverse effect on Unison. Unison's operations are also subject to a variety of
other Federal, state and local regulatory requirements. Failure to maintain
required regulatory approvals and licenses and/or changes in such regulatory
requirements could have a significant adverse effect on Unison.
Unison is from time to time subject to malpractice and related claims and
lawsuits, which arise in the normal course of business and which could have a
significant effect on Unison. Management believes that adequate provision for
these items has been made in the accompanying consolidated financial statements
and that their ultimate resolution will not have a material effect on the
consolidated financial statements.
Since its inception, Unison has grown through acquisitions. The
recoverability of acquisition costs, including excess costs over fair value of
net assets acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon Unison's ability to successfully integrate
and manage acquired operations. Also, Unison's development of healthcare
networks is dependent upon successfully effecting economies of scale, the
recruitment of skilled personnel and the expansion of services and related
revenues.
23. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 -- ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
(SFAS NO. 121)
In 1996, Unison incurred operating losses and shortfalls of cash from
operations. The Company also announced the planned disposition of eight nursing
facilities whose performance did not meet Unison's operational or financial
criteria (Note 4). Of these Disposition Facilities, one was closed in June 1996
and three others, which had incurred operating losses since the Company had
acquired them in August 1995, where disposed of in March 1997. These events, as
well as a history of operating losses at certain facilities, raised the
possibility of continuing losses associated with the Company's income producing
assets. Consequently, Unison evaluated its long-lived assets, including property
and equipment, goodwill, lease operating rights and other intangible assets, for
impairment in accordance with SFAS No. 121. Unison estimated the undiscounted
net cash flows from all business units and determined that the carrying value of
certain of Unison's long-lived assets exceeded such undiscounted cash flows.
Accordingly, Unison compared the fair value of the assets based on the present
value of the estimated future cash flows for the facilities (which were
estimated based on the remaining weighted average useful lives of the assets,
earnings history, and a discount rate commensurate with the risks involved and
market conditions and assumptions reflecting internal operating plans and
strategies) with the carrying value.
Unison determined that the fair value of certain facilities was less than
their carrying value and estimated the costs to sublease and exit from the
Disposition Facilities (Note 4) and, accordingly, recorded a loss on impairment
of $3,865,000 in the 1996 consolidated statement of operations.
24. SUBSEQUENT EVENTS
Effective January 1, 1997, Unison, through its Sunbelt Therapy subsidiary,
purchased the assets of a rehabilitation therapy services company located in
Mississippi. Consideration for the purchase was comprised of cash amounting to
$600,000 and a $300,000 promissory note. Interest on the note bears interest at
10.0%, payable quarterly, and the principal balance is due January 2, 2002.
Unison and certain of its current and former directors and officers are
named as defendants in several purported class action complaints following
Unison's announcement in March 1997 that the Company expected to restate its
financial statements for the nine-month period ended September 30, 1996. To
date, six such claims have been filed in federal district court in Phoenix,
Arizona alleging violations of Sections 10 and
F-28
<PAGE> 147
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
24. SUBSEQUENT EVENTS -- (CONTINUED)
20 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. While the
purported class periods and the named defendants vary, the broadest class period
to date asserts that between May 14, 1996 (the date of Unison's announcement of
first quarter results) and March 10, 1997 (the date before Unison's March 11
announcement of the restatement) the defendants knew, or were reckless in not
knowing, that Unison's results for the first three quarters of 1996 were
materially overstated. In addition, the Company is informed that an action has
been filed in the Superior Court of the State of California (County of Orange)
against the Company, certain current and former officers and directors and
certain underwriting firms. The Orange County action is purportedly filed on
behalf of all persons who acquired Unison stock in the Company's December 1995
initial public offering ("IPO"); it essentially alleges that in connection with
the IPO, the defendants made positive statements about the Company's prospects
for which there was no basis, that accounts receivable were overstated, and that
the Company's statement of financial position as of September 30, 1995 was not
fairly presented. Unison's bylaws require the Company to indemnify current and
former officers and directors to the extent permitted by Delaware law against
liabilities and related expenses. The Company denies the material allegations in
these complaints and intends to defend the actions vigorously. Management
believes that the costs of the ultimate disposition of these matters, if any,
will be substantially covered by insurance. An adverse determination could have
a material adverse effect upon Unison.
F-29
<PAGE> 148
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 2,413,000 $ 17,409,000
Accounts receivable, net...................................... 34,818,000 28,608,000
Prepaid expenses and other current assets..................... 6,390,000 5,885,000
------------ ------------
Total current assets.................................. 43,621,000 51,902,000
Lease operating rights and other intangible assets, net......... 113,054,000 113,781,000
Property and equipment, net..................................... 31,270,000 30,830,000
Goodwill, net................................................... 28,733,000 28,431,000
Security deposits and other assets.............................. 6,509,000 5,977,000
------------ ------------
$223,187,000 $230,921,000
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 15,791,000 $ 10,505,000
Accrued expenses.............................................. 17,927,000 21,437,000
Current portion of notes payable and long-term debt due to
related parties............................................ 6,734,000 12,312,000
Current portion of other notes payable and long-term debt..... 22,154,000 21,603,000
------------ ------------
Total current liabilities............................. 62,606,000 65,857,000
Notes payable and long-term debt due to related parties, less
current portion............................................... 13,009,000 15,882,000
Other notes payable and long-term debt.......................... 115,201,000 107,341,000
Deferred taxes.................................................. 21,458,000 24,791,000
Leasehold liability, net........................................ 4,340,000 4,434,000
Other liabilities............................................... 412,000 927,000
------------ ------------
Total liabilities..................................... 217,026,000 219,232,000
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 shares authorized;
6,422,096 and 6,078,498 shares issued and outstanding at
June 30, 1997 and December 31, 1996........................ 5,000 5,000
Additional paid-in capital...................................... 36,211,000 34,723,000
Accumulated deficit............................................. (30,055,000) (23,039,000)
------------ ------------
Net stockholders' equity.............................. 6,161,000 11,689,000
------------ ------------
$223,187,000 $230,921,000
============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE> 149
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues:
Net patient revenues......................................... $109,532,000 $67,004,000
Other operating revenues..................................... 3,571,000 1,555,000
------------ -----------
Total operating revenues............................. 113,103,000 68,559,000
Expenses:
Wages and related............................................ 59,544,000 33,961,000
Other operating.............................................. 41,201,000 22,665,000
Rent......................................................... 8,386,000 6,704,000
Interest..................................................... 9,594,000 1,508,000
Depreciation and amortization................................ 4,726,000 1,152,000
------------ -----------
Total expenses....................................... 123,451,000 65,990,000
------------ -----------
Income (loss) before income taxes.............................. (10,348,000) 2,569,000
Income tax expense (benefit)................................... (3,333,000) 1,050,000
------------ -----------
Net income (loss).............................................. $ (7,015,000) $ 1,519,000
============ ===========
Net income (loss) per share.................................... $ (1.11) $ 0.33
Common shares used in per share calculation.................... 6,318,722 4,671,955
</TABLE>
See accompanying notes.
F-31
<PAGE> 150
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net cash used in operating activities (including changes in all
operating assets and liabilities)............................. $ (5,857,000) $ (4,205,000)
------------ ------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.............. (1,635,000) (2,040,000)
Increase in intangible assets................................. (339,000) (1,083,000)
Increase in lease deposits and other assets................... (532,000) (70,000)
Acquisitions, net of cash acquired............................ (592,000) (932,000)
------------ ------------
Net cash used in investing activities................. (3,098,000) (4,125,000)
------------ ------------
Cash flows from financing activities:
Net increase in borrowings under revolving lines of credit.... 7,511,000 7,953,000
Proceeds from long-term borrowings............................ 2,950,000 5,317,000
Payments on long-term borrowings.............................. (13,699,000) (10,232,000)
Checks written in excess of bank balances..................... (2,087,000) --
Other items................................................... (716,000) --
------------ ------------
Net cash provided by (used in) financing activities... (6,041,000) 3,038,000
------------ ------------
Net decrease in cash............................................ (14,996,000) (5,292,000)
Cash and cash equivalents at beginning of period................ 17,409,000 6,169,000
------------ ------------
Cash and cash equivalents at end of period...................... $ 2,413,000 $ 877,000
============ ============
Supplemental disclosures:
Cash paid for:
Interest...................................................... $ 9,734,000 $ 1,045,000
Income taxes.................................................. 190,000 7,000
Acquisition of leased facilities:
Increase in assets............................................ 900,000 5,031,000
Liabilities assumed and incurred.............................. 308,000 4,031,000
Conversion of debenture into shares of common stock............. 800,000 1,714,000
Equipment purchased under capital leases........................ 576,000 648,000
Accounts payable converted to debt.............................. 1,275,000 --
</TABLE>
See accompanying notes.
F-32
<PAGE> 151
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to state fairly the
financial position, cash flows and results of operations of Unison HealthCare
Corporation and its subsidiaries ("Unison" or the "Company") as of and for the
periods indicated. The Company's financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1996. Footnote and other disclosures
which would substantially duplicate the disclosures contained in Unison's most
recent annual report on Form 10-K have been omitted. Operating results for the
six months ended June 30, 1997 are not necessarily indicative of the results
which may be expected for the year ended December 31, 1997.
In October 1996, Unison completed a merger with two clinical laboratory
companies, American Professional Holding, Inc. and Memphis Clinical Laboratory,
Inc. (together, "Ampro")(the "Ampro Acquisition"). The Ampro Acquisition has
been accounted for as a pooling of interests. Accordingly, the consolidated
financial statements of Unison for the six months ended June 30, 1996 have been
restated to include the accounts of Ampro.
Certain reclassifications have been made to the 1996 financial statements
to conform to the current year presentation.
2. Other operating revenues include management fees from third parties
amounting to $225,000 and $557,000 for the six months ended June 30, 1997 and
1996, respectively. The provision for doubtful accounts receivable is included
in other operating expenses. Provisions totaled $510,000 and $321,000 for the
six months ended June 30, 1997 and June 30, 1996, respectively. The allowance
for doubtful accounts totaled $3,758,000 at June 30, 1997 and $3,776,000 at
December 31, 1996.
3. In January 1997, with a portion of the proceeds from the sale in
October 1996 of $100,000,000 of 12.25% Senior Notes Due 2006 (the "Senior
Notes"), Unison repaid (i) the $8,000,000 subordinated note (the "Subordinated
Note") payable to the former shareholders of BritWill HealthCare Company
("BritWill"), (ii) $1,750,000 of the contingent obligation due to the former
BritWill shareholders (the "Additional Payment Obligation"), (iii) $2,000,000 of
the convertible notes and debentures payable to the former owners of Sunbelt
Therapy (the "Sunbelt Notes") and (iv) other debt obligations in the aggregate
amount of approximately $2,883,000. The remaining balance of the Sunbelt Notes
in the aggregate amount of $800,000 was converted into 105,196 shares of Unison
Common Stock. In accordance with the terms of the Sunbelt Notes, the conversion
price ($7.61) was equal to 85% of the average closing price of Unison's Common
Stock ($8.95) for the 20-day trading period preceding notice of conversion on
November 27, 1996.
The stated interest rate on the Senior Notes is subject to temporary
increase if the Senior Notes (or Exchange Notes with the same terms) are not
registered with the Securities and Exchange Commission (the "Commission") within
specified time periods. As of June 30, 1997, the interest rate was 13.25%. The
interest rate is subject to further increases of 0.25% on September 12, 1997 and
every 90 days thereafter (up to a maximum rate of 14.25%) until such
registration becomes effective.
The terms of certain of Unison's indebtedness and lease obligations require
the Company to meet certain financial covenants, including cash flow to rent
ratios, cash flow to debt service ratios, current ratios and specified minimum
levels of cash and net worth. The Company is also subject to periodic financial
reporting requirements. At June 30, 1997, Unison was not in compliance with
certain of these covenants. At June 30, 1997, Unison was obligated to Omega
Healthcare Investors, Inc. ("Omega") as a tenant under three master lease
agreements covering 14 facilities having an aggregate minimum rent of
approximately $34,900,000 (subject to increase) during the remainder of their
initial terms ending in 2005. The master leases require the Company to maintain
specified cash flow to rent ratios, cash flow to debt service ratios, minimum
cash, current ratios and tangible net worth ratios (each as defined). Unison
also leases six facilities located in Texas from BritWill Texas (the "BritWill
Texas Leases") for an initial term that expires in December 2005. The
F-33
<PAGE> 152
BritWill Texas Leases contain cross default provisions with the Omega leases by
which if Unison is in default under any obligation to Omega, the Company is also
in default under the BritWill Texas Leases. Although the Company has made all
required payments, it was not, at June 30, 1997, in compliance with the master
lease financial covenants. The Company continues to be out of compliance with
these covenants after this date and, accordingly, is negotiating with Omega to
restructure such covenants. Although discussions with Omega are ongoing, there
can be no assurance that such restructuring will be accomplished, or if
accomplished, that the restructuring will result in more favorable terms to
Unison and its stockholders.
In October 1996, Unison acquired Signature Health Care Corporation and
affiliated companies (collectively, "Signature")(the "Signature Acquisition").
In connection with the Signature Acquisition, Unison assumed a 10.5% mortgage
loan (the "Mortgage Note") collateralized by property and equipment of six of
the Signature facilities. The Mortgage Note requires Unison to maintain, among
other things, a consolidated net worth of at least $39,000,000. Unison's
consolidated net worth was $6,161,000 as of June 30, 1997, and, accordingly, the
Company was not in compliance with this covenant. Unison did not receive a
waiver of this covenant violation and, accordingly, classified the entire
obligation of $18,534,000 as current. In addition, the Company has not met the
financial reporting requirements of the Mortgage Note.
4. Effective January 1, 1997, Unison, through its Sunbelt Therapy
subsidiary, purchased the assets of a rehabilitation therapy services company
located in Mississippi. Consideration for the purchase was comprised of cash
amounting to $600,000 and a $300,000 promissory note. The note bears interest at
10.0%, payable quarterly, and the principal balance is due January 2, 2002.
5. Unison and certain of its current and former directors and officers are
named as defendants in several purported class action complaints seeking
unspecified damages following Unison's announcement in March 1997 that the
Company expected to restate its financial statements for the nine-month period
ended September 30, 1996. See "Legal Proceedings". The Company denies the
material allegations in these complaints and intends to defend the actions
vigorously. While there can be no assurances in such matters, Unison believes,
based on its analysis of the complaints and of its insurance coverage, that the
ultimate disposition of these matters will not adversely affect its liquidity.
6. In accordance with an adjustment provision of the Signature merger
agreements relating to stockholders' equity, in March 1997 the former
shareholders of Signature received additional consideration of $2,511,000, paid
in convertible promissory notes ($1,827,000) (the "Notes") and 238,052 shares of
Unison Common Stock. The adjustment was recorded as an addition to the purchase
price of Signature. The Notes are convertible into shares of Unison Common Stock
at a conversion price of $2.875 per share, subject to adjustment under certain
circumstances. The Notes bear interest at the rate of 12.0% per annum and the
unpaid principal balance, plus accrued interest, is due on December 31, 1997.
The former majority shareholder of Signature is currently serving as interim
Chief Executive Officer, Director and member of the Executive Committee of the
Board of Directors of Unison.
7. On April 21, 1997, Unison obtained a $2,950,000 loan for general
working capital purposes from affiliates of two of its directors, David A.
Kremser and Bruce H. Whitehead. The loan bears interest at prime plus 2.0% and
was due on the earlier of 30 days notice or August 1, 1997. Messrs. Kremser and
Whitehead have agreed to extend the maturity of this loan until November 1,
1997. The loan is secured by a pledge of certain accounts receivable and the
stock of certain Unison subsidiaries.
8. In May 1997, Unison announced that the results of operations for the
nine months ended September 30, 1996 were restated from pretax income of
$328,000 to a pretax loss of $15,000,000. No attempt was made to determine the
particular fiscal quarter or quarters to which the adjustments causing the
restatement pertain, and all of the adjustments were confined to the third
quarter of 1996. Because of the considerable costs and difficulty involved and
inasmuch as it would take months of effort to do a precise allocation, if indeed
such an allocation is possible, Unison does not believe it is in the best
interests of its shareholders to expend the Company's limited resources on that
effort and has instead focused on improving its information systems.
9. Since March 31, 1997, the Company has entered into settlement
agreements in connection with litigation pending on that date. See "Legal
Proceedings".
F-34
<PAGE> 153
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BritWill HealthCare Company
We have audited the accompanying consolidated statement of operations and
cash flows of BritWill HealthCare Company for the month ended July 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of BritWill
HealthCare Company for the one month ended July 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
April 10, 1996
F-35
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of BritWill HealthCare Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of BritWill
HealthCare Company and its subsidiaries at June 30, 1995, and the results of
their operations and their cash flows for the year ended December 31, 1994 and
for the six month period ended June 30, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
November 8, 1995
F-36
<PAGE> 155
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1995
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 858,606
Accounts receivable, less allowance for doubtful accounts of $997,246.................. 7,599,464
Due from third party payors, net....................................................... 2,290,066
Inventories............................................................................ 442,033
Due from affiliates.................................................................... 512,594
Prepaid expenses....................................................................... 486,874
Other receivables...................................................................... 31,151
Security deposits...................................................................... 637,517
Restricted cash........................................................................ 45,000
-----------
Total current assets................................................................ 12,903,305
Furniture, fixtures and equipment, net................................................... 2,210,682
Other assets, net........................................................................ 6,827,126
Deferred charges, net.................................................................... 537,321
Security deposits........................................................................ 2,237,944
-----------
Total assets........................................................................ $24,716,378
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 5,133,964
Accrued expenses....................................................................... 7,002,347
Notes payable due affiliates........................................................... 528,230
Income taxes payable................................................................... 92,126
-----------
Total current liabilities........................................................... 12,756,667
Revolving line of credit................................................................. 1,672,577
Subordinated long-term debt due affiliates............................................... 8,488,465
Other long-term debt..................................................................... 48,183
-----------
Total liabilities................................................................... 22,965,892
-----------
Commitments and contingencies
Shareholders' equity:
Common stock, $1.00 par value; authorized 1,000,000 shares; 424,050 issued and
outstanding......................................................................... 424,050
Additional paid-in capital............................................................. 4,714,469
Treasury stock, 54,650 shares, at par.................................................. (54,650)
Accumulated deficit.................................................................... (3,333,383)
-----------
Total shareholders' equity.......................................................... 1,750,486
-----------
Total liabilities and shareholders' equity.......................................... $24,716,378
===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-37
<PAGE> 156
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ONE MONTH
DECEMBER ENDED JUNE ENDED
31, 30, JULY 31,
1994 1995 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Patient care services, net....................................... $53,800,520 $32,723,297 $5,655,071
Management fee from related parties.............................. 251,186 40,430 --
Other income..................................................... 373,239 228,426 207,270
----------- ----------- -----------
Total revenues................................................ 54,424,945 32,992,153 5,862,341
----------- ----------- -----------
Expenses:
Salaries and contract labor...................................... 32,634,732 19,812,601 3,467,433
Rent............................................................. 8,263,642 4,448,134 775,136
Supplies......................................................... 6,686,572 4,134,207 716,037
General and administrative....................................... 6,252,183 3,255,917 614,191
Depreciation and
amortization.................................................. 986,812 500,682 90,803
Bad debt......................................................... 644,471 21,442 48,631
Other............................................................ 71,529 10,731 121,900
----------- ----------- -----------
Total expenses................................................ 55,539,941 32,183,714 5,834,131
----------- ----------- -----------
Income (loss) from
operations.................................................... (1,114,996) 808,439 28,210
Interest income (expense):
Interest income............................................... 54,545 109,309 3,878
Interest expense.............................................. (131,764) (226,587) (105,127)
Related party interest
expense..................................................... (739,823) (485,265) (88,977)
----------- ----------- -----------
Income (loss) before income taxes................................ (1,932,038) 205,896 (162,016)
Provision for income taxes....................................... 52,896 26,000 4,500
----------- ----------- -----------
Net income (loss)................................................ $(1,984,934) $ 179,896 $ (166,516)
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-38
<PAGE> 157
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994 AND SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------ PAID-IN ----------------- ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT TOTAL
------- -------- ---------- ------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... 389,750 $389,750 $5,176,836 -- -- $(1,464,058) $ 4,102,528
Common stock issued............ 31,300 31,300 (23,475) -- -- -- 7,825
Employee receivable due to
common stock issued.......... -- -- (7,825) -- -- -- (7,825)
Rescission of shares due to
employee terminations........ -- -- 42,600 42,600 $(42,600) -- --
Excess consideration over
historical cost of assets
acquired in a purchase
combination
(Note 1)..................... -- -- (482,596) -- -- -- (482,596)
Net loss....................... (1,984,934) (1,984,934)
------- -------- ---------- ------ ------ ---------- ----------
Balance, December 31, 1994....... 421,050.. 421,050 4,705,540 42,600 (42,600) (3,448,992) 1,634,998
Common stock issued............ 3,000 3,000 (2,250) -- -- -- 750
Employee receivable due to
common stock issued.......... -- -- (750) -- -- -- (750)
Purchase of shares due to
employee terminations........ -- -- 11,929 12,050 (12,050) (64,287) (64,408)
Net income..................... -- -- -- -- -- 179,896 179,896
------- -------- ---------- ------ ------ ---------- ----------
Balance, June 30, 1995........... 424,050 $424,050 $4,714,469 54,650 $(54,650) $(3,333,383) $ 1,750,486
======= ======== ========== ====== ====== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-39
<PAGE> 158
BRITWILL HEALTHCARE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED ONE MONTH
DECEMBER 31, JUNE 30, ENDED
1994 1995 JULY 31, 1995
------------ ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ (1,984,934) $ 179,896 $ (166,516)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization............................... 1,083,779 574,065 90,803
Increase in accounts receivable............................. (2,461,879) (743,748) (100,036)
(Increase) decrease in amounts due from third party
payors..................................................... (1,011,345) (1,140,747) 895,801
Decrease (increase) in inventories.......................... (114,066) (8,550) --
Increase in due from affiliates............................. (361,752) (143,360) --
Increase in prepaid expenses................................ (67,110) (86,567) (19,097)
(Increase) decrease in other receivables.................... 15,017 (12,320) (1,047)
(Increase) decrease in other assets and deferred
charges................................................... (69,733) (173,037) 67,370
Payment for restricted cash................................. (45,000) -- --
(Increase) decrease in security deposits.................... (141,344) 883 (13,119)
(Decrease) increase in accounts payable..................... 3,681,783 (1,115,972) (1,604,192)
Increase in accrued expenses................................ 1,156,766 3,506,897 90,725
Increase (decrease) in income taxes payable................. 1,146 39,230 (19,749)
----------- ----------- -----------
Net cash (used in) provided by operating activities......... (318,672) 876,670 (779,057)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment............................ (551,714) (485,009) (136,997)
Purchase of facilities from related party, net of liabilities
of $340,000................................................. (482,596) -- --
Construction in progress....................................... (170,904) (436,169) --
----------- ----------- -----------
Net cash used in investing activities....................... (1,205,214) (921,178) (136,997)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable........................ 2,283,823 -- --
Proceeds from revolving line of credit......................... -- 1,672,577 1,082,377
Payments on notes payable and long-term debt................... (364,922) (1,754,875) (117,894)
Receipt of restricted cash..................................... -- 600,000 --
Payment for debt issuance costs................................ (190,000) (111,059) --
Repurchase of shares........................................... -- (64,408) --
----------- ----------- -----------
Net cash provided by financing activities................... 1,728,901 342,235 964,483
----------- ----------- -----------
Net increase in cash and cash equivalents........................ 205,015 297,727 48,429
Cash and cash equivalents at beginning of period................. 355,864 560,879 858,606
----------- ----------- -----------
Cash and cash equivalents at end of period....................... $ 560,879 $ 858,606 $ 907,035
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 684,615 $ 296,562 $ 82,069
Income taxes................................................ 51,502
Supplemental schedule of noncash investing and financing
activities:
Security deposit with Omega through issuance of note........... 1,400,000
Acquisition of other intangibles through issuance of note...... 249,000
</TABLE>
See accompanying notes to the consolidated financial statements.
