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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1998.
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
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(Exact name of registrant as specified in its charter)
Delaware 86-0684011
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15300 N. 90th St., Suite 100
Scottsdale, AZ 85260
----------------------------------------
(Address of principal executive offices)
(602) 423-1954
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(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 [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
The Company currently is involved in bankruptcy proceedings, and a plan of
reorganization and disclosure statement was submitted to the court. However, the
plan has not been confirmed, and at this time no securities have been
distributed under the plan. It is anticipated that the plan will be confirmed
during the first quarter of 1999.
As of December 1, 1998 there were 6,422,096 shares of $0.001 par value
common stock outstanding.
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<PAGE>
UNISON HEALTHCARE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997............................................ 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997................................ 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997................................ 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 3. Defaults Upon Senior Securities.............................. 19
ITEM 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES............................................................. 22
NOTE: Items 2, 4 and 5 of Part II are omitted because they are not applicable.
2
<PAGE>
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 6,417 $ 5,295
Accounts receivable, net ................................... 34,871 32,855
Prepaid expenses and other current assets .................. 8,471 7,768
--------- ---------
Total current assets ................................... 49,759 45,918
Lease operating rights and other intangible assets, net ......... 82,825 84,487
Property and equipment, net ..................................... 25,450 25,588
Goodwill, net ................................................... 28,077 28,357
Security deposits and other assets .............................. 8,399 7,817
--------- ---------
$ 194,510 $ 192,167
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 6,867 $ 7,592
Accrued expenses ........................................... 28,622 24,617
Current portion of notes payable and long-term debt
due to related parties .................................. 18,087 20,500
Current portion of other notes payable and long-term debt .. 143,116 144,277
--------- ---------
Total current liabilities .............................. 196,692 196,986
Liabilities subject to compromise ............................... 7,845 --
Notes payable and long-term debt, less current portion .......... 7,681 8,020
Deferred taxes .................................................. 16,013 16,013
Leasehold liability, net ........................................ 4,199 4,246
Other liabilities ............................................... 933 936
--------- ---------
Total liabilities ...................................... 233,363 226,201
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 shares authorized;
6,422,096 shares issued and outstanding at March 31, 1998
and December 31, 1997 ................................... 5 5
Additional paid-in capital ................................. 36,211 36,211
Accumulated deficit ........................................ (75,069) (70,250)
--------- ---------
Net stockholders' equity ............................... (38,853) (34,034)
--------- ---------
$ 194,510 $ 192,167
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
3
<PAGE>
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Total revenues ............................................................ $ 54,677 $ 55,735
Expenses:
Wages and related ..................................................... 27,976 29,578
Other operating ....................................................... 19,483 20,939
Rent .................................................................. 3,964 4,253
Interest (excludes contractual interest not accrued on prepetition debt
of $75 in the three months ended March 31, 1998) ................... 5,800 4,658
Depreciation and amortization ......................................... 2,273 2,369
--------- ---------
Total expenses ..................................................... 59,496 61,797
--------- ---------
Loss before income taxes .................................................. (4,819) (6,062)
Income tax benefit ........................................................ -- (1,980)
--------- ---------
Net loss .................................................................. $ (4,819) $ (4,082)
========= =========
Net loss per share ........................................................ $ (0.75) $ (0.66)
Common shares used in per share calculation ............................... 6,422 6,214
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
4
<PAGE>
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by operating activities (including
changes in all operating assets and liabilities) ....... $ 2,049 $ 71
--------- ---------
Investing activities:
Purchase of equipment and leasehold improvements ....... (492) (950)
Increase in intangible assets .......................... -- (151)
Increase in lease deposits and other assets ............ (582) (482)
Acquisitions, net of cash acquired ..................... -- (592)
--------- ---------
Net cash used in investing activities ............. (1,074) (2,175)
--------- ---------
Financing activities:
Net increase (decrease) in borrowings under revolving
lines of credit ..................................... (93) 6,019
Debt payments .......................................... (1,219) (13,048)
Checks drawn in excess of bank balances ................ 1,515 (494)
Debt issue costs ....................................... (56) --
Other items ............................................ -- (411)
--------- ---------
Net cash provided by (used in) financing activities 147 (7,934)
--------- ---------
Net increase (decrease) in cash ............................ 1,122 (10,038)
Cash and cash equivalents at beginning of period ........... 5,295 17,409
--------- ---------
Cash and cash equivalents at end of period ................. $ 6,417 $ 7,371
========= =========
Supplemental disclosures:
Cash paid for:
Interest ............................................... $ 1,031 $ 2,208
Income taxes ........................................... -- 40
Acquisition of leased facilities:
Increase in assets ..................................... -- 900
Liabilities assumed and incurred ....................... -- 308
Conversion of debentures into shares of common stock ....... -- 800
Equipment purchased under capital leases ................... -- 576
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
5
<PAGE>
UNISON HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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. Unison presumes that users of the interim financial
information herein have read or have access to the Company's audited financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the preceding fiscal year and that the adequacy of
additional disclosures needed for a fair presentation, except in regard to
material contingencies, may be determined in that context. Accordingly, footnote
and other disclosures which would substantially duplicate the disclosures
contained in Unison's most recent annual report to stockholders have been
omitted.
