<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27374
UNISON HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0684011
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
8800 NORTH GAINEY CENTER DRIVE, SUITE 245
SCOTTSDALE, AZ 85258
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(602) 423-1954
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
The number of shares of Common Stock, par value $.001 per share,
outstanding on July 1, 1997: 6,422,096
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UNISON HEALTHCARE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996... 3
Consolidated Statements of Operations for the Three Months Ended March
31, 1997 and 1996........................................................ 4
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1997 and 1996........................................................ 5
Notes to Consolidated Financial Statements............................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................ 17
ITEM 2. Changes in Securities.................................................... 18
ITEM 6. Exhibits and Reports on Form 8-K......................................... 19
Signatures............................................................... 20
</TABLE>
NOTE: Items 3 through 5 of Part II are omitted because they are not
applicable.
2
<PAGE> 3
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 7,371,000 $ 17,409,000
Accounts receivable, net...................................... 29,563,000 28,608,000
Prepaid expenses and other current assets..................... 6,192,000 5,885,000
------------ ------------
Total current assets.................................. 43,126,000 51,902,000
Lease operating rights and other intangible assets, net......... 114,222,000 113,781,000
Property and equipment, net..................................... 31,329,000 30,830,000
Goodwill, net................................................... 28,990,000 28,431,000
Security deposits and other assets.............................. 6,459,000 5,977,000
------------ ------------
$224,126,000 $230,921,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 13,414,000 $ 10,505,000
Accrued expenses.............................................. 21,885,000 21,437,000
Current portion of notes payable and long-term debt due to
related parties............................................ 3,581,000 12,312,000
------------ ------------
Current portion of other notes payable and long-term debt..... 21,574,000 21,603,000
Total current liabilities............................. 60,454,000 65,857,000
Notes payable and long-term debt due to related parties, less
current portion............................................... 13,347,000 15,882,000
Other notes payable and long-term debt.......................... 113,519,000 107,341,000
Deferred taxes.................................................. 22,811,000 24,791,000
Leasehold liability, net........................................ 4,387,000 4,434,000
Other liabilities............................................... 513,000 927,000
------------ ------------
Total liabilities..................................... 215,031,000 219,232,000
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 shares authorized;
6,422,096 and 6,078,498 shares issued and outstanding at
March 31, 1997 and December 31, 1996....................... 5,000 5,000
Additional paid-in capital.................................... 36,211,000 34,723,000
Accumulated deficit........................................... (27,121,000) (23,039,000)
------------ ------------
Net stockholders' equity................................... 9,095,000 11,689,000
------------ ------------
$224,126,000 $230,921,000
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
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UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Net patient revenues............................................ $53,692,000 $32,732,000
Other operating revenues........................................ 2,043,000 762,000
----------- -----------
Total operating revenues................................ 55,735,000 33,494,000
Expenses:
Wages and related............................................... 29,578,000 16,759,000
Other operating................................................. 20,939,000 11,264,000
Rent............................................................ 4,253,000 3,441,000
Interest........................................................ 4,658,000 634,000
Depreciation and amortization................................... 2,369,000 535,000
----------- -----------
Total expenses.......................................... 61,797,000 32,633,000
----------- -----------
Income (loss) before income taxes................................. (6,062,000) 861,000
Income tax expense (benefit)...................................... (1,980,000) 318,000
----------- -----------
Net income (loss)................................................. $(4,082,000) $ 543,000
=========== ===========
Net income (loss) per share....................................... $ (0.66) $ 0.12
Common shares used in per share calculation....................... 6,214,199 4,596,218
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
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UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Net cash provided by (used in) operating activities (including
changes in all operating assets and liabilities)............... $ 71,000 $(6,257,000)
------------ ------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements............... (950,000) (866,000)
Increase in intangible assets.................................. (151,000) (861,000)
Increase in lease deposits and other assets.................... (482,000) (50,000)
Acquisitions, net of cash acquired............................. (592,000) (932,000)
------------ ------------
Net cash used in investing activities....................... (2,175,000) (2,709,000)
------------ ------------
Cash flows from financing activities:
Net increase in borrowings under revolving lines of credit..... 6,019,000 6,841,000