F-40
<PAGE> 159
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
BritWill HealthCare Company (the "Company") was organized as a Delaware
corporation on August 5, 1992. The Company leases and manages long-term care
facilities located throughout Texas and Indiana. The Company commenced
operations on December 24, 1992. At that time, BritWill Investments -- Indiana
L.P. (BI-Indy), an affiliate of the Company, managed thirteen long-term care
facilities owned by Cloverleaf Enterprises, Inc. Such facilities were leased and
operated by Sherwood Healthcare Corp. (Sherwood) and Cedar Care, Inc. (Cedar
Care). Under the terms of a management agreement, BI-Indy exercised its options
to acquire nine of these facilities and acquire the leasehold rights to the
remaining four facilities from Cloverleaf Enterprises, Inc. Concurrently, the
nine facilities were sold by BI-Indy to Omega Healthcare Investors, Inc. (Omega)
and leased back under a "Master Lease" agreement by BritWill Investments -- I
(BI-1), a subsidiary of the Company. The leasehold rights to the four facilities
were contributed to BI-1 by BI-Indy. Further, BI-Indy assigned the two
management agreements for these thirteen facilities to BI-1.
In December 1993, BritWill Investments Texas, Ltd. (BI-TX), an affiliate of
the Company, entered into purchase agreements for six long-term care facilities
and entered into lease agreements for three facilities with third-party lessors.
The total consideration paid by BI-TX was approximately $18,440,000. BI-TX
financed these transactions through two participating mortgages with Omega
totaling $14,760,000 and the sale of five facilities to Omega for $13,810,000.
BritWill Investments -- II (BI-2), a subsidiary of the Company, then entered
into a noncancelable operating lease ("Texas Master Lease") with Omega for the
five facilities sold by BI-TX and also entered into two noncancelable operating
lease and sublease agreements for six facilities either owned or leased by
BI-TX.
During 1993, BI-TX conveyed supply inventories and certain liabilities and
other accrued expenses from the facilities to BI-2. No consideration was paid by
BI-2 to BI-TX for the inventory and BI-TX did not give BI-2 any consideration
for the transfer of the liabilities and accrued expenses. The amount by which
the predecessor cost of the inventory exceeded the assumed liabilities, $77,009,
was recognized as additional paid-in capital.
Effective November 1, 1994, BI-2 purchased the net assets of two nursing
homes operated by Avalon Care, Inc. ("Avalon"), an affiliated company. The
nursing homes acquired were: Elkhart Manor ("Elkhart") and Oakwood Health Care
Center ("Oakwood") facilities. Avalon assigned the responsibilities and rewards
of the Elkhart and Oakwood operating leases to BI-2. As consideration for the
purchase of the leases, BI-2 forgave intercompany debt from Avalon. The amount
by which the consideration paid exceeded the predecessor cost of the acquired
assets less the assumed liabilities and forgiveness of debt, $482,496, was
recognized as a reduction of additional paid-in capital.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, consisting of BI-1 and BI-2. The financial statements
include the accounts of Cedar Care and Sherwood since December 24, 1992.
Although the Company has no ownership interest in Cedar Care or Sherwood, these
companies are consolidated because the Company has unilateral and perpetual
control over the assets and operations of these companies due to the management
agreements. Under these management agreements, managerial control and operating
proceeds have been transferred directly to BI-1. Fees under the management
agreements are based upon the revenues of Cedar Care and Sherwood from the
facilities, such that all net income of Cedar Care and Sherwood is paid to BI-1.
All significant intercompany accounts and transactions have been eliminated.
F-41
<PAGE> 160
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents include amounts held in demand deposits at
financial institutions and all highly liquid investments that have an original
maturity of three months or less.
Restricted cash
As of June 30, 1995, restricted cash consists of the $45,000 certificate of
deposit assigned to a third party as security for payment of insurance claims.
Revenue and accounts receivable
Revenues are derived from patient care services and management fees of
nursing homes not owned or leased by the Company. Credit risk exists to the
extent that the most significant source of revenue is reimbursement for patient
care from state sponsored Medicaid programs in Texas and Indiana and from
Medicare. However, management does not believe that there are any significant
credit risks associated with these governmental agencies. Payments from such
programs are based on cost as defined under the programs, and associated
revenues are presented net of provisions to reduce customary charges to amounts
receivable from such programs. Revenues from private sources are recognized
based upon established charges. Reserves are provided for receivables estimated
to be uncollectible and are adjusted periodically based on the Company's
evaluation of industry conditions, historical collection experience and other
relevant factors.
The following table summarizes the approximate percent of net patient
revenues and accounts receivable from such payors:
<TABLE>
<CAPTION>
NET REVENUE
---------------------------------------------- ACCOUNTS
SIX MONTHS ONE MONTH RECEIVABLE
---------- ---------- ----------
DECEMBER 31, JUNE 30, JULY 31, JUNE 30,
1994 1995 1995 1995
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Medicaid............................ 60.5% 53.7% 53.9% 62.8%
Medicare............................ 17.6 28.6 28.6 25.4
Private............................. 20.1 16.0 15.9 7.9
Other............................... 1.8 1.7 1.6 3.9
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
Inventories
Inventories consist of medical and other supplies necessary for delivering
resident care at the facilities. Inventories are recorded at the lower of cost
(determined by the first-in, first-out method) or market.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are carried at cost. Depreciation is
recognized using the straight-line method over the estimated useful lives of the
assets, which range from five to ten years. Leasehold improvements are amortized
over the lesser of the estimated useful life or lease term. Maintenance cost and
repairs are expensed as incurred; betterments and leasehold improvements are
capitalized.
F-42
<PAGE> 161
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred charges
Deferred charges consist of costs incurred to acquire leases to the
long-term care facilities, which are amortized on the straight-line method over
the term of the lease. Amortization expense was $77,186, $38,366 and $6,436 for
the year ended December 31, 1994, the six months ended June 30, 1995 and the one
month ended July 31, 1995, respectively.
Income taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS 109). The
cumulative effect of the adoption of SFAS 109 was immaterial to the Company's
financial position. Under SFAS 109, the liability method is used to account for
income taxes. Under this method, the deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial reporting of existing assets and liabilities and their respective tax
basis. The Company's principal differences relate to the availability of tax net
operating loss carry forwards, certain reserves, accrued vacation, and
depreciation.
Interim financial data
The following table sets forth summarized results of operations for
BritWill for the periods indicated:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
---------------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenues.................................... $29,857,000 $38,854,000
Income (loss) from operations..................... (1,365,000) 836,000
Income (loss) before income taxes................. (1,886,000) 44,000
Net income (loss)................................. (1,912,000) 13,000
</TABLE>
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995
----------
<S> <C>
Furniture and fixtures........................................... $1,476,780
Leasehold improvements........................................... 504,952
Construction in progress......................................... 649,765
Land............................................................. 55,904
----------
2,687,401
Less accumulated depreciation.................................... (476,719)
----------
$2,210,682
==========
</TABLE>
Depreciation expense was $162,143, $109,712 and $23,468 for the year ended
December 31, 1994, the six months ended June 30, 1995 and the one month ended
July 31, 1995, respectively.
F-43
<PAGE> 162
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995
-----------
<S> <C>
Leasehold rights -- BI-Indy................................... $ 4,103,338
Leasehold rights -- BI-TX..................................... 3,331,547
Deferred financing costs...................................... 1,131,224
-----------
8,566,109
Less accumulated amortization................................. (1,738,983)
-----------
$ 6,827,126
===========
</TABLE>
The leasehold rights -- BI-Indy were recorded at the cost of the
predecessor and are being amortized to rent expense over ten years, the term of
the lease.
The leasehold rights -- BI-TX were recorded at the amount of the obligation
entered into to obtain the right to operate nursing homes acquired by BI-TX in
June and December 1993 and are being amortized to rent expense over ten years,
the term of the lease. See Note 10.
Other deferred financing costs include additional acquisition costs and
debt closing costs which are being amortized to interest expense over periods of
three to ten years. The total amount charged to interest expense was $73,838,
$83,483 and $13,446 for the year ended December 31, 1994, the six months ended
June 30, 1995 and the one month ended July 31, 1995, respectively.
Total amortization expense relating to these assets was $747,483, $352,604
and $60,934 for the year ended December 31, 1994, the six months ended June 30,
1995 and the one month ended July 31, 1995, respectively.
5. SECURITY DEPOSIT
Security deposits consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995
----------
<S> <C>
Lease deposit -- BI-Indy....................................... $1,335,000
Liquidity deposit -- BI-TX..................................... 1,400,000
Other deposits................................................. 140,461
----------
2,875,461
Less current portion........................................... (637,517)
----------
$2,237,944
==========
</TABLE>
In connection with the Indiana transaction discussed in Note 1, the Company
is required to maintain a security deposit equal to seven months minimum lease
obligation. These funds are held in escrow and restricted until certain
financial covenants have been met, including but not limited to net worth and
net operating cash flow requirements. These funds are currently invested by the
lessor in a mutual fund on behalf of the Company and bear interest at 5.5% on
June 30, 1995. Accrued interest receivable on these funds is $72,389 at June 30,
1995. This deposit has been classified as noncurrent.
In connection with the Texas transaction discussed in Note 1, BI-TX
advanced BI-2 $1,400,000. This advance, as described in Note 7, matures in
December 2003 and is classified as a long-term liability. These funds were used
as a liquidity deposit with OMEGA (the "lessor") and are currently invested by
the lessor on
F-44
<PAGE> 163
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
behalf of the Company and bear interest at 5.25% to 6.0%. The underlying note
between BI-2 and BI-TX has interest payable at the same term as the interest
earned on the security deposit. A portion of this deposit, $500,000, has been
classified as current as the terms of the Texas master lease allow for the use
of a letter of credit in place of a security deposit. The Company has a $500,000
letter of credit available through a third party.
Other deposits, primarily lease and utility, have been classified as
current at June 30, 1995. Due to the subsequent event described in Note 12, the
Dallas, Texas operations of the Company will be relocated to Phoenix, Arizona by
March 1996.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995
----------
<S> <C>
Amounts due Medicaid -- Indiana.................................. $3,741,188
Accrued salaries and benefits.................................... 1,205,922
Payroll withholding taxes........................................ 481,522
Ancillary expense................................................ 620,142
Property taxes................................................... 396,700
Rent............................................................. 245,547
Financing costs..................................................
Other............................................................ 311,326
----------
$7,002,347
==========
</TABLE>
In March 1995, the Company received an erroneous Medicaid reimbursement
payment of approximately $4,300,000 related to one of its Indiana facilities.
Negotiations with the state of Indiana's agent regarding such overpayment
resulted in the Company retaining the money paid subject to the Company's
payment of interest thereon to the state of Indiana. Future amounts due the
Company by the state will be offset against the interest-bearing obligation
until March 25, 1996 at which time the Company must reimburse the state for the
unused portion. The unreimbursed Medicaid payment accrues interest at prime plus
3.25% or 12% per annum, whichever is higher. The Company recorded $72,000 of
interest expense during the six-month period ended June 30, 1995 and $74,440 of
interest expense during the one-month period ended July 31, 1995.
F-45
<PAGE> 164
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Subordinated notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995
-----------
<S> <C>
Subordinated notes payable to an affiliate, secured by a $1,400,000 liquidity
deposit bearing interest at 5.2% to 12.0%, due January 1995 through December
2003 payable quarterly...................................................... $ 8,776,782
Note payable to bank, bearing interest at prime plus 2.0% payable monthly, due
October 1998................................................................ 48,183
Subordinated notes payable to third party, bearing interest at 10.0% payable
monthly, due August 1998.................................................... 239,913
Revolving line of credit advances bearing interest at the commercial paper 30
day weighted average rate plus 4.25% payable monthly........................ 1,672,577
-----------
10,737,455
Less current portion.......................................................... (528,230)
-----------
$10,209,225
===========
</TABLE>
The maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1995....................................... $ 1,280,741
1996....................................... 831,918
1997....................................... 254,049
1998....................................... 2,496,647
1999....................................... 286,349
Thereafter................................. 5,670,051
-----------
$10,819,755
===========
</TABLE>
The line of credit and note payable to bank bear interest at 2.0% over
prime (9.0% at June 30, 1995).
On January 31, 1995, the Company completed a three-year revolving credit
line for $6,000,000. The credit line is collateralized by existing and future
accounts receivable of the Company. The credit line requires the Company to
maintain quarterly financial covenants including fixed charge ratio
requirements, cash velocity test requirements, accounts receivable
day-sales-outstanding requirements and positive earnings test requirements. As
of June 30, 1995, the Company was in compliance with all such quarterly
covenants.
F-46
<PAGE> 165
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ONE MONTH
---------- ---------
DECEMBER 31, JUNE 30, JULY 31,
1994 1995 1995
------------ ---------- ---------
<S> <C> <C> <C>
Current:
Federal.....................................
State and local............................. $ 52,896 $ 26,000 $ 4,500
------- ------- -------
52,896 26,000 4,500
Deferred:
Federal.....................................
------- ------- -------
$ 52,896 $ 26,000 $ 4,500
======= ======= =======
</TABLE>
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ONE MONTH
---------- ---------
DECEMBER 31, JUNE 30, JULY 31,
1994 1995 1995
------------ ---------- ---------
<S> <C> <C> <C>
Income taxes computed at statutory U.S.
federal income tax rates.................... $ (533,067) $ 70,005 $(55,080)
Limitation on (utilization of) NOL............ 473,479 (101,239) 50,080
State and local income taxes.................. 52,896 26,000 4,500
Permanent differences......................... 59,588 31,234 5,000
--------- --------- ---------
$ 52,896 $ 26,000 $ 4,500
========= ========= =========
</TABLE>
At June 30, 1995 and July 31, 1995, the Company has federal tax net
operating loss carry forwards of approximately $2,100,000 and $2,100,000,
respectively, which expire at various dates through 2008. Under section 382 of
the Internal Revenue Code of 1986, as amended, the utilization of net operating
loss carry forwards may be delayed or permanently lost if there has been a
cumulative change in ownership during the past three years of more than 50%.
Such a change occurred in August 1995 as described in Note 12. Therefore, the
annual limitation on the Company's net operating loss carry forward is
approximately $1,500,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-47
<PAGE> 166
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's net deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
JUNE 30,
1995
-----------
<S> <C>
Deferred tax assets:
Vacation accrual............................................................ $ (107,086)
Net operating loss carry forward............................................ (1,034,568)
Capital leases.............................................................. (880,088)
Leasehold rights............................................................ (55,191)
Allowance for bad debts..................................................... (292,621)
-----------
Gross deferred tax assets................................................ (2,369,554)
Valuation allowance........................................................... 2,369,554
-----------
Net deferred tax assets....................................................... --
Deferred tax liabilities...................................................... --
-----------
Net deferred tax liabilities.................................................. $ --
===========
</TABLE>
9. LEASES
The Company has noncancelable operating leases on substantially all of its
buildings and equipment which expire at various dates through the year 2003.
BI-1 and BI-2 lease sixteen facilities from Omega under the "Master Lease" and
"Texas Master Lease" Agreements.
The approximate future minimum rental commitments at December 31, 1994
under the operating leases are as follows:
<TABLE>
<S> <C>
1995.................................................... $ 8,098,047
1996.................................................... 7,804,644
1997.................................................... 7,886,491
1998.................................................... 7,901,301
1999.................................................... 7,910,753
Thereafter.............................................. 35,869,739
-----------
$ 75,470,975
===========
</TABLE>
Rent expense under operating leases was $8,263,642, $4,448,134 and $750,636
during the year ended December 31, 1994, the six months ended June 30, 1995 and
the one month ended July 31, 1995, respectively.
The lease terms are generally from eight to ten years with two or three
five-year renewal options. Minimum rentals increase annually based upon the
greater of 5.0% of incremental revenues or the Consumer Price Index, but limited
to a maximum annual increase of 3.5%. Upon exercise of a renewal option, the
rental payments continue in the same fashion as the original lease. The Company
and certain affiliated entities have options to purchase certain properties at
various times at prices determined by a specified formula. The Company and its
subsidiaries have guaranteed performance on the mortgages and lease payments to
Omega as discussed in Note 1 totaling $35,500,000 at December 31, 1994.
The lease payments are personally guaranteed to $13,500,000 by the chairman
of the board whose family trust is a majority shareholder of the Company, as
well as secured by substantially all the personal property and equity of the
Company. Lease rental payments are senior to all unsecured debt. The Company is
responsible for all taxes, maintenance and other executory costs.
F-48
<PAGE> 167
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Covenants to the Master Lease and Texas Master Lease include, but are not
limited to, current ratio requirements, cash flow to rent and debt service
requirements, minimum net worth requirements, and minimum cash requirements. In
March 1994, Omega consolidated and amended certain financial covenants related
to the Indiana and Texas Master Leases and the participating mortgages. Certain
payments to affiliates are subordinate to the lease payments made to Omega. As
of June 30, 1995, the Company was in compliance with these covenants.