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. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results which may be expected for the year ended December 31, 1998.
Certain reclassifications have been made to the 1997 financial statements
to conform to the current year presentation.
The provision for doubtful accounts receivable is included in other
operating expenses. Provisions totaled $264,000 and $249,000 for the three
months ended March 31, 1998 and 1997, respectively. The allowance for doubtful
accounts totaled $7.2 million at March 31, 1998 and $7.4 million at December 31,
1997.
2. PLAN OF REORGANIZATION
BANKRUPTCY PROCEEDINGS. On January 7, 1998, three of Unison's subsidiaries,
BritWill Investments-I, Inc., BritWill Investments-II, Inc. and BritWill Indiana
Partnership (the "BritWill Debtors"), with operations in Texas and Indiana,
filed for protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the District of
Arizona (the "Bankruptcy Court"). The Chapter 11 filings were necessitated by
actions taken by Omega Healthcare Investors, Inc. ("Omega") to terminate or
otherwise enforce the terms of its lease agreements with the Company. Unison,
through its subsidiaries, leases 14 long-term care facilities from Omega under
three master lease agreements. In addition, Unison leases six facilities from
BritWill Investments Texas, Ltd. ("BritWill Texas"), which are subject to a
mortgage in favor of Omega (the "BritWill Texas Leases"). The BritWill Texas
Leases contain cross-default provisions with the Omega leases. Unison is
currently in payment and covenant default of the Omega leases and the BritWill
Texas Leases. BritWill Texas is an affiliate of Bruce H. Whitehead, a major
stockholder and creditor of Unison and, until May 29, 1998, Chairman of Unison's
board of directors.
On May 28, 1998, Unison and 29 of its subsidiaries filed for reorganization
under Chapter 11 of the Bankruptcy Code. Unison had previously initiated
negotiations to reach a consensual restructuring of its debt and lease
obligations with Omega, representatives of certain of the holders of its $100.0
million 12 1/4% Senior Notes due 2006 (the "12 1/4% Senior Notes") and $20.0
million 13% Senior Notes due 1999 (the "13% Senior Notes") (the "Ad Hoc
Committee"), and certain entities related to Mr. Whitehead (the "Whitehead
Affiliates") and David A. Kremser (the "Kremser Affiliates"). Mr. Kremser is a
6
<PAGE>
major stockholder and creditor of Unison and, until May 29, 1998, was a director
of Unison.
On June 15, 1998, Unison concluded an agreement in principle with respect
to a consensual restructuring with some, but not all, of its creditor
constituencies. The agreement in principle formed the basis of the plan of
reorganization filed with the Bankruptcy Court on August 10, 1998. On October
16, 1998, an amended plan of reorganization (the "Plan") was filed. In November
1998, the Company received the requisite number of Plan acceptances from its
creditors and is awaiting confirmation of the Plan by the Bankruptcy court. The
significant elements of the Plan are described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the Disclosure
Statement and the Plan, which were attached to the Company's 1997 Annual Report
on Form 10-K as Exhibit 2.1.
LIABILITIES SUBJECT TO COMPROMISE. During the Chapter 11 process, Unison
and its subsidiaries (the "Debtors") are operating their businesses and managing
their properties as debtors-in-possession under authority of the Bankruptcy
Code. Under Chapter 11, certain claims against the Debtors in existence prior to
the filing of the petitions for reorganization under the federal bankruptcy laws
are stayed while the Debtors are in bankruptcy. These claims are set forth in
the March 31, 1998 balance sheet as "liabilities subject to compromise".