Proceeds from long-term borrowings............................. -- 3,809,000
Payments on long-term borrowings............................... (13,048,000) (6,583,000)
Checks written in excess of bank balances...................... (494,000) --
Other items.................................................... (411,000) --
------------ ------------
Net cash provided by (used in) financing activities......... (7,934,000) 4,067,000
------------ ------------
Net decrease in cash............................................. (10,038,000) (4,899,000)
Cash and cash equivalents at beginning of period................. 17,409,000 6,169,000
------------ ------------
Cash and cash equivalents at end of period....................... $ 7,371,000 $ 1,270,000
============ ============
Supplemental disclosures:
Cash paid for:
Interest....................................................... $ 2,208,000 $ 172,000
Income taxes................................................... 40,000 5,000
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
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
5
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UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three months ended March 31, 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 three months ended
March 31, 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 $140,000 and $330,000 for the three months ended March 31, 1997 and 1996,
respectively. The provision for doubtful accounts receivable is included in
other operating expenses. Provisions totaled $261,000 and $211,000 for the
three months ended March 31, 1997 and 1996, respectively. The allowance for
doubtful accounts totaled $3,611,000 at March 31, 1997 and $3,776,000 at
December 31, 1996.
3. In January 1997, with 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 March 31, 1997, the interest rate was
13.0% and as of August 31, 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 March 31, 1997, Unison was not in
compliance with certain of these covenants. At March 31, 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
6
<PAGE> 7
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases six facilities located in Texas from BritWill Texas (the "BritWill
Texas Leases") for an initial term that expires in December 2005. The
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 March 31, 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. The Company has not
obtained a separate waiver of the covenant violations from BritWill Texas.
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 its remedies of default under the master lease agreements.
On October 31, 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 $9,095,000 as of March 31
1997, and, accordingly, the Company was not in compliance with this
covenant. Unison did not receive a waiver of this covenant violation and,
accordingly, the entire obligation of $18,587,000 at March 31, 1997 is
classified 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 Part II, Item 1, "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 and communications with its insurance carriers, that the
ultimate disposition of these actions will not adversely affect its
liquidity. An adverse determination in these proceedings, if not covered by
insurance, would have a material adverse impact on the Company's liquidity
and results of operations.
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 the form
of 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 a 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 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 until November 1,
1997. The loan is secured by a pledge of certain accounts receivable and the
stock of certain Unison subsidiaries.
7
<PAGE> 8
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. As of June 30, 1997, the
Company had accrued approximately $1,684,000 in the aggregate related to its
settlements with Rehabworks, Inc. and Texas Star Therapy Inc. See Part II
Item 1, "Legal Proceedings".
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report, including without
limitation statements containing the words "believes", "anticipates", "intends",
"expects" and words of similar import, may be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (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 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 Unison's Annual Report on Form 10-K for the year ended
December 31, 1996, in "Item 1 -- Business" and "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Risks and Uncertainties", as well as factors discussed elsewhere
in this report or in any document incorporated herein by reference.
The following material should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto. All
references in this discussion and analysis to years are to fiscal years of the
Company ended December 31 of such year.
RESULTS OF OPERATIONS
As described in Unison's Annual Report on Form 10-K, the Company recorded a
loss of $23,438,000 for the year ended December 31, 1996. The Company pursued in
late 1995 and in 1996 an aggressive expansion program that, in time, overwhelmed
the Company's financial reporting and management information systems and
personnel and increased its corporate overhead in the expectation that the
number and size of acquisitions would continue to grow. Unison's financial
reporting and management information systems were not adequate for the larger
and more complex needs of the Company, making monitoring and control over costs
more difficult. The Company has taken the following steps which it believes will
help remedy these problems and prevent them from recurring. First, Unison
curtailed its acquisition program. Second, in April 1997, Unison accepted the
resignations of several of its principal officers, including its Chief Executive
Officer and Chief Financial Officer. Third, several managers in accounting and
finance were replaced. Fourth, the Company hired a CEO in September 1997 and a
new CFO in April 1998. Fifth, in the second quarter of 1997, the Company
completed the conversion to new accounts payable, accounting and financial
reporting computer systems.