10. RELATED PARTY TRANSACTIONS
BritWill HealthCare Company is a member of a group of affiliated companies
and has extensive transactions and relationships with members of the group.
Management of the Company believes that the terms of these transactions are not
materially different than those which would result from transactions among
wholly unrelated parties.
In December 1992, the Company entered into a transaction with BI-Indy in
which the Company exchanged 75% of its common stock for leasehold rights with a
value of $4,100,000. BI-Indy contributed furniture and equipment and $623,466 of
other costs incurred and capitalized as part of the transaction.
In December 1992, certain affiliates of a director of the Company loaned
the Company $400,000; and Whitehead Family Investments (WFI), a related party,
loaned the Company $2,075,000 which, combined with the director loan, is
recorded as subordinated long-term debt. The loans are subordinate to the lease
obligations on the Company's Indiana facilities. Interest expense on the loans
totaled $297,000 for 1994 and $148,500 and $28,875 for the six months ended June
30, 1995 and one month ended July 31, 1995, respectively. In addition, the
lenders are entitled to a minimum quarterly bonus. The expense for this bonus
agreement totaled $40,000 for 1994 and $20,000 for the six months ended June 30,
1995 and $3,333 for the one month ended July 31, 1995.
On December 23, 1993, an officer of the Company, loaned the Company
$70,000, at 12.0% annual interest, for working capital. The loan renewed a
$60,000 loan issued on October 23, 1993. At December 31, 1994, the outstanding
principal balance amounted to $49,000. Such principal balance was repaid in
1995. Interest expense on these loans amounted to approximately $5,880 in 1994.
In December 1993, the Company entered into a transaction with BI-TX in
which BI-TX contributed $2,800,000 of leasehold rights and $510,000 of working
capital to the Company in exchange for a note payable of $3,310,000. The
outstanding principal balance totaled $2,901,782 at June 30, 1995. Interest
expense on this loan amounted to approximately $226,476, $121,365 and $31,943
for the year ended December 31, 1994, for the six months ended June 30, 1995 and
for the one month ended July 31, 1995, respectively.
In December 1994, certain affiliates of a director of the Company loaned
the Company $1,500,000 at 12.0% annual interest. A portion of the loan,
$500,000, represents a renewal of a $250,000 loan issued on December 1, 1994.
Interest expense on these loans amounted to approximately $1,500 for the year
ended December 31, 1994, $85,562 for the six months ended June 30, 1995 and
$15,068 for the one month ended July 31, 1995.
On June 1, 1994, the Company renewed a $600,000 note payable (in addition
to the above mentioned note) to WFI for working capital at an annual interest
rate of 12.0%. The note was renewed from a loan of the same amount issued on
June 1, 1993. Interest expense on these loans amounted to $72,000, $36,000 and
$6,000 for the year ended December 31, 1994, the six months ended June 30, 1995
and the one month ended July 31, 1995, respectively.
The Company manages nursing homes owned by an affiliate. Management fee
revenues charged the affiliate totaled $251,186, $40,430 and $0 during the year
ended December 31, 1994, the six months ended June 30, 1995 and the one month
ended July 31, 1995, respectively.
F-49
<PAGE> 168
BRITWILL HEALTHCARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Estimated third party settlements
Final determination of amounts earned under cost-reimbursed programs is
subject to review by appropriate governmental authorities or their agents. In
the opinion of management, adequate provision has been made for any adjustments
that could result from such reviews. In addition, the state of Indiana has
reviewed the Indiana Medicaid reimbursement structure. The ultimate impact to
healthcare providers in that state has been estimated and management believes
there will not be a material adverse effect on the financial position or results
of operations of the Company.
Medical malpractice and self-insured risks
The Company has obtained medical malpractice coverage with liability limits
of $5,000,000 per claim and in the aggregate. The Company has also obtained
workers' compensation coverage in Indiana but is uninsured with respect to
certain facilities located in Texas. The Company believes that the provision of
$20,550 recorded at June 30, 1995 for asserted and/or unasserted claims is
adequate based on historical results.
12. SUBSEQUENT EVENT
On August 10, 1995, Sunquest HealthCare Corporation, another long-term care
company operating approximately 21 facilities in eleven states, acquired the
Company's outstanding stock for a fixed payment of $26,000,000, plus contingent
amounts of up to approximately $9.8 million if the company achieves specified
revenue targets. The purchase price was comprised of two promissory notes
amounting to $19,000,000, in total, and a $7,000,000 noninterest bearing
convertible subordinated debenture.
In November 1995, a retroactive restatement and correction of the purchase
agreement reduced the fixed purchase price by $6,000,000. The purchase agreement
includes a related contingent purchase price obligation of up to $9,800,000
depending upon future revenues.
F-50
<PAGE> 169
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Signature Health Care Corporation:
We have audited the accompanying consolidated balance sheets of SIGNATURE
HEALTH CARE CORPORATION (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signature Health Care
Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 15, 1996
F-51
<PAGE> 170
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 212,899 $ 274,992 $ 919,121
Patient accounts receivable, net of allowance for
doubtful accounts of $221,016 at September 30,
1996 and $195,900 and $155,200 at December 31,
1995 and 1994..................................... 4,458,124 3,663,958 1,641,216
Prepaid income taxes................................ 96,138 -- 407,448
Inventory........................................... 257,209 5,000 5,000
Other current assets................................ 257,549 160,073 164,704
Deferred tax asset.................................. 209,000 101,300 102,400
----------- ----------- -----------
Total current assets........................... 5,490,919 4,205,323 3,239,889
Property and equipment, at cost..................... 18,467,409 18,264,010 18,020,293
Less-Accumulated depreciation..................... (2,178,423) (1,490,542) (594,150)
----------- ----------- -----------
Net property and equipment..................... 16,288,986 16,773,468 17,426,143
Goodwill, net of accumulated amortization of
$1,066,855 at September 30, 1996 and $639,142 and
$68,900 at December 31, 1995 and 1994............. 1,578,030 2,005,744 2,576,027
Loan fees, net of accumulated amortization of
$71,467 at September 30, 1996 and $49,000 and
$20,000 at December 31, 1995 and 1994............. 252,830 275,330 304,288
Debt service reserve................................ 1,199,726 1,161,808 1,110,647
Receivables due from affiliates, net................ -- 495,031 --
Deposits and other.................................. 59,925 59,925 63,425
----------- ----------- -----------
Total other assets............................. 3,090,511 3,997,838 4,054,387
----------- ----------- -----------
Total assets.............................. $ 24,870,416 $24,976,629 $24,720,419
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt................ $ 198,994 $ 198,994 $ 141,417
Accounts payable.................................... 1,107,750 1,078,237 189,660
Accrued payroll, taxes and benefits................. 561,199 354,714 676,374
Income taxes payable................................ -- 211,847 --
Accrued property taxes.............................. -- 87,683 92,336
Other accrued expenses.............................. 55,751 104,468 31,077
Unearned revenue.................................... 133,191 96,402 121,016
----------- ----------- -----------
Total current liabilities...................... 2,056,885 2,132,345 1,251,880
Deferred income taxes............................... 2,638,136 2,939,553 3,219,753
Long-term debt, net of current maturities........... 18,474,839 18,605,174 18,842,292
Payables due to affiliates, net..................... 1,563,400 -- --
----------- ----------- -----------
Total liabilities......................... 24,733,260 23,677,072 23,313,925
Common stock, $.01 par value; 1,200,000 shares
authorized; 250,000 shares issued and
outstanding....................................... 5,314 2,500 2,500
Additional paid-in capital.......................... 1,628,302 1,610,600 1,610,600
Accumulated deficit from operations................. (1,496,460) (313,543) (206,606)
----------- ----------- -----------
Total stockholders' equity..................... 137,156 1,299,557 1,406,494
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................. $ 24,870,416 $24,976,629 $24,720,419
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-52
<PAGE> 171
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sub-acute and rehabilitation.......... $ 6,419,000 $ 5,916,524 $ 8,314,758 $ 4,151,426
Alzheimers care....................... 1,349,466 1,089,808 1,493,735 1,129,135
Skilled nursing care.................. 11,160,602 10,772,654 14,481,606 14,428,066
Miscellaneous services................ 93,442 91,424 119,527 200,301
----------- ----------- ----------- -----------
Net patient revenue................... 19,022,510 17,870,410 24,409,626 19,908,928
Management fees....................... -- -- -- 32,772
----------- ----------- ----------- -----------
Total revenue.................... 19,022,510 17,870,410 24,409,626 19,941,700
----------- ----------- ----------- -----------
Nursing services (including $2,720,346
and $1,651,423 at September 30, 1996
and 1995 and $2,365,582 and $583,911
at December 31, 1995 and 1994 to an
affiliate).......................... 9,658,931 8,322,230 11,467,625 9,683,175
Dietary services...................... 1,096,953 1,109,279 1,514,387 1,500,641
General services...................... 2,073,669 2,133,649 2,890,000 3,053,090
Provision for bad debts............... 406,710 125,509 181,339 213,482
Management fees to an affiliate....... 4,564,734 3,101,389 4,725,703 2,301,848
Rent.................................. 288,297 280,009 375,101 397,297
Interest, net of income of $48,878 and
$76,618 at September 30, 1996 and
1995 and $96,959 and $90,041 at
December 31, 1995 and 1994.......... 1,574,078 1,405,904 1,933,452 1,657,162
Depreciation and amortization......... 1,138,094 1,215,720 1,495,634 1,078,710
----------- ----------- ----------- -----------
Total expenses................... $20,801,466 $17,693,689 24,583,241 19,885,405
----------- ----------- ----------- -----------
(Loss) income before income
taxes.......................... (1,778,956) 176,721 (173,615) 56,295
(Benefit) provision for income
taxes.......................... (596,039) 69,952 (66,678) 28,654
----------- ----------- ----------- -----------
Net (loss) income........... $(1,182,917) $ 106,769 $ (106,937) $ 27,641
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE> 172
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
CONVERTIBLE -----------------------------
PREFERRED STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------- PAID-IN EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- ----------- ------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 700,000 $ 2,540,092 250,000 $2,500 $ 191,100 $ 1,391,792 $ 4,125,484
Net income.................... -- -- -- -- -- 27,641 27,641
Purchase of Preferred stock
and elimination of residual
interest in retained
earnings.................... (700,000) (2,540,092) -- -- 1,419,500 (1,626,039) (2,746,631)
-------- ----------- ------- ------ ---------- ----------- -----------
Balances at December 31, 1994... -- $ -- 250,000 $2,500 $1,610,600 $ (206,606) $ 1,406,494
Net loss...................... -- -- -- -- -- (106,937) (106,937)
-------- ----------- ------- ------ ---------- ----------- -----------
Balances at December 31, 1995... -- $ -- 250,000 $2,500 $1,610,600 $ (313,543) $ 1,299,557
Sale of common stock............ -- -- 31,379 2,814 17,702 -- 20,516
Net loss (unaudited).......... -- -- -- -- -- (1,182,917) (1,182,917)
-------- ----------- ------- ------ ---------- ----------- -----------
Balances at September 30, 1996
(unaudited)................... -- $ -- 281,379 $5,314 $1,628,302 $(1,496,460) $ 137,156
======== =========== ======= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE> 173
SIGNATURE HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................... $(1,182,917) $ 106,769 $ (106,937) $ 27,641
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 1,138,094 1,215,720 1,495,634 1,078,710
Provision for bad debts............................ 406,710 125,509 181,339 213,482
Change in deferred taxes........................... (409,117) (279,101) (279,100) 73,591
Changes in non-cash working capital:
Patient accounts receivable..................... (1,200,876) (1,715,892) (2,204,081) (421,724)
Prepaid income taxes............................ (96,138) 407,448 407,448 (407,448)
Inventory and other current assets.............. (349,685) (142,989) 4,631 (54,280)
Accounts payable................................ 29,513 1,020,320 888,577 (149,569)
Accrued payroll, taxes and benefits............. 206,485 (142,443) (321,660) 118,214
Income taxes payable............................ (211,847) 301,680 211,847 (223,500)
Accrued property taxes and other accrued
expenses...................................... (136,400) 39,508 68,738 (47,779)
Unearned revenue................................ 36,789 (24,615) (24,614) 33,213
----------- ----------- ----------- -----------
Net cash provided by operating activities....... (1,769,389) 911,914 321,822 240,551
----------- ----------- ----------- -----------
Cash flows from investing activities:
Recognition of buyout net asset value................ -- -- -- (4,459,908)
Purchase of property and equipment................... (203,398) (171,601) (243,718) (512,922)
Purchase of investments.............................. (37,918) (34,033) (51,161) (17,739)
Purchase of goodwill................................. -- -- -- (2,644,885)
Increase in deferred taxes related to buyout......... -- -- -- 2,778,543
Change in deposits and other assets.................. -- -- 3,500 96,377
----------- ----------- ----------- -----------
Net cash used in investing activities........... (241,316) (205,634) (291,379) (4,760,534)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt.......................... (130,335) (88,073) (179,541) (11,462,055)
Receivables due from affiliates, net................. 2,058,431 (1,129,983) (495,031) --
Issuance of long-term debt........................... -- -- -- 19,100,000
Payment of loan fees................................. -- -- -- (324,297)
Purchase of preferred stock.......................... -- -- -- (2,746,631)
Sale of common stock................................. 20,516 -- -- --
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................... 1,948,612 (1,218,056) (674,572) 4,567,017
----------- ----------- ----------- -----------
Net (decrease) increase in cash................. (62,093) (511,776) (644,129) 47,034
Cash and cash equivalents,
at beginning of year.......................... 274,992 919,121 919,121 872,087
----------- ----------- ----------- -----------
Cash and cash equivalents,
at end of year................................ $ 212,899 $ 407,345 $ 274,992 $ 919,121
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE> 174
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) BUSINESS AND ORGANIZATION
Signature Health Care Corporation and its wholly owned subsidiaries (the
"Corporation") own, operate and manage skilled nursing centers providing
restorative, rehabilitative, and sub-acute services. As of December 31, 1995,
the Corporation owns six nursing homes and leases one for a total of seven
nursing homes with 602 total beds. The Corporation does business in Colorado and
Arizona. The Corporation's nursing homes are subject to licensing and regulation
of their services by various federal and state government agencies. The
Corporation incorporated in Delaware on October 12, 1987.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The accompanying consolidated financial statements include
the accounts of the Corporation and its wholly owned subsidiaries with all
significant intercompany accounts and transactions eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include all
investments with an original maturity of three months or less.
Property and Equipment. Property and equipment are recorded at cost, with
depreciation computed on the straight-line method over the estimated useful
lives of depreciable assets which range from two to 40 years.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires that the Corporation perform a review of long-lived assets and
goodwill related to those assets to assess whether an impairment of value
exists. If such an impairment does exist, the related assets must be written
down to fair value.
The Corporation is required to adopt SFAS 121 in fiscal 1996. Management
has not yet determined what the ultimate impact of adopting this new Statement
will be on the Corporation's financial position or results of operations.
Loan Fees. Loan fees amortize over the term of the related debt using the
effective interest method.
Net Patient Service Revenue and Accounts Receivable. Patient revenue is
reported at established rates or estimated net realizable amounts from
third-party payors or others for services rendered. Credit risk exists to the
extent that the Corporation's most significant source of revenue is
reimbursement for patient care from state-sponsored Medicaid programs and from
Medicare. However, management does not believe that there are significant credit
risks associated with these governmental agencies. Contractual adjustments
resulting from agreements with various organizations to provide services for
amounts which differ from billed charges, including services under Medicare and
Medicaid, are recorded as deductions from gross patient revenue. The estimated
third party payor settlements under Medicare and Medicaid programs are recorded
in the period the related services are rendered and are subject to audit and
final settlement by the fiscal intermediary. Differences between the net amounts
accrued and subsequent settlement, if any, are recorded in operations at the
time the final settlement is determined.
Until the year of settlement, accounts receivable are reduced for the
differences between recognized revenue and interim payments received from
third-party payors. The Corporation classifies these differences in
contra-accounts in accounts receivable as payable to Medicare and Medicaid
third-party payors until the year of settlement. These settlement amounts total
$1,084,000 and $586,000 as of December 31, 1995 and 1994, respectively.
F-56
<PAGE> 175
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company derived patient revenues from various sources in 1995 and 1994,
respectively, as follows:
(a) federal Medicare program (retrospectively reimbursing actual
allowable costs), 33% and 20%;
(b) negotiated contracts with various government agencies and private
insurance companies, 31% and 36%;
(c) private pay sources, 19% and 25%; and
(d) state Medicaid programs (prospectively reimbursing historical
allowable costs plus an inflation factor and profit factor), 17% and 19%.
Management Fees. During 1994 the Corporation provided accounting services
to a contracted therapy business. In return for its management services, the
Corporation received management fees in an amount equal to 3% of net revenue
plus its costs for providing accounting services.
Goodwill. Goodwill is being amortized over a five-year period.
Income Taxes. The Corporation accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109. "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires the use of an asset and liability
approach for measuring deferred taxes based on temporary differences between
financial statement and tax bases of assets and liabilities existing at each
balance date using enacted tax rates for years in which the related taxes are
expected to be paid or recovered.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited consolidated balance sheet and statement of stockholders'
equity as of September 30, 1996 and the unaudited consolidated statements of
income and cash flows for the nine months ended September 30, 1995 and 1996, in
the opinion of management, have been prepared on substantially the same basis as
the audited consolidated financial statements and include all significant
adjustments necessary for the fair presentations of the results of the interim
periods. The data disclosed in these notes to the financial statement for these
periods are also unaudited. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for an entire year.
(4) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
10 year mortgage at 10.5% payable
monthly................................. $18,804,168 $18,983,709
Less current maturities................... (198,994) (141,417)
----------- -----------
$18,605,174 $18,842,292
========== ==========
</TABLE>
The property and equipment of the Corporation secure the current mortgage.
The mortgage contains a personal guarantee from a stockholder of the
Corporation. The mortgage contains various covenants including debt service
coverage, minimum current ratio, and restrictions on the payment of dividends.
The Corporation complied with the covenants throughout 1995 and 1994. Cash paid
for interest totaled $2,030,110 and $1,658,341 in 1995 and 1994, respectively.
F-57
<PAGE> 176
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt maturing in the next five years follows:
<TABLE>
<S> <C>
1996.................................................... $ 198,994
1997.................................................... 220,924
1998.................................................... 245,271
1999.................................................... 272,301
2000.................................................... 302,309
Thereafter.............................................. 17,564,369
-----------
Total long-term debt.......................... $18,804,168
===========
</TABLE>
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, deposits/accounts payable and long-term borrowings approximate their
fair value. The fair value of the Corporation's long-term borrowings is
estimated by discounting future cash flows at current rates offered to the
Corporation for debt of comparable types and maturities. Because no market
exists for these financial instruments, considerable judgment is necessary in
interpreting the data to develop estimates of fair value. The use of different
market assumptions may have a material effect on the estimated fair value
amounts.
(6) EQUITY
The common stock carry certain rights, the more significant of which
follow.
Voting. Each share of common stock carry the right to one vote.
Options. The Corporation reserves 250,000 shares of authorized but
unissued common stock for issuance to employees upon exercise of stock purchase
options. As of December 31, 1995, granted options cover the purchase, of 113,800
shares of common stock, of which 90,000 shares have vested and 23,800 shares
vest upon completion of certain conditions, none of which had occurred as of
December 31, 1995. Activity related to granted options for the two years ended
December 31, 1995 follows:
<TABLE>
<CAPTION>
PRICE PER
SHARES SHARE
------- ---------------
<S> <C> <C>
Granted options at December 31, 1993............................... 107,000 --
Options granted.................................................. 6,800 $12.00
Cancelled options................................................ (3,000) --
-------
Granted options at December 31, 1994............................... 110,800 --
Options granted.................................................. 6,850 $25.00
Cancelled options................................................ (3,850) --
-------
Granted options at December 31, 1995............................... 113,800 --
=======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
During 1993 the Corporation advanced $100,000 to an affiliated entity which
will provide physical, occupational, and speech therapy services to the
Corporation and others. This advance was outstanding during 1993 and 1994.
During 1995 the Corporation incurred and paid for management and
rehabilitation services from an entity having common owners.
F-58
<PAGE> 177
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
The Corporation leases a nursing home, on a ten year base term expiring in
2000, under which the Corporation possesses (1) the right to renew for one
additional 5 year term and (2) the option to purchase the nursing home through
the end of the base term. The lease provides for certain restrictions on the
maintenance and operation of the nursing home and an annual 2% escalation in the
base rent.