Additional claims may arise subsequent to the filing date resulting from
rejection of executory contracts, including leases, and from the determination
by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims
for contingencies and other disputed amounts. Claims secured against the
Company's assets also are stayed, although the holders of such claims have the
right to move the Bankruptcy Court for relief from the stay. Secured claims are
secured primarily by liens on the Debtors' property and equipment. In accordance
with the American Institute of Certified Public Accountants Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"), interest on unsecured, prepetition obligations of
the Debtors ceased to accrue on the filing date.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including payables to vendors
deemed essential to the continued operation of Unison's business ("Essential
Vendor Claims") and employee wages and benefits.
Liabilities of the BritWill Debtors that are subject to compromise consist
of the following (in thousands):
Notes payable and long-term debt ........... $2,602
Trade payables.............................. 2,053
Other....................................... 3,190
------
$7,845
======
3. DISPOSITIONS
As part of the Company's restructuring plans, the Company has identified
long-term care facilities for disposition, which the Company believes will
facilitate the restructuring. As part of these plans, the Company terminated the
leases of 2 long-term care facilities during the first three months of 1998 and
an additional ten facilities in subsequent months (the "Dispositions"). As of
November 30, 1998, seven facilities representing 642 beds remain held for
disposition (the "Disposition Facilities ). Of the seven Disposition Facilities,
six are leased from Omega and, as part of the Plan, Omega will release the
Company from its obligations related to these facilities. Unison also plans to
sell Sunbelt Therapy Management Services, Inc. and its subsidiaries ("Sunbelt").
Sunbelt provides rehabilitation therapy services to Unison facilities and to
third parties. There can be no assurance that the Company's disposition plan as
implemented will prove to be successful or that these dispositions have occurred
or will occur on terms favorable to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
7
<PAGE>
4. CONTINGENCIES
Unison is a defendant in seven consolidated purported securities class
action lawsuits pending in the United States District Court in Phoenix, Arizona
(the "Federal Action"), and a purported securities class action lawsuit pending
in California Superior Court (the "State Action") (collectively, the "Actions").
The Actions arise from the Company's announcement on March 11, 1997 that it
would be restating its financial results for the nine-month period ended
September 30, 1996. The Federal Action seeks damages for alleged violations of
federal and Arizona securities laws; the State Action seeks damages for alleged
violations of the California securities laws. The broadest class period is that
alleged in the Federal Action from December 18, 1995 (the date of the Company's
initial public offering) to May 30, 1997.
The parties in the Federal Action have reached a settlement in principle
that is expected to resolve both the Federal and State Actions in their
entirety, assuming appropriate court approval and acceptance by members of the
class. The settlement in principle calls for a cash payment by the Company's
primary insurer and newly issued shares of Unison common stock or the
post-bankruptcy equivalent value of such shares (i.e., under the Plan, existing
equity holders will have their interests converted into warrants; under the
proposed settlement, class members who receive Unison shares will receive the
same prorated treatment). The parties have executed a Stipulation of Settlement
that must be presented to the Bankruptcy Court and the District Court for
approval. If the warrants do not meet certain Bankruptcy Court or Securities and
Exchange Commission ("SEC") criteria, then all equity interest claims will be
cancelled and terminated.
The Company also is a party to several other lawsuits. See "Legal
Proceedings".
8
<PAGE>
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, are 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, among others: delays in or inability
to conclude transactions, including the contemplated restructuring; adverse
actions which may be taken by creditors; the outcome of various bankruptcy
proceedings; general economic and business conditions; competition; loss of
customers; changes in applicable laws and regulations; availability, terms and
deployment of capital in light of recent losses and cash flow shortfalls;
cancellation of leases or contracts; demand fluctuations; adverse uninsured
determinations in any existing or future litigation or regulatory proceedings;
health care statutory or regulatory changes which disfavor the types of care
delivered by the Company; reversal of the current limitations in the supply of
long-term care facilities; and Year 2000 issues. 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, 1997 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.