The Company is focusing its nursing home marketing efforts on increasing
occupancy levels and improving quality mix in order to increase revenues. 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 working to reduce costs
without adversely impacting the quality of care it provides. The number of
corporate office personnel has been reduced by approximately 35%, 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.
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 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
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The following table summarizes selected operating statistics.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------
1997 1996
----- -----
<S> <C> <C>
Leased and Owned Facilities:
Number of facilities....................................... 56 42
Number of licensed beds:
Long-term care.......................................... 4,780 3,884
Assisted and independent living......................... 315 114
Managed Facilities:
Number of facilities....................................... 2 6
Number of licensed beds.................................... 160 670
Institutional Pharmacies:
Number of outlets.......................................... 2 2
Nonaffiliated facilities served............................ 53 27
Medical reference laboratories:
Number of laboratories..................................... 3 3
Nonaffiliated facilities served............................ 275 270
Nonaffiliated therapy locations.............................. 59 20
</TABLE>
On March 1, 1997, Unison subleased to an unrelated third party four nursing
facilities in Texas which were previously held for disposition. Four other
facilities continue to be held for disposition.
The following table identifies the Company's sources of net operating
revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1997 1996
----- -----
<S> <C> <C>
Percentage of total revenues:
Long term care............................................. 76.8% 86.4%
Therapy contracts.......................................... 14.5 3.8
Pharmacies................................................. 4.9 3.3
Laboratory services........................................ 3.0 5.3
Medicare Part B billing and supply......................... 0.8 1.2
----- -----
Total.............................................. 100.0% 100.0%
===== =====
</TABLE>
Unison's revenues fluctuate from facility to facility based on various
factors, including total capacity, occupancy rates, reimbursement methodologies
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, the Company believes that 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.
10
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Data for nursing center operations with respect to sources of net patient
revenues and patient mix by payor type are set forth below (long-term care
only).
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1997 1996
----- -----
<S> <C> <C>
Medicare.................................................... 31.9% 29.8%
Private and other........................................... 16.3 16.3
----- -----
Quality mix............................................ 48.2 46.1
Medicaid.................................................... 51.8 53.9
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>
In the first quarter of 1997, Unison recorded a net loss of $4,082,000 or
$0.66 per share compared to net income of $543,000 or $0.12 per share in the
prior year quarter. Loss before income taxes amounted to $6,062,000 in the 1997
first quarter compared to pretax income of $861,000 in the same period in 1996.
The loss in 1997 is primarily attributable to: (i) fixed costs (rent, interest,
depreciation and amortization) increasing to 20.2% of total revenues for the
first quarter of 1997 compared to 13.8% for the 1996 period as a result of
financing and acquisition activities subsequent to March 31, 1996; (ii)
corporate overhead costs (excluding corporate fixed costs) amounted to 7.9% of
total revenues for the first quarter of 1997 compared to 6.7% for the 1996
period due in part to the completion of the accounting and information system
conversion and relocation to new office space; (iii) losses from nursing home
operations resulting from controllable expenses (primarily staffing and supply
costs) exceeding budgets; (iv) a $600,000 charge resulting from increasing the
estimated liability recorded for settlement of certain litigation with a therapy
services provider, and 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. These increases in expenses were offset in part by increased
earnings from the Company's therapy, pharmacy and laboratory subsidiaries.
Total operating revenues increased $22,241,000 or 66.4% to $55,735,000 in
the 1997 first quarter from $33,494,000 in the comparable 1996 quarter. The
increase is due to revenues from patient services which increased from
$32,732,000 in the 1996 first quarter to $53,692,000 in the current period.
Patient days increased from 278,540, or 76.7% average occupancy in the 1996
period, to 386,875, or 82.5% 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 facilities operated which increased revenues by
approximately $12,704,000 and patient days by approximately 99,425; (ii) the
increase in the services provided by the 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 $6,763,000; and (iii) an increase in Unison's quality mix to 48.2%
in the 1997 first quarter compared to 46.1% in the prior year quarter. Other
operating revenues increased to $2,043,000 in the 1997 first quarter from
$762,000 in the prior year quarter due primarily to ancillary company management
fees of $1,619,000, offset by a decrease in managed facilities from six at March
31, 1996 to two at March 31, 1997.