The Corporation also leases office space for its corporate office, on a
year to year basis, under which the Corporation possesses the right to renew for
additional one year terms.
Both leases are treated as operating leases, future lease payments follow:
<TABLE>
<S> <C>
1996..................................................... $ 381,152
1997..................................................... 374,370
1998..................................................... 380,736
1999..................................................... 387,648
2000..................................................... 361,152
----------
Total base term rent........................... $1,885,058
==========
</TABLE>
The Corporation has been named as a defendant in certain litigation.
Corporation management believes amounts which may become payable, if any,
pursuant to such litigation, will not be material to the Corporation's
consolidated financial statements.
(9) INCOME TAXES
The Corporation accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of events which have been included in
the financial statement or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Deferred taxes liability as of December 31, 1995 and 1994 are comprised of
the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Tax credit........................................ $ -- 13,000
Accrued liabilities and allowances................ 101,300 89,400
----------- -----------
Total current deferred tax asset............. 101,300 102,400
----------- -----------
Depreciation and amortization..................... (601,100) (441,200)
Basis step-up (see Note 9)........................ (2,338,500) (2,778,500)
----------- -----------
Total noncurrent deferred tax liability...... (2,939,600) (3,219,700)
----------- -----------
Total net deferred taxes................ $(2,838,300) $(3,117,300)
=========== ===========
</TABLE>
The Corporation did not record any valuation allowances against the
deferred tax asset at December 31, 1995 and 1994, as the Corporation's
management believes that it is more likely than not that the asset will be
realized. Cash paid for income taxes totaled $0 and $462,000 in 1995 and 1994
respectively.
F-59
<PAGE> 178
SIGNATURE HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision (benefit) consist of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Federal............................................... $ 195,484 $ 44,533
State................................................. 43,275 9,859
--------- --------
Current income tax provision........................ 238,759 54,392
--------- --------
Federal............................................... (250,077) (21,072)
State................................................. (55,360) (4,666)
--------- --------
Deferred income tax provision (benefit)............. (305,437) (25,738)
--------- --------
Total income tax provision (benefit)............. $ (66,678) $ 28,654
========= ========
</TABLE>
The difference between the Corporation's effective income tax rates and the
statutory rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Statutory federal income tax expense (benefit)........ $ (59,025) $ 19,140
Increases (decreases) resulting from:
State tax expense (benefit) net of federal
benefit.......................................... (8,681) 2,815
Nondeductible expenses.............................. 5,659 6,115
Other............................................... (4,631) 584
--------- --------
Income tax expense (benefit).......................... $ (66,678) $ 28,654
========= ========
</TABLE>
(10) BUY OUT OF PREFERRED STOCKHOLDERS
On March 30, 1994, the Corporation completed new long-term financing. The
proceeds were used to retire all existing debt, create a minimum debt service
reserve, and redeem all outstanding convertible preferred stock, which had
rights which made it essentially equivalent to common stock and comprised
approximately 67% of the Corporation's equity ownership.
Because a substantive change in control occurred, a proportional share of
the Corporation's net assets were revalued based on the monetary consideration
paid to the preferred shareholders and the assets applicable to common
stockholders' residual interest were carried forward at historical cost, net of
related valuation and allowance accounts.
The transaction resulted in an increase in property and equipment of
approximately $4.4 million, goodwill of $2.6 million, deferred tax liability of
$2.8 million as no step-up in basis was allowed for tax purposes, and the
elimination of retained earnings and an increase in paid-in capital.
The depreciation and amortization related to the increase in property and
equipment and goodwill referred to above totalled $233,350 in 1994 and
$1,210,111 in 1995.
(11) SUBSEQUENT EVENT
On August 2, 1996, the Corporation entered into an agreement and plan of
merger with Unison HealthCare Corporation ("Unison"). Through the merger the
Corporation will become a wholly owned subsidiary of Unison. Outstanding shares
of the Corporation will be converted into the right to receive, subject to
certain adjustments, cash equal to $10,200,000 and shares of Unison's common
stock equal to approximately $20,000,000. The merger is subject to regulatory
and shareholder approval.
F-60
<PAGE> 179
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc., and Safford Care,
Inc.:
We have audited the accompanying combined balance sheet of ARKANSAS, INC.,
CORNERSTONE CARE, INC., DOUGLAS MANOR, INC., and SAFFORD CARE, INC. (Colorado
corporations) as of December 31, 1995, and the related combined statements of
operations, stockholders' equity and cash flows for the period from inception,
May 9, 1995 through December 31, 1995. These financial statements are the
responsibility of each Corporation's management. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Arkansas, Inc.,
Cornerstone Care, Inc., Douglas Manor, Inc., and Safford Care, Inc. as of
December 31, 1995, and the combined results of their operations and their cash
flows for the period from inception through December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 15, 1996
F-61
<PAGE> 180
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER
1996 31, 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 534,774 $ 313,198
Patient accounts receivable, net of allowance for doubtful accounts
of $45,507 at September 30, 1996 and $23,000 at December 31,
1995.............................................................. 2,407,145 2,382,353
Inventory........................................................... 192,922 --
Other current assets................................................ 27,384 3,483
---------- ----------
Total current assets........................................... 3,162,225 2,699,034
Equipment........................................................... 795,880 800,995
Leasehold improvements.............................................. 202,695 167,695
---------- ----------
Property and equipment, at cost................................... 998,575 968,690
Less -- Accumulated depreciation.................................. (183,474) (54,314)
---------- ----------
Net property and equipment..................................... 815,101 914,376
Deposits and other.................................................. 69,960 70,605
Receivables due from affiliates..................................... 137,571
Prepaid rent........................................................ -- 209,587
---------- ----------
Total other assets............................................. 207,531 280,192
---------- ----------
Total assets.............................................. $4,184,857 $3,893,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of capitalized lease................................ $ 52,992 $ 48,003
Accounts payable.................................................... 674,901 430,382
Accrued payroll, taxes and benefits................................. 294,194 312,124
Property taxes payable.............................................. 62,725 48,015
Other accrued expenses.............................................. 30,119 4,905
Unearned revenue.................................................... 85,269 30,550
---------- ----------
Total current liabilities...................................... 1,200,200 873,979
Deferred rent.................................................. 62,552 91,428
Capitalized lease, net of current portion...................... 668,624 668,940
Amounts due affiliates......................................... 1,130,521 1,579,209
---------- ----------
Total liabilities.............................................. 3,061,897 3,213,556
Common stock, $.01 par value; 400,000 shares authorized; 4,000
shares issued and outstanding..................................... 4,000 4,000
Additional paid-in capital.......................................... 377,000 377,000
Distributions to stockholders....................................... (1,926,000) (406,000)
Accumulated earnings from operations................................ 2,667,960 705,046
---------- ----------
Total stockholders' equity..................................... 1,122,960 680,046
---------- ----------
Total liabilities and stockholders' equity................ $4,184,857 $3,893,602
========= =========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-62
<PAGE> 181
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED INCEPTION TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
----------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Sub-acute and rehabilitation..................... $ 3,696,304 $ 855,684 $1,965,605
Alzheimers care.................................. 1,726,107 2,841,917 1,063,937
Skilled nursing care............................. 8,641,061 497,493 5,449,292
Miscellaneous services........................... 290,349 64,329 161,906
----------- ---------- ----------
Total revenue............................... 14,353,821 4,259,423 8,640,740
----------- ---------- ----------
Nursing services (including $828,922 and $227,848
at September 30, 1996 and 1995 and $467,124 at
December 31, 1995 to an affiliate)............. 6,504,479 2,086,036 4,286,037
Dietary services................................. 856,756 320,919 634,946
General services................................. 1,670,550 586,108 1,213,308
Provision for bad debts.......................... 160,320 27,927 55,624
Management fees paid to an affiliate............. 1,747,695 383,403 797,900
Rent............................................. 1,276,755 355,147 860,211
Interest, net of income of $6,300 and $601 at
September 30, 1996 and 1995 and $2,600 at
December 31, 1995.............................. 45,192 35,353 33,354
Depreciation and amortization.................... 129,160 36,962 54,314
----------- ---------- ----------
Total expenses.............................. 12,390,907 3,831,855 7,935,694
----------- ---------- ----------
Net income............................. $ 1,962,914 $ 427,568 $ 705,046
=========== ========== ==========
Pro forma information:
Net income before taxes........................ $ 1,962,914 $ 427,568 $ 705,046
Income tax provision........................... 726,000 158,000 261,000
----------- ---------- ----------
Net income..................................... $ 1,236,914 $ 269,568 $ 444,046
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE> 182
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
ADDITIONAL DISTRIBUTIONS ACCUMULATED TOTAL
PAID-IN TO EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) EQUITY
------ ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arkansas, Inc. ................... 1,000 $1,000 $ -- $ -- $ -- $ 1,000
Cornerstone Care, Inc. ........... 1,000 1,000 -- -- -- 1,000
Douglas Manor, Inc. .............. 1,000 1,000 -- -- -- 1,000
Safford Care, Inc. ............... 1,000 1,000 -- -- -- 1,000
----- ------ -------- ----------- ---------- ----------
Purchase of common stock..... 4,000 4,000 -- -- -- 4,000
Douglas Manor, Inc. .............. -- -- 259,000 -- -- 259,000
Safford Care, Inc. ............... -- -- 118,000 -- -- 118,000
----- ------ -------- ----------- ---------- ----------
Additional capital
contributions.............. -- -- 377,000 -- -- 377,000
Arkansas, Inc. ................... -- -- -- -- 442,759 442,759
Cornerstone Care, Inc. ........... -- -- -- -- 170,237 170,237
Douglas Manor, Inc. .............. -- -- -- -- (58,419) (58,419)
Safford Care, Inc. ............... -- -- -- -- 150,469 150,469
----- ------ -------- ----------- ---------- ----------
Net Income................... -- -- -- -- 705,046 705,046
Arkansas, Inc. ................... -- -- -- (318,000) -- (318,000)
Cornerstone Care, Inc. ........... -- -- -- (88,000) -- (88,000)
----- ------ -------- ----------- ---------- ----------
Distributions to
stockholders............... -- -- -- (406,000) -- (406,000)
----- ------ -------- ----------- ---------- ----------
Balances at December 31, 1995..... 4,000 $4,000 $377,000 $ (406,000) $ 705,046 $ 680,046
----- ------ -------- ----------- ---------- ----------
Arkansas, Inc. ................... -- -- -- -- 723,975 723,975
Cornerstone Care, Inc. ........... -- -- -- -- 714,813 714,813
Douglas Manor, Inc. .............. -- -- -- -- (110,011) (110,011)
Safford Care, Inc. ............... -- -- -- -- 634,137 634,137
----- ------ -------- ----------- ---------- ----------
Net Income (unaudited)....... -- -- -- -- 1,962,914 1,962,914
Arkansas, Inc. ................... -- -- -- (442,000) -- (442,000)
Cornerstone Care, Inc. ........... -- -- -- (526,000) -- (526,000)
Douglas Manor, Inc. .............. -- -- -- (203,000) -- (203,000)
Safford Care, Inc. ............... -- -- -- (349,000) -- (349,000)
----- ------ -------- ----------- ---------- ----------
Distributions to stockholders
(unaudited)................ -- -- -- (1,520,000) -- (1,520,000
----- ------ -------- ----------- ---------- ----------
Balances at September 30, 1996
(unaudited)..................... 4,000 $4,000 $377,000 $(1,926,000) $2,667,960 $ 1,122,960
===== ====== ======== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE> 183
ARKANSAS, INC., CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND SAFFORD CARE, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED INCEPTION TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1995
----------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 1,962,914 $ 427,568 $ 705,046
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............. 129,160 36,962 54,314
Provision for bad debts................... 160,320 27,927 55,624
Deferred rent expense..................... (28,876) 91,428 91,428
Changes in non-cash working capital:
Patient accounts receivable............ (185,112) (1,969,240) (2,437,977)
Inventory and other current assets..... (7,236) (361,590) (213,070)
Accounts payable....................... 244,519 640,719 430,382
Accrued payroll, taxes and benefits.... (17,930) 363,252 312,124
Property taxes payable and other
accrued expenses..................... 39,924 33,613 52,920
Unearned revenue....................... 54,719 30,551 30,550
----------- ----------- -----------
Net cash used in operating
activities........................ 2,352,402 (678,810) (918,659)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.......... (29,885) (131,942) (229,455)
Change in deposits and other assets......... 915 (70,605) (70,605)
----------- ----------- -----------
Net cash used in investing activities..... (28,970) (202,547) (300,060)
----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock........................ -- 4,000 4,000
Amortization of lease obligation............ 4,673 (22,292) (22,292)
Amounts due to affiliates, net.............. (586,529) 1,346,115 1,579,209
Additional paid in capital.................. -- 377,000
Distributions to stockholders............... (1,520,000) -- (406,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities.............. (2,101,856) 1,327,823 1,531,917
----------- ----------- -----------
Net increase in cash and cash
equivalents..................... 221,576 446,466 313,198
Cash and cash equivalents, at
beginning of year............... 313,198 -- $ --
=========== =========== ===========
Cash and cash equivalents at end
of year......................... $ 534,774 $ 446,466 $ 313,198
=========== =========== ===========
Supplemental disclosure of non-cash
investing and financing activities:
Acquisition of capitalized equipment
lease.................................. -- $ 739,235 $ 739,235
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE> 184
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIODS)
(1) BUSINESS AND ORGANIZATION
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc., and Safford
Care, Inc. (the "Sub-S Corporations"), operate skilled nursing centers providing
restorative, rehabilitative, and sub-acute services and assisted living centers
providing supervisory nursing services. As of December 31, 1995, the Sub-S
Corporations lease four nursing homes and two assisted living centers with 579
total beds. The Sub-S Corporations do business in Colorado and Arizona. The
Sub-S Corporations' nursing homes and assisted living centers are subject to
licensing and regulation of their services by various federal and/or state
government agencies. The Sub-S Corporations incorporated in Colorado on May 9,
1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination. The accompanying combined financial statements include the
accounts of the Sub-S Corporations, which all have common ownership, with all
significant intercompany accounts and transactions eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include all
investments with an original maturity of three months or less.
Property and Equipment. Property and equipment are recorded at cost, with
depreciation computed on the straight-line method over the estimated useful
lives of depreciable assets which range from three to ten years.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires that the Sub-S Corporations perform a review of long-lived assets
to assess whether an impairment of value exists. If such an impairment does
exist, the related assets must be written down to fair value.
The Sub-S Corporations are required to adopt SFAS 121 in fiscal 1996.
Management has not yet determined what the ultimate impact of adopting this new
Statement will be on the Sub-S Corporations' financial position or results of
operations.
Net Patient Service Revenue and Accounts Receivable. Patient revenue is
reported at established rates or estimated net realizable amounts from
third-party payors or others for services rendered. Credit risk exists to the
extent that the Sub-S Corporations' most significant source of revenue is
reimbursement for patient care from state-sponsored Medicaid programs and from
Medicare. However, management does not believe that there are significant credit
risks associated with these governmental agencies. Contractual adjustments
resulting from agreements with various organizations to provide services for
amounts which differ from billed charges, including services under Medicare and
Medicaid, are recorded as deductions from gross patient revenue. The estimated
third party payor settlements under Medicare and Medicaid programs are recorded
in the period the related services are rendered and are subject to audit and
final settlement by the fiscal intermediary. Differences between the net amounts
accrued and subsequent settlement, if any, are recorded in operations at the
time the final settlement is determined.
Until the year of settlement, accounts receivable are reduced for the
differences between recognized revenue and interim payments received from
third-party payors. The Sub-S Corporations classify these
F-66
<PAGE> 185
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
differences in contra-accounts in accounts receivable as payable to Medicare and
Medicaid third-party payors until the year of settlement. These settlement
amounts total $114,550 as of December 31, 1995.
The Sub-S Corporations derived patient revenues from various sources in
1995, as follows:
(a) state Medicaid programs (prospectively reimbursing historical
allowable costs plus an inflation factor and profit factor), 42%;
(b) federal Medicare program (retrospectively reimbursing actual
allowable costs), 22%;
(c) negotiated contracts with various government agencies and private
insurance companies, 21%; and
(d) private pay sources, 15%.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited combined balance sheet and statement of stockholders' equity
as of September 30, 1996 and the unaudited combined statements of income and
cash flows for the nine months ended September 30, 1995 and 1996, in the opinion
of management, have been prepared on substantially the same basis as the audited
combined financial statements and include all significant adjustments necessary
for the fair presentations of the results of the interim periods. The data
disclosed in these notes to the financial statement for these periods are also
unaudited. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for an entire year.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, deposits/accounts payable and long-term borrowings approximate their
fair value. The fair value of the Sub-S Corporation's long-term borrowings is
estimated by discounting future cash flows at current rates offered to the Sub-S
Corporations for debt of comparable types and maturities. Because no market
exists for these financial instruments, considerable judgment is necessary in
interpreting the data to develop estimates of fair value. The use of different
market assumptions may have a material effect on the estimated fair value
amounts.
(5) COMMITMENTS AND CONTINGENCIES
The Sub-S Corporations lease nursing homes and assisted living centers, on
a ten year base term expiring in 2005, under which the Sub-S Corporations
possess (1) the right to renew for three additional 10 year terms and (2) the
option to purchase the nursing homes and assisted living centers through the end
of the base term and any renewals. The leases provide for certain restrictions
on the maintenance and operation of the nursing
F-67
<PAGE> 186
ARKANSAS, INC.,
CORNERSTONE CARE, INC.,
DOUGLAS MANOR, INC., AND
SAFFORD CARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
homes and assisted living centers and an annual 2.5% escalation in the base
rent. Future lease payments follow:
<TABLE>
<S> <C>
1996.................................................... $ 1,642,264
1997.................................................... 1,683,320
1998.................................................... 1,725,403
1999.................................................... 1,768,538
2000.................................................... 1,812,752
Thereafter.............................................. 8,729,428
-----------
Total base term rent.......................... $17,361,705
===========
</TABLE>
For financial reporting purposes leases are treated as operating leases
and, for financial reporting purposes, the applicable future lease payments are
being recognized on a straight-line allocation basis. The property and equipment
of the Sub-S Corporations secure the leases. The leases contain various
covenants including completion of capital additions. The Sub-S Corporations
complied with the covenants throughout 1995.
(6) RELATED PARTY TRANSACTIONS
The Sub-S Corporations incurred and paid for management and rehabilitation
services from an entity having common ownership.
(7) INCOME TAXES
Historical
The Sub-S Corporations elected and have been granted S corporation status
under the regulations of the Internal Revenue Service. Under these regulations,
The Sub-S Corporations' taxable income is divided among, and passed through to,
its stockholders. Therefore, the Sub-S Corporations do not account for income
taxes and deferred tax assets or liabilities.
Pro Forma
The pro forma income tax provision and related information presented on the
combined statements of operations reflects a provision for taxes as if the
companies had been tax paying corporations for each of the periods presented.
(8) SUBSEQUENT EVENT
On August 2, 1996 the Sub-S Corporations entered into agreements and plans
of merger with Unison HealthCare Corporation ("Unison"). Through the mergers the
Sub-S Corporations will become wholly owned subsidiaries of Unison. Outstanding
shares of the Sub-S Corporations will be converted into the right to receive,
subject to certain adjustments, cash equal to approximately $28,000,000. The
merger agreements are subject to regulatory and shareholder approval.
F-68
<PAGE> 187
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of RehabWest, Inc.:
We have audited the accompanying balance sheets of RehabWest, Inc. (a S
corporation), as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RehabWest, Inc., as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ANDERSON & WHITNEY, P.C.