PLAN OF REORGANIZATION
As described in the Company's 1997 Annual Report on Form 10-K, the
operating results and financial condition of the Company have been negatively
impacted by a number of factors, including cash flow difficulties, increased
costs due to recent acquisitions, and rising litigation costs. 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. Consequently, the Company currently is in breach and in default of
the material terms of operating leases and debt instruments. It is expected that
the Company will be unable to remedy the existing breaches and defaults. 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 leases may be terminated and certain lenders currently have the
right to foreclose on Company assets securing their indebtedness, which would
include substantially all of the Company's operating assets. However, the
exercise of these rights has been stayed as a result of the Company's bankruptcy
filing. The Company is attempting to implement a plan of reorganization in an
attempt to deal with these issues. See Note 2 of Notes to Consolidated Financial
Statements.
In June 1998, Unison reached an agreement in principle (the "Term Sheet")
with respect to a restructuring of the Company's debt and equity with Omega and
the Ad Hoc Committee. The Company also obtained a continuation of its accounts
receivable-backed line of credit with HealthCare Financial Partners ("HCFP") in
the amount of $11.0 million (the "HCFP DIP Loan") that is available to Unison
for working capital needs during the Chapter 11 process. Unison did not at that
time reach an agreement with Messrs. Kremser and Whitehead, shareholders and
former directors to whom the Company has various debt obligations. The Term
Sheet formed the basis for the Company's Plan of Reorganization, which was filed
with the Bankruptcy Court on August 10, 1998. The Term Sheet expired on
September 30, 1998. On October 16, 1998, Unison filed an amended Plan of
Reorganization (the "Plan") with the Bankruptcy Court, which includes an
agreement with Messrs. Kremser and Whitehead. The significant provisions of the
Plan (as modified on November 17, 1998) are as follows. As used herein,
9
<PAGE>
"Reorganized Unison" means the Company, as reorganized and reconstituted,
pursuant to the Plan on the effective date of the Plan (the "Effective Date").
* Omega has agreed to purchase seven facilities owned and operated by
Unison for a purchase price of $38.2 million. Proceeds from the sale
will be used to: (i) repay the mortgage note related to six of these
facilities amounting to approximately $19 million (the "Mortgage
Note"); (ii) pay off the balance of the HCFP DIP Loan; (iii) exercise
the Company's option to purchase The Arbors Health Care Center in
Arizona for approximately $3.2 million; and (iv) settle certain
bankruptcy claims as provided for in the Plan and described below. The
facilities will then be leased back to Unison (the "Signature Sale
Leaseback"). Omega will receive closing costs, financing fees and
reimbursement of expenses in the amount of $1.0 million. These
facilities and ten other facilities currently leased from Omega and
BritWill Texas will be combined into a single master lease (the
"Master Lease"). Six leased facilities will be returned to Omega and
three facilities that Unison disposed of in March 1997 via a sublease
agreement will be excluded from the Master Lease. In consideration
thereof, Omega will receive $2.0 million in cash, a seven-year, $3.0
million promissory note bearing interest at 7.0% and a guarantee to be
executed by Unison and BritWill Investments-II, Inc. to supersede and
replace all existing guarantees of BritWill Texas obligations. Unison
will pay, in cash, all prepetition rent payments due to Omega in the
amount of approximately $1.5 million.
* In settlement of approximately $15.0 million of obligations, the
Whitehead Affiliates will receive $541,000 in cash, an unsecured
promissory note amounting to approximately $1.5 million and
approximately 9.1% of the newly issued shares of common stock in
Reorganized Unison (the "New Common Stock"). The promissory note will
bear interest at 9.0%, payable quarterly, and the principal amount
will be due and payable at the end of four years. This treatment was
contingent upon the Whitehead Affiliates voting to accept the Plan,
which they did.
* In settlement of approximately $5.6 million of obligations, the
Kremser Affiliates will receive $541,000 in cash and a promissory note
amounting to approximately $1.4 million. The promissory note will bear
interest at 9.0%, payable quarterly, and the principal amount will be
due and payable at the end of five years. This treatment was
contingent upon the Kremser Affiliates voting to accept the Plan,
which they did.