Wages and related expense increased $12,819,000 or 76.5% from $16,759,000
in the 1996 first quarter to $29,578,000 in the current quarter and as a
percentage of revenues from 50.0% in 1996 to 53.1% 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
and regional wages and related expenses due to Unison's acquisition program
during 1996 and its accounting and information system conversions. The
percentage increase is due primarily to the increase in the services provided by
the therapy companies, which have an inherently higher percentage of salaries to
revenues (63.1% for the first quarter of 1997) than long-term care providers,
and an increase in corporate and regional overhead.
Other operating expenses increased $9,675,000 or 85.9% from $11,264,000 in
the 1996 first quarter to $20,939,000 in the 1997 first quarter due primarily to
an increase in the number of facilities operated, an increase in the services of
the ancillary companies and increases in corporate operating expenses. Other
operating expenses as a percentage of revenues was 37.6% in the 1997 first
quarter compared to 33.6% in the
11
<PAGE> 12
1996 period. The percentage increase is 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
other operating expenses to revenues than long-term care providers.
Rent expense increased $812,000 or 23.6% from $3,441,000 in the 1996 first
quarter to $4,253,000 in the 1997 period but decreased as a percentage of
revenues from 10.3% in the 1996 first quarter to 7.6% in the current quarter.
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 the 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 $4,658,000 in the current quarter compared to
$634,000 in the 1996 first quarter and increased as a percentage of revenues
from 1.9% in the 1996 first quarter to 8.4% in the 1997 period. The dollar and
percentage increases are 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 $1,834,000 from $535,000 in
the first quarter of 1996 to $2,369,000 in the 1997 first quarter and increased
as a percentage of revenues from 1.6% in the 1996 first quarter to 4.3% in the
1997 first quarter. 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.
Unison recorded an income tax benefit for the first quarter of 1997
amounting to $1,980,000. The effective tax rate of 32.7% 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 first quarter of $318,000,
or 36.9% of pretax income.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 changes the manner in which earnings per common share ("EPS") are calculated
and presented. Under SFAS 128, two EPS amounts are required: (i) basic EPS and
(ii) diluted EPS. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares actually
outstanding during the period. Diluted EPS represents the per share allocation
of income attributable to common stockholders based on the weighted average
number of common shares actually outstanding plus dilutive potential common
shares outstanding such as options, warrants and convertible securities. Unison
will be required to implement SFAS 128 as of December 31, 1997. Had the Company
implemented SFAS 128 on January 1, 1996, it would have reported basic and
diluted EPS for the three months ended March 31, 1996 of $0.13 and $0.12,
respectively. Loss per share for the 1997 first quarter would remain unchanged
at $0.66 for both the basic and diluted calculations, as the Company's options,
warrants and convertible notes are antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Unison had $7,371,000 in cash and cash equivalents
(which includes $2,549,000 of checks written in excess of bank balances in
accounts payable) compared to $17,409,000 at December 31, 1996. The Company had
a working capital deficit of $17,328,000 at March 31, 1997 compared to a working
capital deficit at December 31, 1996 amounting to $13,955,000. Current
maturities of notes and debt at March 31, 1997 amounted to $25,155,000, of which
$19,188,000 is classified as a current liability because Unison is not in
compliance with certain financial covenants. However, although the financial
covenant violations have not been cured, management has no reason to believe
that this debt will be accelerated and required to be paid off in 1997.
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<PAGE> 13
Cash provided by operations in the 1997 first quarter amounted to $71,000
primarily due to an increase in accounts payable and accrued expenses.
Net cash used in investing activities amounted to $2,175,000 in the 1997
first quarter. Capital expenditures amounted to $950,000 and expenditures for
acquisitions, net of cash acquired, amounted to $592,000. Aggregate expenditures
for other assets amounted to $633,000. 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.