Greeley, Colorado
September 27, 1996
F-69
<PAGE> 188
REHABWEST, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash................................................................... $153,867 $ 22,397
Related party accounts receivable.................................... 309,896 111,793
Accounts receivable.................................................. 2,273 209,942
Bad debt allowance................................................... (36,868) (46,797)
-------- --------
Accounts receivable, net............................................... 275,301 274,938
Prepaid expenses....................................................... 4,387 5,194
-------- --------
Total current assets.............................................. 433,555 302,529
Equipment.............................................................. 11,315 2,748
Accumulated depreciation............................................... (6,288) (458)
-------- --------
Equipment, net......................................................... 5,027 2,290
Other assets........................................................... 595 0
-------- --------
TOTAL ASSETS................................................. $439,177 $304,819
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable....................................................... $ 4,542 $ 7,513
Accrued wages.......................................................... 120,914 114,319
Accrued payroll related................................................ 92,994 28,974
Income taxes payable................................................... 0 7,433
Amounts owed to related party.......................................... 122,923 165,350
-------- --------
TOTAL LIABILITIES............................................ 341,373 323,589
Common stock, no par, 1,000,000 shares authorized, 340,000 shares
issued and outstanding............................................... 340 340
Accumulated earnings/(deficit)......................................... 97,464 (19,110)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................... 97,804 (18,770)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $439,177 $304,819
======== ========
</TABLE>
See Accompanying Notes to Financial Statements
F-70
<PAGE> 189
REHABWEST, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Physical therapy.................................................... $ 202,563 $ 198,018
Speech therapy...................................................... 144,635 138,803
Occupational therapy................................................ 201,320 173,328
Physical therapy -- related parties................................. 1,106,952 234,222
Speech therapy -- related parties................................... 584,284 135,861
Occupational therapy -- related parties............................. 1,141,472 211,186
---------- ----------
TOTAL REVENUE............................................. 3,381,226 1,091,418
---------- ----------
Direct labor and related............................................ 1,999,919 630,537
Contracted labor.................................................... 248,257 106,902
Supplies and other.................................................. 54,738 15,001
---------- ----------
COST OF SERVICES RENDERED........................................... 2,302,914 752,440
---------- ----------
GROSS PROFIT........................................................ 1,078,312 338,978
---------- ----------
Labor and related................................................... 522,704 219,827
Supplies and other.................................................. 113,707 35,810
Related party accounting fee........................................ 301,038 32,772
Bad debts........................................................... 0 48,614
---------- ----------
Total administrative expenses..................................... 937,449 337,023
Interest expense.................................................... 8,862 7,363
Interest income..................................................... (890) (975)
---------- ----------
Interest, net....................................................... 7,972 6,388
Office rent......................................................... 10,487 6,446
Depreciation and amortization....................................... 5,830 798
---------- ----------
Total general expenses, net....................................... 24,289 13,632
---------- ----------
TOTAL INDIRECT EXPENSES................................... 961,738 350,655
---------- ----------
EARNINGS/(LOSS) BEFORE INCOME TAX................................... 116,574 (11,677)
INCOME TAXES........................................................ 0 7,433
---------- ----------
NET INCOME/(LOSS)......................................... $ 116,574 $ (19,110)
========== ==========
Pro forma (1995 only) assuming company taxed as a C-corporation:
Earnings before income taxes...................................... $ 116,574
Income taxes...................................................... (33,482)
----------
Net income........................................................ $ 83,092
==========
</TABLE>
See Accompanying Notes to Financial Statements
F-71
<PAGE> 190
REHABWEST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
------- ------ ----------- ------------
<S> <C> <C> <C> <C>
$340 $ 0 $ 340
BALANCES AT DECEMBER 31, 1993................... 340,000
0 (19,110) (19,110)
Net loss...................................... 0
------- ---- -------- --------
340 (19,110) (18,770)
BALANCES AT DECEMBER 31, 1994................... 340,000
0 116,574 116,574
Net income.................................... 0
------- ---- -------- --------
$340 $ 97,464 $ 97,804
BALANCES AT DECEMBER 31, 1995................... 340,000
======= ==== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements
F-72
<PAGE> 191
REHABWEST, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss).................................................. $ 116,574 $ (19,110)
Adjustments to reconcile net income/(loss) to net cash provided
by/(used in) operating activities:
Depreciation and amortization................................... 5,830 798
Provision for bad debts......................................... (9,929) 46,797
Changes in non-cash working capital:
Accounts receivable............................................. 9,566 (321,735)
Prepaid expenses................................................ 807 (5,194)
Accounts payable................................................ (2,971) 7,513
Accrued wages................................................... 64,020 28,974
Accrued payroll related......................................... 6,595 114,319
Income taxes payable............................................ (7,433) 7,433
Related party payable........................................... 57,573 65,350
--------- ---------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES.................. 240,632 (74,855)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.............................................. (8,567) (2,748)
Change in other assets............................................. (595) 0
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................................ (9,162) (2,748)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party notes payable.......................... 60,000 100,000
Principal payments on related party notes payable.................. (160,000) 0
--------- ---------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES.................. (100,000) 100,000
--------- ---------
NET INCREASE/(DECREASE) IN CASH...................................... 131,470 22,397
CASH, AT BEGINNING OF YEAR........................................... 22,397 0
--------- ---------
CASH, AT END OF YEAR................................................. $ 153,867 $ 22,397
========= =========
</TABLE>
See Accompanying Notes to Financial Statements
F-73
<PAGE> 192
REHABWEST, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) BUSINESS AND ORGANIZATION
RehabWest, Inc., (the "Corporation") provides and manages Physical, Speech,
and Occupational Therapy ("Therapy") programs in health care centers,
predominantly, skilled nursing centers. As of December 31, 1995, the Corporation
provided services to nine skilled nursing homes in Colorado (5) and Arizona (4),
previously on December 31, 1994, the Corporation provided services to ten
skilled nursing homes, one psychiatric medical center, one developmentally
disabled medical center, and one home health agency in Colorado (11) and Arizona
(2). RehabWest earns a significant portion of its revenue from health care
centers owned by entities having common owners (see Note 5 below). The
Corporation's employees are subject to licensing and regulation by various state
government agencies and the provision of Therapies in health care centers is
regulated by various federal and state government agencies. The Corporation
incorporated in Colorado on November 22, 1993, and began business operations in
January of 1994.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash. Cash and cash equivalents include all investments with an original
maturity of three months or less.
Equipment. Equipment is recorded at cost, with depreciation computed on
the straight-line method over the estimated useful lives of the depreciable
assets.
Net Therapy Revenue and Accounts Receivable. Revenue is reported at
established rates or estimated net realizable amounts from private payors at the
time service is provided.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable, and borrowings approximate their fair value.
Because no market exists for these financial instruments, considerable judgment
is necessary in interpreting the data to develop estimates of fair value. The
use of different market assumptions may have a material effect on the estimated
fair value amounts.
(4) EQUITY
The common stock carries certain rights, the more significant of which is
that each share carries the right to one vote. The Corporation reserves 70,000
shares of authorized but unissued common stock for issuance to employees upon
exercise of stock purchase options. No options were granted during 1994. As of
December 31, 1995, granted options covering the purchase of 20,000 shares of
common stock at $16.04 per share, which vest upon completion of certain
conditions, none of which had occurred as of December 31, 1995.
(5) RELATED PARTY TRANSACTIONS
During 1995 and 1994, the Corporation earned 83% and 53%, respectively, of
its revenue from health care centers owned by entities having common owners with
RehabWest. The Corporation bills and accrues revenue the same at both related
party and non-related party health care centers.
During 1995 and 1994, the Corporation incurred and paid for accounting
services to an entity having common owners with RehabWest.
F-74
<PAGE> 193
REHABWEST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1994 the Corporation received an advance of $100,000 and during 1995
an advance of $60,000 at 8% from entities having common owners with RehabWest.
These advances were paid back during 1995. Cash paid for interest totaled $8,884
and $7,341 in 1995 and 1994 respectively.
(6) COMMITMENTS AND CONTINGENCIES
The Corporation leases office space for its corporate office, on a year to
year basis. The lease is treated as an operating lease. The future base lease
payments of exercised terms as of December 31, 1994 and 1995, was immaterial.
(7) INCOME TAXES
During 1994 the Corporation was classified as a "C" corporation by the
Internal Revenue Service (IRS) and accounted for income taxes under the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"), which requires recognition of deferred tax
assets and liabilities for the expected future income tax consequences of events
which have been included in the financial statement or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The net deferred tax asset as of December 31, 1994, was comprised of the
following.
<TABLE>
<CAPTION>
1994
-------
<S> <C>
Allowances for bad debts................................................... $ 9,360
-------
Total current deferred tax asset........................................... 9,360
-------
Deferred tax asset valuation allowance..................................... (9,360)
-------
Total net deferred taxes................................................... $ 0
=======
</TABLE>
The components of the income tax provision consist of the following.
<TABLE>
<CAPTION>
1994
-------
<S> <C>
Federal.................................................................... $ 5,576
State...................................................................... 1,857
-------
Current income tax provision............................................... 7,433
-------
Federal.................................................................... 0
State...................................................................... 0
-------
Deferred income tax provision.............................................. 0
-------
Total income tax provision................................................. $ 7,433
=======
</TABLE>
On January 1, 1995, the stockholders of the Corporation filed an election
with, which was granted by, the IRS for classification as a "S" corporation.
Under these regulations, the Corporation's taxable income is divided among, and
passed through to, its stockholders. Therefore, the Corporation does not account
for income taxes and deferred tax assets or liabilities after December 31, 1994.
Cash paid for income taxes totaled $7,433 and $0 in 1995 and 1994, respectively.
(8) RETIREMENT PLAN
The Corporation has a 401(k) savings plan that covers substantially all
employees who have attained age 21 and completed six months of service. Employer
contributions are at the discretion of the Board of
F-75
<PAGE> 194
REHABWEST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Employees become fully-vested after seven years of service for
employer contributions. There were no employer contributions for 1995 or 1994.
(9) CONCENTRATION OF CREDIT RISK
At December 31, 1994, the Corporation had accounts receivable of $200,553
from four customers. Each of these customer's balances at year end exceeded 10%
of the Corporation's total accounts receivable. The Corporation's policy is to
not obtain collateral on accounts receivable.
At December 31, 1995, the Corporation had various cash accounts totaling
$153,867 in one commercial bank located in Greeley, Colorado. The cash balances
are secured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
(10) SUBSEQUENT EVENTS
On March 1, 1996, all the outstanding shares of the Corporation were sold,
by the then current stockholders, to the President of the Corporation. The new
shareholder of the Corporation is unrelated to the previous owners of the
Corporation's shares.
In September of 1996, the Corporation reached an agreement in principal to
merge with Unison HealthCare Corporation ("Unison"). Through the merger the
Corporation will become a wholly owned subsidiary of Unison. Outstanding shares
of the Corporation will be sold for cash. The merger is subject to negotiation
of a definitive agreement, regulatory approval, and shareholder approval.
(11) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited balance sheet and statement of stockholders' equity as of
September 30, 1996, and the unaudited statements of income and cash flows for
the nine months ended September 30, 1995 and 1996, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
include all significant adjustments necessary for the fair presentations of the
results of the interim periods. The data disclosed in these notes to the
financial statements for these periods are also unaudited. Operating results for
the interim periods are not necessarily indicative of the results that may be
expected for an entire year.
F-76
<PAGE> 195
REHABWEST, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................................... $ 37,140 $ 41,060
Related party accounts receivable...................................... 657,602 206,684
Accounts receivable.................................................... 8,531 83,349
Bad debt allowance..................................................... 0 (44,834)
-------- --------
Accounts receivable, net............................................... 666,133 245,199
Prepaid expenses....................................................... 18,960 8,657
-------- --------
Total current assets.............................................. 722,233 294,916
Equipment.............................................................. 16,194 9,088
Accumulated depreciation............................................... (7,924) (8,702)
-------- --------
Equipment, net......................................................... 8,270 386
Other assets........................................................... 130 0
-------- --------
TOTAL ASSETS................................................. $730,633 $295,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable....................................................... $110,264 $ 54,881
Accrued wages.......................................................... 176,456 90,260
Accrued payroll related................................................ 196,569 42,033
Income taxes payable................................................... 0 0
Amounts owed to related party.......................................... 2,132 30,757
-------- --------
TOTAL LIABILITIES............................................ 485,421 217,931
Common stock, no par, 1,000,000 shares authorized, 340,000 shares
issued
and outstanding...................................................... 340 340
Accumulated earnings................................................... 244,872 77,031
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................... 245,212 77,371
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $730,633 $295,302
======== ========
</TABLE>
F-77
<PAGE> 196
REHABWEST, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Physical therapy.................................................... $1,400,131 $ 953,846
Speech therapy...................................................... 575,425 531,694
Occupational therapy................................................ 1,588,078 935,277
---------- ----------
TOTAL REVENUE............................................. 3,563,634 2,420,817
---------- ----------
Direct labor and related............................................ 1,573,233 1,100,442
Contracted labor.................................................... 315,415 176,720
Supplies and other.................................................. 27,907 41,222
---------- ----------
COST OF SERVICES RENDERED........................................... 1,916,555 1,318,384
---------- ----------
GROSS PROFIT........................................................ 1,647,079 1,102,433
---------- ----------
Labor and related................................................... 688,165 687,329
Supplies and other.................................................. 90,801 81,150
Related party accounting fee........................................ 76,462 214,598
Bad debts........................................................... (34,144) 0
---------- ----------
Total administrative expenses..................................... 821,284 983,077
Interest expense.................................................... 2,485 8,862
Interest income..................................................... (1,326) (853)
---------- ----------
Interest, net....................................................... 1,159 8,009
Office rent......................................................... 8,685 6,963
Depreciation and amortization....................................... 1,636 8,244
---------- ----------
Total general expenses, net....................................... 11,480 23,216
---------- ----------
TOTAL INDIRECT EXPENSES................................... 832,764 1,006,293
---------- ----------
NET INCOME................................................ $ 814,315 $ 96,140
========== ==========
Pro forma assuming company taxed as a C-corporation:
Earnings before income taxes...................................... $ 814,315 $ 96,140
Income taxes...................................................... 301,297 26,919
---------- ----------
Net income........................................................ $ 513,018 $ 69,221
========== ==========
</TABLE>
F-78
<PAGE> 197
REHABWEST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
EARNINGS/ STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
------- ------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995...................... 340,000 $340 $ 97,464 $ 97,804
Distributions to stockholders (unaudited)........ 0 0 (666,907) (666,907)
Net income (unaudited)........................... 0 0 814,315 814,315
------- ---- --------- ---------
BALANCES AT SEPTEMBER 30, 1996 (unaudited)......... 340,000 $340 $ 244,872 $ 245,212
======= ==== ========= =========
</TABLE>
F-79
<PAGE> 198
REHABWEST, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 814,315 $ 96,140
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 1,636 8,244
Provision for bad debts......................................... (36,868) (1,963)
Changes in non-cash working capital:
Accounts receivable............................................. (353,964) 31,702
Prepaid expenses................................................ (14,573) (3,463)
Accounts payable................................................ 105,722 47,369
Accrued wages................................................... 55,542 (24,059)
Accrued payroll related......................................... 103,575 13,059
Income taxes payable............................................ 0 (7,433)
Related party payable........................................... (120,791) (134,593)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 554,594 25,003
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment.............................................. (4,879) (6,340)
Change in other assets............................................. 465 0
--------- --------
NET CASH USED IN INVESTING ACTIVITIES................................ (4,414) (6,340)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders...................................... (666,907) 0
--------- --------
NET CASH USED IN FINANCING ACTIVITIES................................ (666,907) 0
--------- --------
NET INCREASE/(DECREASE) IN CASH...................................... (116,727) 18,663
CASH, AT BEGINNING OF PERIOD......................................... 153,867 22,397
--------- --------
CASH, AT END OF PERIOD............................................... $ 37,140 $ 41,060
========= ========
</TABLE>
F-80
<PAGE> 199
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Henderson & Associates Rehabilitation and
Sunbelt Therapy Management Services, Inc.
We have audited the accompanying combined statements of operations and
stockholders' equity and cash flows of Henderson & Associates Rehabilitation and
Sunbelt Therapy Management Services, Inc. for the years ended December 31, 1995
and 1994. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and cash
flows of Henderson & Associates Rehabilitation and Sunbelt Therapy Management
Services, Inc. for the years ended December 31, 1995 and 1994 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
May 16, 1996
Phoenix, Arizona
F-81
<PAGE> 200
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net Patient Service Revenue....................................... $4,803,845 $3,965,529
Operating Expenses:
Salaries and related expenses................................... 3,710,351 2,840,249
Contract labor.................................................. 382,612 345,843
Insurance....................................................... 202,814 230,980
Office supplies and expenses.................................... 127,262 88,902
Rent............................................................ 59,497 57,130
Travel.......................................................... 156,166 100,015
Other........................................................... 92,892 82,754
Depreciation.................................................... 34,741 17,387
Interest........................................................ 12,335 6,651
---------- ----------
Total operating expenses................................ 4,778,670 3,769,911
---------- ----------
Income from operations............................................ 25,175 195,618
Nonoperating losses............................................... (39,744) (46,626)
---------- ----------
Net (loss) income................................................. (14,569) 148,992
Distributions to stockholders..................................... (150,319) (83,541)
Retained earnings at beginning of period.......................... 234,578 169,127
---------- ----------
Retained earnings at end of period................................ $ 69,690 $ 234,578
========== ==========
Pro forma assuming company taxed as a C-corporation:
Earnings before income taxes.................................... $ (14,569) $ 148,992
Income taxes (benefit).......................................... (5,828) 59,597
---------- ----------
Net income...................................................... $ (8,741) $ 89,395
========== ==========
</TABLE>
See accompanying notes.
F-82
<PAGE> 201
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................................ $ (14,569) $ 148,992
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation.................................................. 34,741 17,387
Loss on partnership investment................................ 16,278 22,457
Loss on disposal of assets.................................... 23,466 24,167
Changes in operating assets and liabilities:
Accounts receivable, net...................................... (128,913) 9,967
Accounts payable.............................................. 9,593 14,730
Other accrued expenses and liabilities........................ 177,420 66,649
Customer deposits............................................. (731) 28,067
--------- ---------
Net cash provided by operating activities................ 117,285 332,416
INVESTING ACTIVITIES
Purchases of property and equipment.............................. (7,280) (144,915)
Changes in other assets.......................................... (21,910) (28,969)
--------- ---------
Net cash used in investing activities.................... (29,190) (173,884)
FINANCING ACTIVITIES
Proceeds from long-term debt..................................... 201,460 99,497
Payments of long-term debt and capital lease obligation.......... (131,315) (92,327)
Distributions to stockholders.................................... (150,319) (83,541)
--------- ---------
Net cash used in financing activities.................... (80,174) (76,371)
--------- ---------
Increase in cash................................................. 7,921 82,161
CASH at beginning of period...................................... 61,858 (20,303)
--------- ---------
CASH at end of period............................................ $ 69,779 $ 61,858
========= =========
</TABLE>
See accompanying notes.
F-83
<PAGE> 202
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Henderson & Associates Rehabilitation (HAR) and Sunbelt Therapy Management
Services, Inc. (Sunbelt) provide a variety of therapy services to patients, and
contract their services to hospitals, home health agencies and other
third-parties.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Henderson &
Associates Rehabilitation and Sunbelt Therapy Management Services, Inc. All
significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
DEPRECIATION
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Routine
maintenance and repairs are charged to expenses as incurred.
INCOME TAXES
HAR and Sunbelt are S corporations, and taxable income or loss flows
through to the individual stockholders for income tax purposes. Accordingly, no
provision for income taxes or income tax liabilities has been included in the
accompanying combined financial statements.
NET PATIENT SERVICE REVENUE
Revenues are recognized when services are provided.
Net patient service revenue is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. HAR and
Sunbelt have negotiated agreements with several organizations to provide therapy
services based on fee schedules.
F-84
<PAGE> 203
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Lines of credit.................................................... $ 65,050 $ 18,000
Note payable to a bank, due in monthly installments of $1,421,
interest at 1% above prime through November 1996................. -- 30,003
Note payable to a bank in monthly installments of $1,282, interest
at 1% above prime through October 1997........................... -- 31,510
Note payable to a credit union in monthly installments of $680,
interest at 7.11% through December 1997.......................... -- 22,000
Note payable to a bank, due in monthly installments of $2,245,
interest at 8.25% through November 1998.......................... 69,638 --
Note payable to a bank, due in monthly installments of $3,100,
interest at .5% above the average yield of U.S. Treasury Bills
through May 1996, at which time a final installment in the amount
of the unpaid balance is due..................................... 46,785 --
Capital lease obligation in monthly installments of $818........... 5,725 15,540
--------- ---------
187,198 117,053
Less current portion............................................... (139,580) (65,996)
--------- ---------
$ 47,618 $ 51,057
========= =========
</TABLE>
HAR has negotiated a $35,000 line of credit with a bank at an interest rate
of 1% over the prime rate.
Sunbelt has negotiated a $50,050 line of credit with a bank at an interest
rate of .5% over the bank's Base Lending Rate (8.5% at December 31, 1995).
Both lines of credit are secured by personal guarantees of the
stockholders.