* Convenience Claims, defined in the Plan as payables due to general
unsecured creditors amounting to $1,000 or less (or $2,000 or less
whose holders elect to reduce their claims to $1,000), will be paid in
cash. The Company estimates that the aggregate amount of Convenience
Claims is approximately $692,000 and the Company will pay up to
$600,000 to satisfy these claims. Essential Vendor Claims, defined in
the Plan as payable to vendors deemed essential to the continued
operation of Unison's business, will be paid in cash the lesser amount
of the allowed claim or a pro rata portion of $4.4 million. The
Company estimates that there will be approximately $1.0 million of
Essential Vendor Claims on the effective date of the Plan (the
"Effective Date"). Trade Unsecured Claims, defined in the Plan as
payables to other trade vendors (with certain exclusions), will
receive (a) in cash the lesser of (i) 35% of the allowed amount of the
claim and (ii) a pro rata portion of $1.4 million, plus (b)
approximately 0.11% of the shares of New Common Stock. The Company
estimates that Trade Unsecured Claims will amount to approximately
$3.4 million. All other general unsecured creditors, including the
holders of the 12 1/4% Senior Notes and the 13% Senior Notes, will
share PRO RATA in (i) approximately 90.8% of the shares of New Common
Stock; and (ii) a new senior debt security (the "New Senior Note") in
the amount of approximately $25.2 million. The New Senior Note will
bear interest at 11.0% and will mature four years from the Effective
Date. As a result of a subordination agreement related to the 13%
Senior Notes, the distribution of New Senior Notes and New Common
Stock will be reallocated as amongst the holders of the 13% Senior
Notes and those holders of the 12 1/4% Senior Notes who had consented
10
<PAGE>
to the subordination agreement (the "Consenting Noteholders"). As a
result of this reallocation: (a) the holders of the 13% Senior Notes
will receive New Senior Notes equal to 100% of their allowed claims
($22.1 million); (b) the Consenting Noteholders will receive only New
Common Stock; and (c) distributions to all other holders of general
unsecured claims will be unaffected by this reallocation. The Company
estimates that the aggregate amount of general unsecured claims, other
than Convenience Claims, Essential Vendor Claims. Trade Unsecured
Claims and claims of the Whitehead Affiliates, is approximately $137.5
million.
* Secured claims, which include the Mortgage Note, the HCFP DIP Loan,
claims of Omega, property tax liabilities and other secured loans,
will receive one of the following treatments: (i) the claim may be
paid in cash on the Effective Date; (ii) liabilities not in default
may continue in accordance with their original terms; (iii)
liabilities in default may continue in accordance with their original
terms upon the reinstatement or cure of the default (as defined); and
(iv) the collateral securing such liability may be returned to the
creditor in full satisfaction of the claim. The Company estimates that
the aggregate amount of secured claims is approximately $26.5 million.
* Subject to certain conditions, Unison's stockholders will share pro
rata in the issuance of warrants to purchase approximately 378,000
shares of New Common Stock which, if exercised, will represent
approximately 5% of the equity of Reorganized Unison on a fully
diluted basis. Within three months of the Effective Date, the board of
Reorganized Unison will grant to the Company's five senior executives
options to purchase New Common Stock or otherwise issue to these
individuals, in the aggregate, up to 5% of the New Common Stock on
fully diluted basis.
* Prior to the Effective Date, Unison must obtain a new line of credit
that is ready to fund. Unison has negotiated the terms of a $12.0
million new line of credit with HCFP.
For the Plan to be confirmed by the Bankruptcy Court, it must meet a number
of tests including, among other things: (i) that the Plan has been accepted by
the requisite number of votes of creditors; (ii) that the Plan is feasible and
confirmation of the Plan is not likely to be followed by the liquidation or the
need for further reorganization of the Company; and (iii) that the Plan provides
all creditors and stockholders with distributions in an amount not less than
such parties would receive if Unison were liquidated under Chapter 7 of the
Bankruptcy Code. The Company believes that the Plan meets these tests. In
November 1998, the Company received the requisite number of Plan acceptances
from its creditors and is awaiting confirmation of the Plan by the Bankruptcy
Court.
11
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes selected operating statistics.
At March 31,
--------------
1998 1997
---- ----
Leased and Owned Facilities:
Number of facilities ................................ 52 54
Number of licensed beds:
Long-term care .................................... 4,595 4,780
Assisted and independent living ................... 325 325
Managed Facilities:
Number of facilities ................................ 1 2
Number of licensed beds ............................. 71 160
Institutional Pharmacies:
Number of outlets ................................... 2 2
Nonaffiliated facilities served ..................... 61 53
Laboratory Services:
Number of laboratories .............................. 3 3
Nonaffiliated entities served ....................... 260 275
Therapy Services:
Nonaffiliated entities served ....................... 117 59
The following table identifies the Company's sources of net operating
revenues.