Net cash used in financing activities amounted to $7,934,000 in the current
quarter due to the repayment of notes and long-term debt amounting to
$13,048,000, including $12,055,000 paid to affiliates, and other financing
activities totaling $905,000 offset by net borrowings under the revolving line
of credit amounting to $6,019,000. At March 31, 1997, Unison had $152,021,000 in
total debt (94.4% of total capitalization) compared to $157,138,000 at December
31, 1996 (93.1% of total capitalization).
In January 1997, Unison repaid with proceeds from the Senior Notes the
$8,000,000 Subordinated Note payable to the former BritWill shareholders and
$1,750,000 of the Additional Payment Obligation due to the former BritWill
shareholders. Thereafter, Unison's remaining obligation associated with the
acquisition of BritWill is 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 include 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 sheets at
December 31, 1996 and March 31, 1997. Although this accounting treatment 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 compared to
1996 in the aggregate amount of approximately $1,600,000 ($400,000 for the 1997
first quarter). 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.
Also in January 1997, Unison repaid $2,000,000 of the Sunbelt Notes 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 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 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.
On April 21, 1997, Unison obtained a $2,950,000 loan for general working
capital purposes from affiliates of two of its directors, Messrs. Kremser and
Whitehead. This loan matured on November 1, 1997. On September 25, 1997, Unison
borrowed an additional $1.0 million from Messrs. Kremser and Whitehead which was
due on October 7, 1997. The loans bear interest at prime plus 2.0% and are
secured by a pledge of certain accounts receivable and the stock of certain
Unison subsidiaries. Unison is currently in default on its obligations to repay
these loans. In addition to the foregoing, the loan documents state that the
collateral pledged for the working capital loans also collateralized all other
obligations which may be due to these individuals and/or entities which they
control; and further that all such obligations are in default due to cross
default provisions in those loan and security documents. All of these
obligations total, in the aggregate, approximately $18.9 million as of September
30, 1997. The Company has not obtained a waiver of the defaults
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<PAGE> 14
on its obligations in the loan and security documents described above. An
acceleration of Unison's obligations under these financial instruments could
have a material adverse effect on Unison.
Unison finances its working capital needs with cash provided by its
operations and draws under a $10,000,000 revolving credit facility. Borrowings
under this credit facility amounted to $6,019,000 at March 31, 1997 with
interest at the prime rate plus 2.0% (10.5% at March 31, 1997). 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 (subsequently extended to June 30, 1998). 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.
The Company believes that, absent additional financing, its cash flows from
operations and draws under its existing $10,000,000 line of credit will not be
sufficient to meet all of its debt service requirements in 1997 and beyond.
On December 1, 1997, Unison completed the private placement of $20.0
million of its 13% Senior Notes due 1999 (the "13% Notes"). The net proceeds to
the Company of $19.2 million were used for debt service, including the
semiannual payment of interest on the 12.25% Senior Notes amounting to $6.7
million, and for working capital. The Company has not made the interest payment
due March 1, 1998 on the 13% Notes in the amount of $650,000.
The Company has been working since July 1997 on a plan designed to: (a)
reduce its costs of capital and operating expenses to improve operating results;
(b) provide short-term and long-term liquidity; and (c) restructure its balance
sheet and increase stockholders' equity. The key elements of the plan include:
(i) reductions in controllable costs as described in "-- Results of Operations";
(ii) obtaining a new revolving line of credit secured by its eligible accounts
receivable; (iii) completing a refinancing of the Mortgage Note incurred in
connection with the Signature Acquisition; and then, (iv) depending on market
conditions, an equity infusion. The Company is currently seeking to replace the
Mortgage Note (and to refinance one of its leased facilities which is subject to
a purchase option) with new financing in the amount of up to $40.0 million. The
Mortgage Note had a balance at September 30, 1997 of $18.5 million. Proceeds
from these financing transactions would be used for debt service and working
capital. There is no assurance that the Company will be successful in effecting
any refinancing of the Mortgage Note.
Even if the Company is successful in completing refinancing transactions of
the type it is currently seeking, it will still not have sufficient liquidity to
meet all of its short- and long-term debt service and capital requirements,
absent significant asset sales or a substantial restructuring of its debt and
lease obligations. Some of these obligations are already in default, as
described herein. Market conditions permitting, Unison may seek to raise
additional equity through the private placement of stock, but there can be no
assurance that any such equity financing will be available.