Sunbelt has a capital lease for physical therapy equipment with a bargain
purchase option upon completion of the lease. At December 31, 1995, the leased
equipment, which is included in property and equipment in the accompanying
combined balance sheet, is carried at a cost of $21,310 less accumulated
depreciation of $6,038.
The lease expires in June 1996.
The following is a schedule of principal maturities of long-term debt and
capital lease obligation at December 31, 1995:
<TABLE>
<S> <C>
1996............................................................ $139,580
1997............................................................ 23,907
1998............................................................ 23,711
--------
$187,198
========
</TABLE>
3. RELATED PARTIES
HAR and Sunbelt share employees and expenses with several organizations of
which the stockholders are owners. However, HAR and Sunbelt have not billed
these organizations for shared activities and have not
F-85
<PAGE> 204
HENDERSON & ASSOCIATES REHABILITATION
AND
SUNBELT THERAPY MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
identified the related costs, and the accompanying combined financial statements
do not include revenue from these shared activities.
4. EMPLOYEE BENEFIT PLAN
Sunbelt has a qualified defined contribution plan covering all eligible
employees. Contributions are determined based upon a percentage of each eligible
employee's compensation, as defined by management. Contributions to the plan
were approximately $3,809 in 1995 and $3,458 in 1994.
HAR has a profit sharing plan covering all eligible employees.
Contributions are at the discretion of management. No contributions were made to
the plan in 1995 or 1994.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by HAR and Sunbelt in
estimating the fair value of their financial instruments:
Cash, Accounts Payable and Accrued Liabilities: The carrying amounts
reported in the combined balance sheets approximate their fair values.
Long-Term Debt: The fair values of fixed rate issues are estimated using
discounted cash flow analyses based on the current incremental borrowing rates
for similar types of borrowing arrangements. The carrying amounts of all fixed
and variable rate issues approximate their fair values.
6. PRO FORMA
The pro forma income tax provision and related information presented on the
combined statements of operations and stockholders' equity reflects a provision
for taxes as if the companies had been tax paying corporations for each of the
periods presented.
7. SUBSEQUENT EVENT
Unison HealthCare Corporation purchased 90% of the common stock of HAR and
Sunbelt effective February 1, 1996.
F-86
<PAGE> 205
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Unison HealthCare Corporation
We have audited the accompanying combined statements of operations, and
cash flows of the Franciscan Health Care Centers at Enumclaw and Walla Walla
(the Companies) for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, combined results of their operations and their cash
flows of the Companies for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Phoenix, Arizona
October 4, 1996
F-87
<PAGE> 206
FRANCISCAN HEALTH CARE CENTERS AT
ENUMCLAW AND WALLA WALLA
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Changes in unrestricted net assets:
Revenues:
Net patient.......................................... $5,367,940 $5,571,282 $4,991,628
Other................................................ 3,221 1,026 584
---------- ---------- ----------
Total.................................................. 5,371,161 5,572,308 4,992,212
Expenses:
Wages and related.................................... 4,158,494 4,576,574 4,107,961
Other................................................ 1,412,513 1,424,319 1,554,089
Depreciation......................................... 276,853 240,153 268,934
---------- ---------- ----------
Total.................................................. 5,847,860 6,241,046 5,930,984
---------- ---------- ----------
Net loss............................................... $ (476,699) $ (668,738) $ (938,772)
========== ========== ==========
</TABLE>
See accompanying notes.
F-88
<PAGE> 207
FRANCISCAN HEALTH CARE CENTERS AT
ENUMCLAW AND WALLA WALLA
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $(476,699) $(668,738) $(938,772)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation.......................................... 276,853 240,153 268,934
Provision for doubtful accounts....................... 5,619 20,523 104,502
Changes in operating assets and liabilities:
Accounts receivable................................ 262,725 (404,232) (386,721)
Prepaids and other................................. (4,980) 53,380 (43,474)
Accounts payable and accrued expenses.............. 5,884 (2,967) 524,251
--------- --------- ---------
Net cash provided by (used in) operating activities..... 69,402 (761,881) (471,280)
INVESTING ACTIVITIES
Purchases of property and equipment..................... (158,892) (63,288) (326,685)
--------- --------- ---------
Net cash used in investing activities................... (158,892) (63,288) (326,685)
FINANCING ACTIVITIES
Net transfers from affiliates........................... 89,993 825,440 799,850
--------- --------- ---------
Net cash provided by financing activities............... 89,993 825,440 799,850
--------- --------- ---------
Net increase in cash.................................... 503 271 1,885
Cash at beginning of period............................. 699 1,202 1,473
--------- --------- ---------
Cash at end of period................................... $ 1,202 $ 1,473 $ 3,358
========= ========= =========
</TABLE>
See accompanying notes
F-89
<PAGE> 208
FRANCISCAN HEALTH CARE CENTERS AT
ENUMCLAW AND WALLA WALLA
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
DESCRIPTION OF BUSINESS
Franciscan Health Care Center at Enumclaw (Enumclaw) is a 148 bed skilled
nursing facility located in Enumclaw, Washington. Franciscan Health Care Center
at Walla Walla (Walla Walla) is a 74 bed skilled nursing facility located in
Walla Walla, Washington. Unison HealthCare Corporation (Unison) began operating
Enumclaw and Walla Walla through the terms of an operating lease agreement
effective August 1996. Prior to August 1996, both Enumclaw and Walla Walla were
operating divisions of Franciscan ElderCare Corporation (FEC), a Delaware
not-for-profit corporation.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The accompanying combined financial statements include the accounts of
Enumclaw and Walla Walla, (collectively referred to as the Companies).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
Net Patient Revenues
The Companies' revenues are derived primarily from providing long-term
health care services. Approximately 83, 77 and 78 percent of the Companies' net
patient revenues for the years ended June 30, 1996, 1995 and 1994, respectively,
were derived from Medicare and Medicaid assistance programs and approximately 71
and 87 percent of the Companies' net patient accounts receivable at June 30,
1996 and 1995, respectively, are due from such programs. These revenues are
reported at their estimated net realizable amounts and are subject to audit and
retroactive adjustments. Contractual adjustments resulting from agreements with
various organizations to provide services for amounts which differ from billed
charges, including services under Medicare and Medicaid, are recorded as
deductions from gross patient revenue. The collectibility of receivables from
Medicare and Medicaid are dependent upon the performance of these programs.
A provision for doubtful accounts is made when the related revenue is
recorded. Accounts, when determined to be uncollectible, are charged against the
allowance for doubtful accounts. Provisions for estimated third-party payor
settlements are provided in the period the related services are rendered and are
adjusted in the period of settlement.
The estimated third party payor settlements under the Medicare and Medicaid
programs are recorded in the period the related services are rendered and are
subject to audit and final settlement by the fiscal intermediary. Differences
between the net amounts accrued and subsequent settlement, if any, are recorded
in operations at the time the final settlement is determined.
Depreciation
Depreciation is computed using the straight-line method over the respective
estimated useful lives of the respective assets. The Companies' property and
equipment serves as collateral with FEC's pooled financing bonds.
F-90
<PAGE> 209
FRANCISCAN HEALTH CARE CENTERS AT
ENUMCLAW AND WALLA WALLA
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
RELATED PARTY TRANSACTIONS
The Companies represent two of several facilities operated as divisions of
FEC. FEC makes advances to its divisions for operating purposes and the
divisions forward cash receipts to FEC as part of FEC's centralized cash
management system. Consequently, the Companies' combined financial statements do
not include certain accounts, such as operating cash and debt. The results of
transactions between FEC and the Companies are reflected as net transfers from
affiliates in the accompanying combined statements of operations and changes in
net assets.
Prior to December 1, 1994, management services were provided to the
Companies by FEC. Management fees allocated from FEC totaled $283,000 for the
year ended June 30, 1994 and $23,000 for the five months ended November 30,
1994. From December 1, 1994 to June 30, 1996, management services were provided
to the Companies by Unison, based on a percentage of net patient revenue.
Management fees totaled $298,000 in 1996 and $182,000 in 1995, and are included
in other expenses. Management fee accrual totaled $26,252 at June 30, 1996 and
$16,493 at June 30, 1995.
LEASES
Future minimum lease payments for the Companies at June 30, 1996, by year
and in the aggregate, under noncancelable operating lease arrangements with
initial or remaining terms of one year or more consist of the following:
<TABLE>
<S> <C>
1997..................................................... $ 629,724
1998..................................................... 629,724
1999..................................................... 629,724
2000..................................................... 629,724
2001..................................................... 629,724
Thereafter............................................... 5,341,980
----------
$8,490,600
=========
</TABLE>
INSURANCE
Health care companies are subject to medical malpractice, personal injury
and other liability claims that are customary risks inherent in their operations
and are generally covered by insurance. The Companies are subject to claims and
litigation for which FEC carries professional, general liability and other
insurance coverages. In the opinion of the Companies management, the outcome of
such claims and litigation will not have a material impact on the Companies'
combined financial position or results of operations.
SUBSEQUENT EVENT
In July 1996, FEC entered into a purchase agreement, pursuant to which
Monica R. Salusky and Walla Walla Partners, L.P. (the acquirers) purchased
certain accounts receivable, equipment, leasehold improvements and supply
inventory, and acquired FEC's rights under certain contracts of the Companies.
Beginning in August of 1996, Unison leased the Companies' skilled nursing
facilities from the acquirers. The lease agreements require that Unison be
responsible for management and operation of the Companies' facilities.
F-91
<PAGE> 210
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS MEMORANDUM DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 11
Certain Federal Income Tax
Consequences........................ 27
Use of Proceeds....................... 27
Capitalization........................ 30
Unaudited Pro Forma Condensed Com-
bined Statement of Operations....... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 38
Business.............................. 55
Management............................ 72
Certain Transactions.................. 80
Principal Stockholders................ 83
Description of the Senior Notes....... 84
The Registration Rights Agreement..... 109
Plan of Distribution.................. 111
Legal Matters......................... 112
Experts............................... 112
Available Information................. 113
Proposed Amendment to the Registration
Rights Agreement.................... A-1
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
$100,000,000
LOGO
UNISON HEALTHCARE CORPORATION
12 1/4% SENIOR NOTES DUE 2006
------------------------------------------------------
OFFER TO EXCHANGE ITS 12 1/4% SENIOR
NOTES DUE 2006, WHICH HAVE
BEEN REGISTERED UNDER THE
SECURITIES ACT, FOR ANY AND
ALL OF ITS OUTSTANDING
12 1/4% SENIOR NOTES DUE 2006
------------------------------------------------------
, 1997
======================================================
<PAGE> 211
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under provisions of Section 145 of the Delaware General Corporation Law and
the Bylaws of the Company (Exhibit 3.2 hereto), directors, officers and persons
controlling the Company are indemnified by the Company under certain
circumstances for certain liabilities and expenses. In addition, officers and
directors of the Company are insured, under a policy of insurance paid for by
the Company, under certain circumstances for certain liabilities and expenses.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. The enabling
statute provides, however, that liability for breaches of the duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct, or
knowing violation of the law, and the unlawful purchase or redemption of stock
or payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. The Certificate of Incorporation
(Exhibits 3.1 and 3.1.1 hereto) and Bylaws of the Company include a provision
which eliminates, to the fullest extent permitted, director liability for
monetary damages for breaches of fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for such indemnification is
asserted (except to the extent that such claim seeks reimbursement of expenses
in connection with a successful defense of any action, suit or proceeding) by a
director, officer or controlling person of the Company in connection with the
securities being registered and the Securities and Exchange Commission is still
of the same opinion, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in said Act and will be governed by the final
adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(C) EXHIBITS
<TABLE>
<C> <S>
2 Second Amended and Restated Purchase and Sale Agreement among Unison HealthCare
Corporation and Whitehead Family Investments, Ltd., as amended (incorporated by
reference to Exhibit 2 to Amendment No. 1 to the Registration Statement on Form
S-1 filed on November 16, 1995, File No. 33-97662)
2.1 Modification Agreement dated April 15, 1996 among Unison HealthCare Corporation,
BritWill HealthCare Company and Bruce H. Whitehead (incorporated by reference to
Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
2.1.1 Modification Agreement dated August 28, 1996 among Unison HealthCare Corporation,
BritWill HealthCare Company and Bruce H. Whitehead (incorporated by reference to
Exhibit 2.1.1 to the Registration Statement on Form S-4 filed on September 18,
1996, File No. 333-12263)
2.2 Purchase and Sale Agreement effective as of February 1, 1996 by and among Unison
HealthCare Corporation, a Delaware corporation, Sunbelt Therapy Management
Services, Inc., an Arizona corporation, Paul G. Henderson and Paige B. Plash
(incorporated by reference to Exhibit 2.1 to the Form 8-K filed on April 12, 1996)
2.2.1 Agreement for Purchase of Shares as of November 24, 1996, among Unison HealthCare
Corporation, Paul G. Henderson and Paige B. Plash (incorporated by reference to
Exhibit 2.2.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
</TABLE>
II-1
<PAGE> 212
<TABLE>
<C> <S>
2.3 Agreement and Plan of Merger among Unison HealthCare Corporation, Signature Health
Care Corporation, David A. Kremser and John D. Filkoski (incorporated by reference
to Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996)
2.3.1 Amendment to Agreement and Plan of Merger among Union HealthCare Corporation,
Signature Health Care Corporation, David A. Kremser and John D. Filkoski
(incorporated by reference to Exhibit 2.3.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
2.4 Agreement and Plan of Merger among Unison HealthCare Corporation, Arkansas, Inc.,
David A. Kremser and John D. Filkoski (incorporated by reference to Exhibit 2.4 to
the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996)
2.5 Agreement and Plan of Merger among Unison HealthCare Corporation, Cornerstone
Care, Inc., David A. Kremser and John D. Filkoski (incorporated by reference to
Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996)
2.6 Agreement and Plan of Merger among Unison HealthCare Corporation, Douglas Manor,
Inc., David A. Kremser and John D. Filkoski (incorporated by reference to Exhibit
2.6 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996)
2.7 Agreement and Plan of Merger among Unison HealthCare Corporation, Safford Care,
Inc., David A. Kremser and John D. Filkoski (incorporated by reference to Exhibit
2.7 to the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996)
2.7.1 Amendment to Agreements and Plans of Merger among Unison HealthCare Corporation,
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc., Safford Care, Inc.,
David A. Kremser and John D. Filkoski (incorporated by reference to Exhibit 2.7.1
to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
2.8 Agreement and Plan of Merger among Unison HealthCare Corporation, a Delaware
corporation, Labco Acquisition Co., a Delaware corporation, and American
Professional Holding, Inc., a Utah corporation (incorporated by reference to the
Company's Current Report on Form 8-K dated July 31, 1996)
2.8.1 First Amendment to Agreement and Plan of Merger among Unison HealthCare
Corporation, a Delaware corporation, Labco Acquisition Co., a Delaware
corporation, and American Professional Holding, Inc., a Utah corporation
(incorporated by reference to Exhibit 2.8.1 to Amendment No. 1 to the Registration
Statement on Form S-4 filed on October 11, 1996, File No. 333-12263)
2.9 Agreement and Plan of Merger among Unison HealthCare Corporation, a Delaware
corporation, Memphis Acquisition Co., a Delaware corporation, and Memphis Clinical
Laboratory, Inc., a Tennessee corporation (incorporated by reference to the
Company's Current Report on Form 8-K dated July 31, 1996)
2.10 Stock Purchase Agreement among Unison HealthCare Corporation, Linda Redwine, David
A. Kremser and John D. Filkoski (incorporated by reference to the Company's
Current Report on Form 8-K dated October 10, 1996)
3.1 Restated Certificate of Incorporation of Unison HealthCare Corporation
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on November 16, 1995, File No. 33-97662)
3.1.1 Amendment to Restated Certificate of Incorporation of Unison HealthCare
Corporation (incorporated by reference to Exhibit 3.1.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996)
3.2 Articles of Incorporation of SunQuest SPC, Inc. (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.3 Certificate of Incorporation of BritWill HealthCare Company (incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
</TABLE>
II-2
<PAGE> 213
<TABLE>
<C> <S>
3.4 Certificate of Incorporation of BritWill Investments-I, Inc. (incorporated by
reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.5 Certificate of Incorporation of BritWill Investments-II, Inc. (incorporated by
reference to Exhibit 3.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.6 Certificate of Incorporation of BritWill Funding Corporation (incorporated by
reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.7 Articles of Incorporation of Emory Care Center, Inc. (incorporated by reference to
Exhibit 3.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.8 Charter of Memphis Clinical Laboratory, Inc. (incorporated by reference to Exhibit
3.8 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
3.9 Articles of Incorporation of American Professional Holding, Inc. (incorporated by
reference to Exhibit 3.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.10 Articles of Incorporation of Ampro Medical Services, Inc. (incorporated by
reference to Exhibit 3.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.11 Articles of Incorporation of Gamma Laboratories, Inc. (incorporated by reference
to Exhibit 3.11 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.12 Certificate of Incorporation of Signature Health Care Corporation (incorporated by
reference to Exhibit 3.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.13 Articles of Incorporation of Brookshire House, Inc. (incorporated by reference to
Exhibit 3.13 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.14 Articles of Incorporation of Christopher Nursing Center, Inc. (incorporated by
reference to Exhibit 3.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.15 Articles of Incorporation of Amberwood Court, Inc. (incorporated by reference to
Exhibit 3.15 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.16 Articles of Incorporation of The Arbors Health Care Center, Inc. (incorporated by
reference to Exhibit 3.16 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.17 Articles of Incorporation of Los Arcos, Inc. (incorporated by reference to Exhibit
3.17 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
3.18 Articles of Incorporation of Pueblo Norte, Inc. (incorporated by reference to
Exhibit 3.18 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.19 Articles of Incorporation of Rio Verde Nursing Center, Inc. (incorporated by
reference to Exhibit 3.19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.20 Articles of Incorporation of Signature Management Group, Inc. (incorporated by
reference to Exhibit 3.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.21 Articles of Incorporation of Cornerstone Care, Inc. (incorporated by reference to
Exhibit 3.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.22 Articles of Incorporation of Arkansas, Inc. (incorporated by reference to Exhibit
3.22 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
</TABLE>
II-3
<PAGE> 214
<TABLE>
<C> <S>
3.23 Articles of Incorporation of Douglas Manor, Inc. (incorporated by reference to
Exhibit 3.23 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.24 Articles of Incorporation of Safford Care, Inc. (incorporated by reference to
Exhibit 3.24 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.25 Articles of Incorporation of RehabWest, Inc. (incorporated by reference to Exhibit
3.25 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
3.26 Articles of Incorporation of Quest Pharmacies, Inc., as amended, and related
Shareholder Agreements (incorporated by reference to Exhibit 3.26 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
3.27 Articles of Incorporation of Sunbelt Therapy Management Services, Inc.
(incorporated by reference to Exhibit 3.27 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
3.28 Articles of Incorporation of Decatur SportsFit & Wellness Center, Inc.
(incorporated by reference to Exhibit 3.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
3.29 Articles of Incorporation of Therapy Health Systems, Inc. (incorporated by
reference to Exhibit 3.29 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.30 Articles of Incorporation of Henderson & Associates Rehabilitation, Inc.
(incorporated by reference to Exhibit 3.30 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
3.31 Articles of Incorporation of Sunbelt Therapy Management Services, Inc.
(incorporated by reference to Exhibit 3.31 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
3.32 Articles of Incorporation of Cedar Care, Inc. (incorporated by reference to
Exhibit 3.32 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.33 Articles of Incorporation of Sherwood Healthcare Corporation (incorporated by
reference to Exhibit 3.33 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.34 Partnership Agreement of BritWill Indiana Partnership (incorporated by reference
to Exhibit 3.34 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.35 Bylaws of Unison HealthCare Corporation (incorporated by reference to Exhibit 3.2
to the Registration Statement on Form S-1 filed on October 2, 1995, File No.
33-97662)
3.36 Bylaws of Henderson & Associates Rehabilitation, Inc. (incorporated by reference
to Exhibit 3.36 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.37 Form of Bylaws of SunQuest SPC, Inc., The Arbors Health Care Center, Inc. and
Sunbelt Therapy Management Services, Inc. (incorporated by reference to Exhibit
3.37 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
3.38 Form of Bylaws of Brookshire House, Inc., Christopher Nursing Center, Inc.,
Amberwood Court, Inc., Los Arcos, Inc., Pueblo Norte, Inc., Rio Verde Nursing
Center, Inc., Signature Management Group, Inc., Cornerstone Care, Inc., Arkansas,
Inc., Douglas Manor, Inc., Safford Care, Inc. and RehabWest, Inc. (incorporated by
reference to Exhibit 3.38 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
3.39 Form of Bylaws of BritWill HealthCare Company, BritWill Investments-I, Inc.,
BritWill Investments-II, Inc., BritWill Funding Corporation and Signature Health
Care Corporation (incorporated by reference to Exhibit 3.39 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
</TABLE>
II-4
<PAGE> 215
<TABLE>
<C> <S>
3.40 Bylaws of Therapy Health Systems, Inc. (incorporated by reference to Exhibit 3.40
to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
3.41 Bylaws of Gamma Laboratories, Inc. (incorporated by reference to Exhibit 3.41 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
3.42 Bylaws of Memphis Clinical Laboratory, Inc. (incorporated by reference to Exhibit
3.42 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
3.43 Bylaws of Emory Care Center, Inc. (incorporated by reference to Exhibit 3.43 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
3.44 Bylaws of Ampro Medical Services, Inc. (incorporated by reference to Exhibit 3.44
to the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
3.45 Bylaws of American Professional Holding, Inc. (incorporated by reference to
Exhibit 3.45 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
3.46 Form of Bylaws of Cedar Care, Inc. and Sherwood Healthcare Corporation**
4.1 Specimen 12 1/4% Senior Note due 2006 (incorporated by reference to Exhibit 4.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996)
4.2 Securities Purchase Agreement dated as of October 28, 1996 between Unison
HealthCare Corporation and the Initial Purchasers (incorporated by reference to
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
4.3 Indenture dated as of October 31, 1996 among Unison HealthCare Corporation, the
Guarantors and First Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996)
4.3.1 Supplement No. 1 dated as of February 1, 1997 to Indenture dated as of October 28,
1996 (incorporated by reference to Exhibit 4.3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
4.4 Senior Note Registration Rights Agreement dated as of October 31, 1996 among
Unison HealthCare Corporation, the Guarantors and the Initial Purchasers
(incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
5.1 Form of Opinion Regarding Legality of Securities***
9 Voting Agreement among the Company and Messrs. Walker, Rollins, Contris, Lynch,
Boystak and King (incorporated by reference to Exhibit 9 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.1 Promissory Note of Unison HealthCare Corporation to the Agent for the Former
BritWill Shareholders in the amount of $1,000,000 dated May 6, 1996 (incorporated
by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q filed
on May 15, 1996, File No. 0-27374)
10.1.1 Second Amended and Restated Subordinated Promissory Note of the Company to the
former shareholders of BritWill (incorporated by reference to Exhibit 10.1.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995)
10.1.2 Contingent Payment Agreement dated April 15, 1996 among Unison HealthCare
Corporation, BritWill HealthCare Company and Bruce H. Whitehead (incorporated by
reference to Exhibit 10.1.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.2 Term Note of the Company to the former shareholders of BritWill (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-1 filed on
October 2, 1995, File No. 33-97662)
10.3 Convertible Debenture of the Company issued to the former shareholders of BritWill
(incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on November 16, 1995, File No. 33-97662)
</TABLE>
II-5
<PAGE> 216
<TABLE>
<C> <S>
10.4 Renewal Note of BritWill to the former shareholders of BritWill (incorporated by
reference to Exhibit 10.4 to the Registration Statement on Form S-1 filed on
December 4, 1995, File No. 33-97662)
10.4.1 Letter agreement modifying the Term Note and the Renewal Note (incorporated by
reference to Exhibit 10.4.1 to Amendment No. 2 to the Registration Statement on
Form S-1 filed on December 4, 1995, File No. 33-97662)
10.5 $500,000 Supplemental Note of the Company to the former shareholders of BritWill
(incorporated by reference to Exhibit 10.5 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.5.1 Letter agreement regarding the $500,000 Supplemental Note (incorporated by
reference to Exhibit 10.5.1 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.6 $250,000 Supplemental Note of the Company to WFI (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.7 Example of Stock Pledge Agreement of certain officers and the Former Shareholders
of BritWill (incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.8 Registration Rights Agreement between the Company and WFI (incorporated by
reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed on
October 2, 1995, File No. 33-97662)
10.9 Employment Agreement of Jerry M. Walker (incorporated by reference to Exhibit 10.9
to Amendment No. 1 to the Registration Statement on Form S-1 filed on November 16,
1995, File No. 33-97662)
10.10 Employment Agreement of Phillip R. Rollins, Sr. (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Registration Statement on Form S-1 filed
on November 16, 1995, File No. 33-97662)
10.11 Employment Agreement of Craig R. Clark (incorporated by reference to Exhibit 10.11
to Amendment No. 1 to the Registration Statement on Form S-1 filed on November 16,
1995, File No. 33-97662)
10.12 Employment Agreement of Paul J. Contris (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.13 Employment and Non-Competition Agreement of L. Robert Oberfield (incorporated by
reference to Exhibit 10.13 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.14 Shareholders Agreement dated May 15, 1995, among Quest Pharmacies, Inc., the
Company and L. Robert Oberfield (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.15 Unison HealthCare Corporation 1995 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.16 [Intentionally Omitted]
10.17 Receivables Acquisition Agreement, dated November 14, 1994, as amended, with
HealthPartners Funding, L.P. (incorporated by reference to Exhibit 10.17 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.18 Agreements between the Company and Trouver Capital Partners, L.P. dated March 16,
1992 and July 10, 1995 (incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
</TABLE>
II-6
<PAGE> 217
<TABLE>
<C> <S>
10.19 Agreement between BritWill and Trouver Capital Partners, L.P. dated September 15,
1992, as amended (incorporated by reference to Exhibit 10.19 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.20 Master Lease between BritWill -- I and Omega, dated as of November 1, 1992, for
Capital Care HealthCare Center, Cedar Crest HealthCare Center (Wellington Manor),
English Estates (Kingsbury Rehabilitation and HealthCare Center), Lockerbie
HealthCare Center, Parkview Manor and Sunset Manor (incorporated by reference to
Exhibit 10.20 to the Registration Statement on Form S-1 filed on October 2, 1995,
File No. 33-97662)
10.21 Agreement of Acquisition and Lease between BritWill and Omega, dated as of
November 1, 1992 (incorporated by reference to Exhibit 10.21 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.22 Leasehold Mortgage between BritWill -- I and Omega, dated November 1, 1992
(incorporated by reference to Exhibit 10.22 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.23 Loan Agreement (Texas Facilities) between BritWill Investments -- Texas and Omega,
dated April 1, 1993 (incorporated by reference to Exhibit 10.23 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.24 [Intentionally Omitted]
10.25 Loan Agreement between BritWill Investments -- Texas and Omega, dated November 30,
1993 (incorporated by reference to Exhibit 10.25 to the Registration Statement on
Form S-1 filed on October 2, 1995, File No. 33-97662)
10.26 BritWill Master Guaranty between BritWill and Omega, dated November 30, 1993
(incorporated by reference to Exhibit 10.26 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.27 Letter of Credit Agreement between BritWill Investments -- II and Omega, dated
November 30, 1993 (incorporated by reference to Exhibit 10.27 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.28 Master Lease between BritWill -- II and Omega, dated as of November 30, 1993
(incorporated by reference to Exhibit 10.28 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.29 Agreement Regarding Financial Covenants Compliance and Amendment Agreement among
BritWill and Omega, dated December 13, 1994 (incorporated by reference to Exhibit
10.29 to the Registration Statement on Form S-1 filed on October 2, 1995, File No.
33-97662)
10.30 Master Lease between BritWill -- II and Omega, dated December 12, 1994
(incorporated by reference to Exhibit 10.30 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.31 Amendment Agreement between the Company and Omega, dated August 10, 1995
(incorporated by reference to Exhibit 10.31 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.32 Unison Master Guaranty to Omega, dated August 10, 1995 (incorporated by reference
to Exhibit 10.32 to the Registration Statement on Form S-1 filed on October 2,
1995, File No. 33-97662)
10.32.1 Letter Agreement among Unison HealthCare Corporation, Bruce H. Whitehead and Omega
dated October 31, 1996 (incorporated by reference to Exhibit 10.32.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996)
10.33 Subordinated Promissory Note in the amount of $2,475,000 of BritWill to WFI, dated
December 24, 1992 (incorporated by reference to Exhibit 10.33 to the Registration
Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
</TABLE>
II-7
<PAGE> 218
<TABLE>
<C> <S>
10.34 Participation Agreement among BritWill, WFI and Garth Financial Services, Inc.,
dated December 24, 1992 (incorporated by reference to Exhibit 10.34 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.35 Bonus Participation Agreement between BritWill and WFI, dated December 24, 1992
(incorporated by reference to Exhibit 10.35 to the Registration Statement on Form
S-1 filed on October 2, 1995, File No. 33-97662)
10.36 Unsecured Promissory Note of BritWill -- II to BritWill Investments -- Texas in
the amount of $1,081,548.39, dated November, 1993 (incorporated by reference to
Exhibit 10.36 to the Registration Statement on Form S-1 filed on October 2, 1995,
File No. 33-97662)
10.37 Unsecured Promissory Note of BritWill -- II to BritWill Investments -- Texas in
the amount of $500,000, dated November, 1993 (incorporated by reference to Exhibit
10.37 to the Registration Statement on Form S-1 filed on October 2, 1995, File No.
33-97662)
10.38 Unsecured Promissory Note of BritWill -- II to BritWill Investments -- Texas in
the amount of $660,000, dated November, 1993 (incorporated by reference to Exhibit
10.38 to the Registration Statement on Form S-1 filed on October 2, 1995, File No.
33-97662)
10.39 [Intentionally Omitted]
10.40 Management Services Agreement between Unison and Lake City Nursing Homes, Inc.,
dated December 1, 1993 (incorporated by reference to Exhibit 10.40 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.41 Lease Contract and Agreement between BritWill Investments -- Texas, as Lessor and
BritWill -- II, as Lessee, dated December 1, 1993, for Four States Care Center,
Heritage Plaza Nursing Center, Pine Haven Care Center, Reunion Plaza Senior Care
and Retirement Center and Texarkana Nursing Center (incorporated by reference to
Exhibit 10.41 to the Registration Statement on Form S-1 filed on October 2, 1995,
File No. 33-97662)
10.42 Management Agreement between Sherwood HealthCare Corp. and BritWill Investments --
Indiana, dated November 1, 1991, as amended, for Capital Care, Parkview, Sunset
Manor, Boonville, Holiday Manor, Kendallville Manor and Owensville (incorporated
by reference to Exhibit 10.42 to the Registration Statement on Form S-1 filed on
October 2, 1995, File No. 33-97662)
10.43 Management Agreement between Cedar Care, Inc. and BritWill Investments -- Indiana,
dated November 1, 1991, as amended, for Cedar Crest, Country Side, English, Harty,
Lockerbie and Willow Manor (incorporated by reference to Exhibit 10.43 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.44 [Intentionally Omitted]
10.44.1 Lease for Oakwood Nursing Care Center (incorporated by reference to Exhibit
10.44.1 to the Company's Annual Report on Form 10-K for the year ended December
31, 1996)
10.45 Lease for Elkhart Nursing Home (incorporated by reference to Exhibit 10.45 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.46 Management Services Agreement between the Company and Marshall Manor (Michigan),
dated September 15, 1992 (incorporated by reference to Exhibit 10.46 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
10.47 Leases for Center (aka Pine Grove Care Center) and Waxahachie (aka Pleasant Manor
Living Center) with BritWill Investments -- Texas (incorporated by reference to
Exhibit 10.47 to the Registration Statement on Form S-1 filed on October 2, 1995,
File No. 33-97662)
10.48 Management Services Agreement between the Company and HP/HealthCare Acquirors,
Inc. for Windsor Manor (incorporated by reference to Exhibit 10.48 to the
Registration Statement on Form S-1 filed on October 2, 1995, File No. 33-97662)
</TABLE>
II-8
<PAGE> 219
<TABLE>
<C> <S>
10.49 Management Services Agreement for Bayshore Convalescent Center (incorporated by
reference to Exhibit 10.49 to the Registration Statement on Form S-1 filed on
October 2, 1995, File No. 33-97662)
10.50 Lease for Henry Clay Villa, dated July 1, 1995 (incorporated by reference to
Exhibit 10.50 to the Registration Statement on Form S-1 filed on October 2, 1995,
File No. 33-97662)
10.51 Lease for Marshall Manor Nursing Home (Alabama) (incorporated by reference to
Exhibit 10.51 to Amendment No. 1 to the Registration Statement on Form S-1 filed
on November 16, 1995, File No. 33-97662)
10.52 [Intentionally Omitted]
10.53 [Intentionally Omitted]
10.54 [Intentionally Omitted]
10.55 Sublease for Ridgewood Health Care Center (incorporated by reference to Exhibit
10.55 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.56 Management Services Agreement for Peachtree Nursing Center (aka Smyrna Nursing
Center) and Rehabilitation Facility, dated September 15, 1993 (incorporated by
reference to Exhibit 10.56 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.57 Management Services Agreement for St. Barnabas Nursing Home, and Retirement
Apartments, dated January 12, 1995 (incorporated by reference to Exhibit 10.57 to
Amendment No. 1 to the Registration Statement on Form S-1 filed on November 16,
1995, File No. 33-97662)
10.58 [Intentionally Omitted]
10.59 Lease for Boonville Convalescent Center (incorporated by reference to Exhibit
10.59 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.60 [Intentionally Omitted]
10.61 [Intentionally Omitted]
10.62 [Intentionally Omitted]
10.63 Sublease for Holiday Manor (incorporated by reference to Exhibit 10.63 to
Amendment No. 1 to the Registration Statement on Form S-1 filed on November 16,
1995, File No. 33-97662)
10.64 [Intentionally Omitted]
10.65 [Intentionally Omitted]
10.66 Lease for Owensville Convalescent Center (incorporated by reference to Exhibit
10.66 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.67 [Intentionally Omitted]
10.68 [Intentionally Omitted]
10.69 [Intentionally Omitted]
10.70 Lease for Willow Manor Convalescent Center (incorporated by reference to Exhibit
10.70 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.71 Lease for Bonner Health Center, dated February 1, 1995 (incorporated by reference
to Exhibit 10.71 to Amendment No. 1 to the Registration Statement on Form S-1
filed on November 16, 1995, File No. 33-97662)
</TABLE>
II-9
<PAGE> 220
<TABLE>
<C> <S>
10.72 Lease for Hillside Care Center (aka Prairie Manor), dated February 1, 1995
(incorporated by reference to Exhibit 10.72 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on November 16, 1995, File No. 33-97662)
10.73 Lease for Oswego Manor, dated March 2, 1994 (incorporated by reference to Exhibit
10.73 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.74 [Intentionally Omitted]
10.75 Lease for SunCrest HealthCare Center, dated September 14, 1994 (incorporated by
reference to Exhibit 10.75 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.76 Sublease for The Oaks of Boise (aka Franciscan Health Care Center of Boise)
(incorporated by reference to Exhibit 10.76 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on November 16, 1995, File No. 33-97662)
10.77 Lease for Mountainside Care Center (aka Sandpoint Manor) and St. Francis Preschool
and Childcare Center (incorporated by reference to Exhibit 10.77 to Amendment No.
1 to the Registration Statement on Form S-1 filed on November 16, 1995, File No.
33-97662)
10.77.1 Sublease for Mountainside Care Center (incorporated by reference to Exhibit
10.77.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed on
November 16, 1995, File No. 33-97662)
10.78 [Intentionally Omitted]
10.79 Lease for White Pine Care Center, dated November 1, 1994 (incorporated by
reference to Exhibit 10.79 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.80 [Intentionally Omitted]
10.81 [Intentionally Omitted]
10.82 [Intentionally Omitted]
10.83 Lease for Green Acres Nursing Home, dated August 30, 1995 (incorporated by
reference to Exhibit 10.83 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.84 Lease for Hemphill Care Center, dated September 1, 1994 (incorporated by reference
to Exhibit 10.84 to Amendment No. 1 to the Registration Statement on Form S-1
filed on November 16, 1995, File No. 33-97662)
10.85 [Intentionally Omitted]
10.86 [Intentionally Omitted]
10.87 [Intentionally Omitted]
10.88 [Intentionally Omitted]
10.89 [Intentionally Omitted]
10.90 Lease for Nightingale West Nursing Home, dated August 24, 1995 (incorporated by
reference to Exhibit 10.90 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.91 Sublease for Twin Pines of Lewisville, dated September 8, 1995 (incorporated by
reference to Exhibit 10.91 to Amendment No. 1 to the Registration Statement on
Form S-1 filed on November 16, 1995, File No. 33-97662)
10.92 Lease for Homestead of McKinney dated as of July 1, 1996 between Westminister
Healthcare, Inc. and Brit Will Investments-II, Inc. (incorporated by reference to
Exhibit 10.92 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
</TABLE>
II-10
<PAGE> 221
<TABLE>
<C> <S>
10.93 [Intentionally Omitted]
10.94 Letter Agreement regarding licensing and operation of the Indiana facilities from
Cedar Care and Sherwood to the Company, dated August 10, 1995 (incorporated by
reference to Exhibit 10.94 to Amendment No. 2 to the Registration Statement on
Form S-1 filed on December 4, 1995, File No. 33-97662)
10.95 Agreement Regarding Conversion of the Convertible Debenture, dated December 1,
1995 (incorporated by reference to Exhibit 10.95 to Amendment No. 2 to the
Registration Statement on Form S-1 filed on December 4, 1995, File No. 33-97662)
10.96 Letter Agreement Regarding Consulting Services (incorporated by reference to
Exhibit 10.96 to Amendment No. 3 to the Registration Statement on Form S-1 filed
on December 12, 1995, File No. 33-97662)
10.97 Loan and Security Agreement dated February 16, 1996 by and between Unison
HealthCare Corporation, SunQuest SPC, Inc., BritWill HealthCare Company, BritWill
Investments-I, Inc., BritWill Funding Corporation, BritWill Investments-II, Inc.,
Emory Care Center, Inc., Cedar Care, Inc., Sherwood Healthcare Corp. (collectively
as borrowers) and HealthPartners Funding, L.P. (as lender) (incorporated by
reference to Exhibit 10.97 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.97.1 Letter Agreement dated October 4, 1996 between HealthPartners Funding, L.P. and
Unison HealthCare Corporation (incorporated by reference to Exhibit 10.97.1 to
Amendment No. 1 to the Registration Statement on Form S-4 filed on October 11,
1996, File No. 333-12263)
10.98 Security Agreement effective as of February 1, 1996 by and among Unison HealthCare
Corporation, a Delaware corporation, Sunbelt Therapy Management Services, Inc., an
Arizona corporation, Paul G. Henderson and Paige B. Plash (incorporated by
reference to Exhibit 10.1 to the Form 8-K filed on April 12, 1996)
10.99 Promissory Note of Unison HealthCare Corporation to Omega Healthcare Investors,
Inc. in the amount of $3,500,000, dated February 9, 1996 (incorporated by
reference to Exhibit 10.99 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.100 Lease dated November 30, 1994 between Monica R. Salusky and SunQuest SPC, Inc.
(commencement date: August 1, 1996) (incorporated by reference to the Company's
Current Report on Form 8-K dated August 14, 1996)
10.101 Modification of Lease dated as of July 31, 1996 between Monica R, Salusky,
SunQuest SPC, Inc. and Unison HealthCare Corporation (incorporated by reference to
the Company's Current Report on Form 8-K dated August 14, 1996)
10.102 Lease dated June 19, 1996 between Walla Walla Partners, L.P. and SunQuest SPC,
Inc. (commencement date: August 1, 1996) (incorporated by reference to the
Company's Current Report on Form 8-K dated August 14, 1996)
10.103 First Amendment to Lease dated July 26, 1996 between Walla Walla Partners, L.P.
and SunQuest SPC, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K dated August 14, 1996)
10.109 Promissory Note of Unison HealthCare Corporation to Red Line Healthcare
Corporation in the amount of $771,004.60 dated August 30, 1996 (incorporated by
reference to Exhibit 10.109 to the Registration Statement on Form S-4 filed on
September 18, 1996, File No. 333-12263)
10.110 Receivables Purchase and Sale Agreement dated August 8, 1996 between
HealthPartners Funding, L.P., Sunbelt Therapy Management Services, Inc. (an
Arizona corporation), Henderson & Associates Rehabilitation, Inc., Decator
Sportsfit & Wellness Center, Inc., Therapy Health Systems, Inc., Sunbelt Therapy
Management Services, Inc. (an Alabama corporation), Quest Pharmacies, Inc. and
SunQuest SPC, Inc. (incorporated by reference to Exhibit 10.110 to the
Registration Statement on Form S-4 filed on September 18, 1996, File No.