If the Company completes the recapitalization plans outlined above, it may
incur a charge to earnings of up to $2,500,000 from prepayment penalties and
write-off of deferred financing costs related to those obligations which are
proposed to be paid off.
Unison's recapitalization plan may be affected by covenants under the
Senior Notes. 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 to 1 after December 31, 1997). As of June 30, 1997, Unison had incurred
approximately $17,490,000 of such secured and other indebtedness. There can be
no assurance that the Company will obtain the necessary consents from its
lessors and debtors in the future if it attempts to engage in one of the
aforementioned types of transactions.
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<PAGE> 15
Because of substantial losses reported by the Company in 1996, it does not
currently satisfy the minimum tangible net asset requirement for the listing of
its common stock on the Nasdaq National Market's National Market System. 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 per share initial inclusion bid price
requirement. On February 23, 1998, new, more stringent quantitative maintenance
requirements for continued listing on the Nasdaq SmallCap Market went into
effect. Unison does not currently meet these requirements, and on April 15,
1998, its securities were delisted by Nasdaq. The Company is unable to determine
what effect, if any the delisting of its stock will have on its ability to
effect the aforementioned private placement of stock.
The stated interest on the Senior Notes has temporarily increased from
12.25% to 13.50% at September 12, 1997 and it is subject to further increases at
90-day intervals (to a maximum of 14.25%) until a registration statement for the
Senior Notes (or for Exchange Notes on the same terms) is filed and is declared
effective by the Securities and Exchange Commission. Unison delayed filing the
required registration statement while it completed work on its financial
statements for 1996. Unison made the filing on July 3, 1997, but it has not yet
become effective. Further delays in completing the required registration, with
corresponding additional interest expense on the Senior Notes, are likely.
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 March 31, 1997, Unison was not in compliance with
many of these covenants. At March 31, 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 $34,000,000 (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. Unison also leases six facilities
located in Texas from BritWill Texas 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 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 March 31, 1997, in compliance with the master
lease financial covenants and did not obtain a waiver of the covenant violations
from Omega or BritWill Texas. The Company continues to be out of compliance with
these covenants after this date and, accordingly, is negotiating with Omega to
restructure such covenants. 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.
Unison was, at December 31, 1997, in arrears of its rent obligations under
these leases in the approximate amount of $1.3 million plus late charges. On
January 7, 1998, three of Unison's subsidiaries (BritWill Investments - I, Inc.,
BritWill Investments - II, Inc., and BritWill Indiana Partnership) filed for
protection under Chapter 11 of the federal bankruptcy laws. These subsidiaries
operate a total of 26 facilities in Texas and Indiana including the facilities
leased from Omega and BritWill Texas. The filings were necessitated by actions
taken by Omega to terminate or otherwise enforce contractual arrangements under
the leases. The subsidiary filings do not affect Unison's operations outside of
Texas and Indiana.
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 a
consolidated net worth of at least $39,000,000. Unison's consolidated net worth
was $9,095,000 as of March 31, 1997, and, accordingly, the Company was not in
compliance with this covenant. Unison has not received a waiver of this covenant
violation and, accordingly, the entire obligation of $18,587,000 at March 31,
1997 is classified 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
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<PAGE> 16
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, based on discussions with the lender, that a declaration of default
will occur, it is considering refinancing of the Mortgage Note as discussed
above. 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 quarter ended March 31, 1997 as a result of the Company's covenant
defaults on its debt and lease agreements.
Because the Company's cash flows from operations and its available capital
have been insufficient to meet its current operating expenses, lease obligations
and debt service requirements, the Company is currently in covenant and payment
default in the terms of material operating leases and indebtedness. In the
absence of obtaining additional capital through the refinancing of the Mortgage
Note, asset sales, securing an increased revolving credit facility, consensual
restructuring of debt and lease terms and/or similar measures, the Company will
be unable to remedy the existing defaults and will experience additional
defaults in the future. The Company's operating leases are subject to
termination in the event of default, and the Company's indebtedness may be
accelerated in the event of continuing default. Certain lenders could foreclose
on Company assets securing their indebtedness, which would include substantially
all of the Company's operating assets. Accordingly, the Company's financial
condition could require that the Company seek additional protection under
applicable reorganization laws in order to avoid or delay actions by its
creditors and lessors which could materially adversely affect or cause the
cessation of the Company's operations.