333-12263)
</TABLE>
II-11
<PAGE> 222
<TABLE>
<C> <S>
10.111 Master Lease Agreement dated June 4, 1996 between Unison HealthCare Corporation
and LINC Anthem Corporation (incorporated by reference to Exhibit 10.111 to the
Registration Statement on Form S-4 filed on September 18, 1996, File No.
333-12263)
10.112 Form of Promissory Notes dated March 17, 1997, to former Signature shareholders in
partial payment of Equity Adjustment Amount (incorporated by reference to Exhibit
10.112 to the Company's Annual Report on Form 10-K for the year ended December 31,
1996)
10.113 Services Agreement dated as of March 31, 1997, between the Registrant and David A.
Kremser (incorporated by reference to Exhibit 10.113 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996)
10.114 Indemnification Agreement dated as of March 31, 1997, between the Registrant and
David A. Kremser (incorporated by reference to Exhibit 10.114 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
10.115 Tolling Agreement dated as of March 31, 1997, between the Registrant and David A.
Kremser (incorporated by reference to Exhibit 10.115 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996)
10.116 Stock Option Agreement dated as of March 31, 1997, between the Registrant and
David A. Kremser (incorporated by reference to Exhibit 10.116 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
10.117.1 Form of Loan and Security Agreement dated as of April 21, 1997 among the
Registrant, Elk Meadows Investments, L.L.C. and BritWill Investments Company, Ltd.
(incorporated by reference to Exhibit 10.117.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
10.117.2 Form of Stock Pledge Agreement dated as of April 21, 1997 among the Registrant,
Elk Meadows Investments, L.L.C. and BritWill Investments Company, Ltd.
(incorporated by reference to Exhibit 10.117.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
10.118 Asset Purchase Agreement dated as of December 20, 1996, among Sunbelt Therapy
Management Services, Inc., Spine Rehabilitation and Physical Therapy Center, Inc.
and Douglas L. Bates (incorporated by reference to Exhibit 10.118 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
10.119 Master Lease Agreement dated November 25, 1996, between Unison HealthCare
Corporation and Pacific Financial Company, relating to computer equipment and
software (incorporated by reference to Exhibit 10.119 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996)
10.120 Form of sublease agreement dated as of March 1, 1997, between BritWill
Investments-II, Inc. and Hasmark East Ltd., relating to Four States Care Center,
Green Acres, Heritage Oaks and Texarkana Nursing Center (incorporated by reference
to Exhibit 10.120 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996)
10.121 Lease dated as of June 13, 1995, between AHP of Colorado, Inc. and Arkansas,
Inc.***
10.122 Lease dated as of June 13, 1995, between AHP of Colorado, Inc. and Cornerstone
Care, Inc.***
10.123 Lease dated as of July 28, 1995, between American Health Properties of Arizona,
Inc. and Safford Care, Inc.***
10.124 Lease dated as of July 28, 1995, between American Health Properties of Arizona,
Inc. and Douglas Manor, Inc. (incorporated by reference to Exhibit 10.124 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996)
</TABLE>
II-12
<PAGE> 223
<TABLE>
<C> <S>
10.125 Promissory Note and related Mortgage dated March 30, 1994 in the original
principal amount of $19.1 million between Signature Health Care, Inc. and National
Health Investors, Inc. (incorporated by reference to Exhibit 10.125 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996)
10.126 Lease dated as of December 1, 1990 between Health Care Reit, Inc. and The Arbors
Health Care Center Inc. (incorporated by reference to Exhibit 10.126 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996)
11.1 Unison HealthCare Corporation Statement Re: Computation of Per Share Earnings
(incorporated by reference to Exhibit 11.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
12 Computation of Ratio of Earnings to Fixed Charges(reference is made to II-27)*
21 List of subsidiaries (incorporated by reference to Exhibit 21 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996)
23.1 Consent of Ernst & Young LLP (reference is made to page II-20)*
23.2 Consent of Price Waterhouse (reference is made to page II-21)*
23.3 Consent of Arthur Andersen LLP (reference is made to II-22)*
23.4 Consent of Anderson & Whitney, P.C. (reference is made to II-23)*
23.5 Consent of Ronald H. Ridgers, P.C. (reference is made to II-24)*
23.6 Consent of Ronald H. Ridgers, P.C. (reference is made to II-25)*
23.12 Consent of Quarles & Brady (contained in its opinion filed as Exhibit 5.1 hereto)*
24.1 Power of Attorney (reference is made to pages II-17 and II-18)*
25 Statement of Eligibility of Trustee*
99.1 Form of Letter of Transmittal***
99.2 Form of Notice of Guaranteed Delivery**
99.3 Report of Ernst & Young LLP (reference is made to II-26)*
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment
*** Previously filed with original Form S-4
(b) FINANCIAL STATEMENT SCHEDULES
Unison HealthCare Corporation
Schedule II Valuation and Qualifying Accounts (reference is made to
II-15)
BritWill HealthCare Company
Schedule II Valuation and Qualifying Accounts (reference is made to
II-16)
All other schedules are omitted because they are not applicable or required
or because the information required is included in the financial statements or
notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with
II-13
<PAGE> 224
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
II-14
<PAGE> 225
SCHEDULE II
UNISON HEALTHCARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------
CHARGED
BALANCE AT TO COST CHARGED BALANCE AT
BEGINNING AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful
accounts........................ $164,000 $ 128,000 $ $ (2,000)(1) $ 290,000
Year ended December 31, 1995
Allowance for doubtful
accounts........................ $290,000 $ 29,000 $801,000(2) $(337,000)(1) $ 783,000
Year ended December 31, 1996
Allowance for doubtful
accounts........................ $783,000 $2,742,000 $672,000(3) $(420,000)(1) $3,776,000
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents the allowance for doubtful accounts recorded by BritWill at July
31, 1995.
(3) Represents the allowance for doubtful accounts recorded by Signature at
October 31, 1996.
II-15
<PAGE> 226
SCHEDULE II
BRITWILL HEALTHCARE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT TO COST CHARGED BALANCE AT
BEGINNING AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for uncollectible
accounts........................ $ (480,039) $(644,471) $127,264(2) $(997,246)
Six Months ended June 30, 1995
Allowance for uncollectible
accounts........................ $ (997,246) $ (21,442) $227,821(2) $(790,867)
One Month ended July 31, 1995
Allowance for uncollectible
accounts........................ $ (790,867) $ (48,631) $ 38,724(2) $(800,774)
</TABLE>
- ---------------
(1) Adjustment related to increasing accounts receivable and the allowance to
reconcile to accounts receivable agings.
(2) Uncollectible accounts written off, net of recoveries.
II-16
<PAGE> 227
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, State of
Arizona, on the tenth day of October 1997.
Unison HealthCare Corporation
By: /s/ MICHAEL A. JEFFRIES
------------------------------------
Michael A. Jeffries
President and Chief Executive
Officer
POWER OF ATTORNEY
Know All Men by These Presents, that each person whose signature appears
below constitutes and appoints Michael A. Jeffries and James A. Rice, and each
one of them individually, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to file the same
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of
Unison HealthCare Corporation in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<C> <S> <C>
/s/ MICHAEL A. JEFFRIES President and Chief Executive October 10, 1997
- ----------------------------------- Officer
Michael A. Jeffries (Principal Executive Officer)
/s/ WARREN K. JERREMS Vice President, Chief Accounting October 10, 1997
- ----------------------------------- Officer (Principal Accounting
Warren K. Jerrems Officer)
/s/ BRUCE H. WHITEHEAD Chairman of the Board of Directors October 10, 1997
- -----------------------------------
Bruce H. Whitehead
/s/ TYRRELL L. GARTH Director October 10, 1997
- -----------------------------------
Tyrrell L. Garth
/s/ JOHN T. LYNCH, JR. Director October 10, 1997
- -----------------------------------
John T. Lynch, Jr.
/s/ MARK W. WHITE Director October 10, 1997
- -----------------------------------
Mark W. White
/s/ JOHN T. CASEY Director October 10, 1997
- -----------------------------------
John T. Casey
</TABLE>
II-17
<PAGE> 228
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Michael A. Jeffries and James A. Rice, and each
of them individually, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to file the same
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<C> <S> <C>
Quest Pharmacies, Inc., an Arizona corporation
/s/ L. ROBERT OBERFIELD President, Director (Principal October 10, 1997
- ----------------------------------- Executive Officer)
L. Robert Oberfield
/s/ MICHAEL A. JEFFRIES Vice President, Director October 10, 1997
- -----------------------------------
Michael A. Jeffries
/s/ CLAYTON KLOEHR Treasurer and Chief Financial October 10, 1997
- ----------------------------------- Officer
Clayton Kloehr (Principal Financial Officer)*
Sunbelt Therapy Management Service, Inc., an Arizona corporation
/s/ PAUL G. HENDERSON President (Principal Executive October 10, 1997
- ----------------------------------- Officer)
Paul G. Henderson
/s/ MICHAEL A. JEFFRIES Vice President, Director October 10, 1997
- -----------------------------------
Michael A. Jeffries
/s/ CLAYTON KLOEHR Treasurer and Chief Financial October 10, 1997
- ----------------------------------- Officer (Principal Financial
Clayton Kloehr Officer)*
* Mr. Kloehr is signing in the capacity of Principal Financial Officer and Principal Accounting
Officer.
</TABLE>
II-18
<PAGE> 229
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<C> <S> <C>
Decatur Sports Fit & Wellness Center, Inc., an Alabama corporation
Therapy Health Systems, Inc., a Mississippi corporation
Henderson & Associates Rehabilitation, Inc., an Alabama corporation
Sunbelt Therapy Management Services, Inc., an Alabama corporation
/s/ PAUL G. HENDERSON President (Principal Executive October 10, 1997
- ----------------------------------- Officer)
Paul G. Henderson
/s/ MICHAEL A. JEFFRIES Vice President, Director October 10, 1997
- -----------------------------------
Michael A. Jeffries
/s/ CLAYTON KLOEHR Treasurer and Chief Financial October 10, 1997
- ----------------------------------- Officer (Principal Financial
Clayton Kloehr Officer)*
Sunquest SPC, Inc., an Arizona corporation, Christopher Nursing Center, Inc., a Colorado
corporation, BritWill HealthCare Company, a Delaware corporation, Amberwood Court, Inc., a
Colorado corporation, BritWill Investments - I, Inc., a Delaware corporation, The Arbors
Health Care Center, Inc., an Arizona corporation, BritWill Investments -II, Inc., a Delaware
corporation, Los Arcos, Inc., a Colorado corporation, BritWill Funding Corporation, a
Delaware corporation, Pueblo Norte, Inc., a Colorado corporation, Emory Care Center Inc., a
Texas corporation, Rio Verde Nursing Center, Inc., a Colorado corporation, Memphis Clinical
Laboratory, Inc., a Tennessee corporation, Signature Management Group, Inc., a Colorado
corporation, American Professional Holding, Inc., a Utah corporation, Cornerstone Care, Inc.,
a Colorado corporation, Ampro Medical Services, Inc., a Texas corporation, Arkansas, Inc., a
Colorado corporation, Gamma Laboratories, Inc., a Missouri corporation, Douglas Manor, Inc.,
a Colorado corporation, Signature Health Care Corporation, a Delaware corporation, Safford
Care, Inc., a Colorado corporation, Brookshire House, Inc., a Colorado corporation,
RehabWest, Inc., a Colorado corporation
/s/ MICHAEL A. JEFFRIES President and Chief Executive October 10, 1997
- ----------------------------------- Officer, Director (Principal
Michael A. Jeffries Executive Officer)
/s/ CLAYTON KLOEHR Treasurer and Chief Financial October 10, 1997
- ----------------------------------- Officer
Clayton Kloehr (Principal Financial Officer)*
* Mr. Kloehr is signing in the capacity of Principal Financial Officer and Principal Accounting
Officer.
</TABLE>
II-19
<PAGE> 230
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 16, 1997 with respect to the financial
statements and schedule of Unison HealthCare Corporation for the three years
ended December 31, 1996, which, as to the years 1995 and 1994, are based in part
on the reports of other auditors; our reports dated April 10, 1996 with respect
to the financial statements and schedule of BritWill HealthCare Company for the
month ended July 31, 1995; our report dated May 16, 1996 with respect to the
financial statements of Henderson & Associates Rehabilitation and Sunbelt
Therapy Management Services, Inc. for the two years ended December 31, 1995; and
our report dated October 4, 1996 with respect to the financial statements of
Franciscan Healthcare Centers at Enumclaw and Walla Walla for the three years
ended June 30, 1996, all of which are included in the Registration Statement
(Form S-4 No. 333-30793) and related Prospectus of Unison HealthCare Corporation
for the registration of $100,000,000 of its 12 1/4% Senior Notes Due 2006.
Ernst & Young LLP
Phoenix, Arizona
October 7, 1997
II-20
<PAGE> 231
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated November 8, 1995 relating
to the financial statements of BritWill HealthCare Company, which appears in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the year ended December 31, 1994 and for the
six month period ended June 30, 1995 included in Part II of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
October 7, 1997
II-21
<PAGE> 232
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 15, 1996, on the consolidated balance sheets of Signature
Health Care Corporation (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994; and our report dated April 15, 1996, on the combined balance sheet of
Arkansas, Inc., Cornerstone Care, Inc., Douglas Manor, Inc. and Safford Care,
Inc. (Colorado corporations) as of December 31, 1995 and the related combined
statements of operations, stockholders' equity and cash flows for the period
from inception, May 9, 1995, through December 31, 1995, and to all references to
our Firm included in or made a part of the Registration Statement on Form S-4
(File No. 333-30793) for Unison HealthCare Corporation.
ARTHUR ANDERSEN LLP
Denver, Colorado
October 10, 1997
II-22
<PAGE> 233
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 27, 1996 accompanying the financial
statements of RehabWest, Inc. contained in the Prospectus of Unison HealthCare
Corporation that is made a part of the Registration Statement (Form S-4) for the
registration of the exchange of its 12.25% Senior Notes due 2006.
ANDERSON & WHITNEY, P.C.
Greeley, Colorado
October 9, 1997
II-23
<PAGE> 234
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 10, 1996, accompanying the financial
statements of Memphis Clinical Laboratory, Inc. contained in the Registration
Statement on Form S-4 (Registration No. 333-30793) of Unison HealthCare
Corporation.
RONALD H. RIDGERS, P.C.
Richardson, Texas
October 8, 1997
II-24
<PAGE> 235
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 30, 1996, accompanying the financial
statements of American Professional Holding, Inc. contained in the Registration
Statement on Form S-4 (Registration No. 333-30793) of Unison HealthCare
Corporation.
RONALD H. RIDGERS, P.C.
Richardson, Texas
October 8, 1997
II-25
<PAGE> 236
EXHIBIT 99.3
REPORT OF INDEPENDENT AUDITORS
Board of Directors
BritWill HealthCare Company
We have audited the consolidated statements of operations and cash flows of
BritWill HealthCare Company for the month ended July 31, 1995 and have issued
our report thereon dated April 10, 1996. Our audit also included the financial
statement schedule listed in Item 21(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express our opinion on this schedule based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Phoenix, Arizona
April 10, 1996
II-26
<PAGE> 237
EXHIBIT 12
UNISON HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
SIX MONTHS ENDED
ACTUAL PRO JUNE 30,
---------------------------------------- FORMA -----------------
1992 1993 1994 1995 1996 1996(1) 1996 1997
---- ---- ------ ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income
taxes...................... $338 $286 $ 512 $ 249 $(31,794) $(31,731) $2,569 $(10,348)
---- ---- ------ ------ -------- -------- ------ --------
Fixed charges:
Interest expense........... 14 44 147 1,176 5,824 15,638 1,508 9,594
Amortization of debt
expense................. -- -- -- 69 246 700 38 299
Portion of rents
representing
interest -- 33%......... 52 69 468 2,222 5,214 5,199 2,232 2,793
---- ---- ------ ------ -------- -------- ------ --------
Total fixed charges.......... 66 113 615 3,467 11,284 21,537 3,778 12,686
---- ---- ------ ------ -------- -------- ------ --------
Income (loss) before income
taxes and fixed charges.... $404 $399 $1,127 $3,716 $(20,510) $(10,194) $6,347 $ 2,338
==== ==== ====== ====== ======== ======== ====== ========
Ratio of earnings to fixed
charges(2)................. 6.15 3.54 1.83 1.07 -- -- 1.68 0.18
</TABLE>
- ---------------
(1) Gives effect to (i) the Dispositions, (ii) the Completed Acquisitions and
(iii) the Private Offering of the Senior Notes and the application of the
proceeds therefrom, effective, in each case, at the beginning of the period.
(2) Earnings were inadequate to cover fixed charges by $31,794 in 1996, $31,731
in 1996 on a pro forma basis and $10,348 for the six months ended June 30,
1997.
II-27
<PAGE> 1
Exhibit 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST BANK NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0256895
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center, 180 East Fifth Street,
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
UNISON HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0684011
(State of Incorporation) (I.R.S. Employer
Identification No.)
AND ITS GUARANTOR SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Arizona SunQuest SPC, Inc. 86-0686301 Colorado Los Arcos, Inc. 84-1123464
Delaware BritWill HealthCare Company 52-1788276 Colorado Pueblo Norte, Inc. 84-1109376
Delaware BritWill Investments-I, Inc. 52-1797108 Colorado Rio Verde Nursing 84-1195626
Center, Inc.
Delaware BritWill Investments-II, Inc. 52-1797107 Colorado Signature Management 84-1188485
Group, Inc.
Delaware BritWill Funding Corporation Colorado Cornerstone Care, Inc. 84-1305948
Texas Emory Care Center, Inc. 75-2497463 Colorado Arkansas, Inc. 84-1305949
Tennessee Memphis Clinical 62-1308835 Colorado Douglas Manor, Inc. 84-1305945
Laboratory, Inc.
Utah American Professional 87-0421087 Colorado Safford Care, Inc. 84-1305944
Holding, Inc.
Texas Ampro Medical 75-2409091 Colorado RehabWest, Inc. 84-1250141
Services, Inc.
Missouri Gamma Laboratories, Inc. 43-1247740 Arizona Quest Pharmacies, Inc. 86-0801362
Delaware Signature Health Care 84-1093732 Arizona Sunbelt Therapy Management (applied for)
Corporation Services, Inc.
Colorado Brookshire House, Inc. 84-1123466 Alabama Decatur SportsFit & Wellness 63-1090003
Center, Inc.
Colorado Christopher Nursing 84-1124242 Mississippi Therapy Health Systems, Inc. 64-0743156
Center, Inc.
Colorado Amberwood Court, Inc. 84-1123461 Alabama Henderson & Associates 63-1090002
Rehabilitation, Inc.
Arizona The Arbors Health Care 86-0668106 Alabama Sunbelt Therapy Management 63-0897514
Center, Inc. Services, Inc.
(State of (Exact name of registrant as (I.R.S. (State of (Exact name of registrant as (I.R.S.
Incorporation) specified in its charter) Employer Incorporation) specified in its charter) Employer
Identification Identification
Number) Number)
</TABLE>
7272 East Indian School Road, Suite 214
Scottsdale, Arizona 85251
(Address of Principal Executive Offices) (Zip Code)
12 1/4% SENIOR NOTES, DUE 2006
(Title of the Indenture Securities)
1
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the
Trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which
the Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association (incorporated by
reference to registration number 333-30939).
2. Copy of Certificate of Authority to Commence
Business (incorporated by reference to registration number 333-30939).
3. Authorization of the Trustee to exercise corporate
trust powers (included in Exhibits 1 and 2; no separate instrument).
4. Copy of existing By-Laws (incorporated by reference
to registration number 333-30939).
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section
321(b) of the act.
7. Copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its supervising or
examining authority (incorporated by reference to registration number
333-26679).
2
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Bank National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 6th day of December,
1996.
FIRST BANK NATIONAL ASSOCIATION
[SEAL]
/s/ Richard Prokosch
---------------------------------
Richard Prokosch
Trust Officer
/s/ Christina Hatfield
- ---------------------------------
Christina Hatfield
Assistant Secretary
3
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, FIRST BANK NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: October 10, 1996
FIRST BANK NATIONAL ASSOCIATION
/s/ Richard Prokosch
------------------------------
Richard Prokosch
Trust Officer
4