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 Part II, Item 1, "Legal Proceedings." While there
can be no assurances in such matters, Unison believes, based on its analysis of
the complaints and of its insurance coverage and communications with its
insurance carriers, that the ultimate disposition of these actions will not
adversely affect its liquidity. An adverse determination in these proceedings,
if not covered by insurance, would have a material adverse impact on the
Company's liquidity and results of operations.
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<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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.
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 two of these actions (Grossman et al. v. Unison HealthCare
Corporation et al. and Goldstein et al. 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, Craig R. Clark
and Paul J. Contris, at the time of their resignations in April 1997, the
President and Chief Executive Officer, Executive Vice President and Chief
Financial Officer and Executive Vice President-Acquisitions and Development,
respectively, of the Company, and Bruce H. Whitehead and Phillip R. Rollins,
currently Chairman of the Board and Executive Vice President and Chief Operating
Officer, respectively, 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 Corp., 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. 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
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<PAGE> 18
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 in the prospectus and registration statement concerning 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.
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 and communications with its insurance carriers, that
the ultimate disposition of these actions will not adversely affect its
liquidity. An adverse determination in these proceedings, if not covered by
insurance, would have a material adverse impact on the Company's liquidity and
results of operations.
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
culminated 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 beached a nonsolicitation 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, exemplary damages of
not less than $2,250,000, 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, believes that an adverse outcome would not
have a material effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
In accordance with an adjustment provision of the Signature merger
agreements relating to stockholders' equity, in March 1997 the former Signature
shareholders received additional consideration of $2,511,000, paid in
convertible promissory notes in the aggregate amount of $1,827,000 (the "Notes")
and 238,052 shares of Unison Common Stock with an aggregate market value as of
March 27, 1997 of $684,000. The Notes are convertible after June 30, 1997, in
whole or in part, into shares of Unison Common Stock at a conversion price of
$2.875 per share (the "Conversion Price"). The Conversion Price is subject to
adjustment if Unison issues Common Stock for a price per share (i) less than the
Conversion Price or (ii) less than the market price of
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<PAGE> 19
the Common Stock at the time of issuance. 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.
ITEMS 3-5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index following the Signatures page, which index is
incorporated herein by reference.
(b) Reports filed on Form 8-K:
Unison filed the following reports on Form 8-K during the quarter ended
March 31, 1997:
(1) Report dated March 11, 1997 including a news release describing an
anticipated restatement of the Company's previously issued financial
results for the nine months ended September 30, 1996. No financial
statements were filed with the Form 8-K.
(2) Report dated March 19, 1997 including a news release describing
the nature and estimated impact of an anticipated restatement of the
Company's previously issued financial results for the nine months ended
September 30, 1996 and related matters.
(3) Report dated March 24, 1997 describing the use of proceeds of
Unison's $100,000,000 of 12.25% Senior Notes Due 2006.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNISON HEALTHCARE CORPORATION
(Registrant)
By: /s/ MICHAEL A. JEFFRIES
------------------------------------
Michael A. Jeffries
President and Chief Executive
Officer
(Principal Executive Officer)
Date: April 21, 1998
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
2.1 Amendment to Agreement and Plan of Merger among Unison
HealthCare 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)
2.2 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)
4.1 Supplement No. 1 dated as of February 1, 1997 to Indenture
dated as of October 31, 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)
10.1 Promissory Note dated March 17, 1997 to David A. Kremser in
partial payment of Equity Adjustment Amount (incorporated by
reference to Exhibit 10.112.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996)
10.2 Form of Promissory Notes dated March 17, 1997 to former
Signature shareholders in partial payment of Equity
Adjustment Amount (incorporated by reference to Exhibit
10.112.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 Form of sublease agreement dated as of March 1, 1997 between
BritWill Investments-II, Inc. and Hasmark East Ltd., related
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)
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule (included only in the EDGAR filing)
</TABLE>
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