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Percentage of total revenues:
Long term care .................................... 74.9% 76.8%
Therapy services .................................. 15.3 14.5
Pharmacy services ................................. 6.5 4.9
Laboratory services ............................... 2.7 3.0
Medicare Part B billing and
supply .......................................... 0.6 0.8
----- -----
Total ......................................... 100.0% 100.0%
===== =====
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.
12
<PAGE>
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).
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Medicare................................................ 31.7% 31.9%
Private and other....................................... 16.5 16.3
----- -----
Quality mix............................................. 48.2 48.2
Medicaid................................................ 51.8 51.8
----- -----
Total.............................................. 100.0% 100.0%
===== =====
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
In the first quarter of 1998, Unison recorded a net loss of $4.8 million,
or $0.75 per share, compared to a net loss of $4.1 million, or $0.66 per share,
in the prior year quarter. Loss before income taxes amounted to $4.8 million in
the 1998 first quarter compared to $6.1 million in the same period in 1997.
Total revenues decreased $1.1 million, or 19.0%, to $54.7 million in the
1998 first quarter from $55.7 million in the comparable 1997 quarter. The
decrease is due to a decrease in management fees from $1.7 million in the 1997
first quarter to $185,000 in the current quarter, net of an increase in net
patient service revenues. Net patient service revenues increased from $53.7
million in the 1997 first quarter to $54.1 million in the current period. This
increase is due to the growth in the ancillary companies, which recorded
aggregate net patient revenues of $13.4 million in the 1998 first quarter
compared to $11.3 million in the 1997 period. The Company's long-term care
facilities recorded net patient service revenues of $40.8 million in the 1998
first quarter compared to $42.4 million in the 1997 period. This decrease is due
primarily to the Dispositions. Patient days decreased from 388,407 in the 1997
period to 361,992 in the current period. Average occupancy decreased from 80.8%
in the 1997 first quarter to 79.8% in the current period. The decrease in
occupancy is due primarily to the negative perception of Unison as a result of
the bankruptcy filings. Management believes that Unison's average occupancy will
improve as it implements the Plan. Quality mix is 48.2% in both the 1997 and
1998 periods.
Wages and related expenses decreased $1.6 million, or 5.4%, from $29.6
million in the 1997 first quarter to $28.0 million in the current quarter. The
decrease is due primarily to: (i) a decrease in corporate and regional office
expense of approximately $1.0 million; (ii) the disposition of three facilities
on March 1, 1997 and two facilities on February 28, 1998, which accounts for
approximately $991,000 of the decrease; and (iii) cost controls in the Company's
long-term care facilities, net of an increase of approximately $1.6 million
related to the ancillary companies. Wages and related expenses as a percentage
of revenues amounted to 51.2% in 1998 and 53.1% in 1997.
Other operating expenses decreased $1.5 million, or 7.0%, from $20.9
million in the 1997 first quarter to $19.5 million in the 1998 first quarter. Of
this decrease, approximately $500,000 is due to the disposition of facilities
and approximately $1.0 million is the result of reductions in corporate and
regional office expenses. Other operating expenses as a percentage of revenues
amounted to 35.6% in the 1998 first quarter and 37.6% in the 1997 period.
Rent expense decreased from $4.3 million in the 1997 first quarter to $4.0
million in the 1998 period. The decrease is due primarily to the disposition of
facilities. Rent expense as a percentage of revenues was 7.6% in the 1997 first
quarter and 7.3% in the current quarter.
Interest expense amounted to $5.8 million in the 1998 first quarter
compared to $4.7 million in the 1997 first quarter. The increase is due to debt
13
<PAGE>
incurred throughout 1997, including the 13% Senior Notes and borrowings for
working capital. Interest expense as a percentage of revenues was 10.6% in the
1998 first quarter compared to 8.4% in the prior year period.
Depreciation and amortization expense decreased from $2.4 million in the
1997 first quarter to $2.3 million in the 1998 first quarter. The decrease is
due to the disposition of facilities, net of depreciation on 1998 capital
expenditures. Depreciation and amortization as a percentage of revenues amounted
to 4.2% in the 1998 first quarter compared to 4.3% in the prior year period.
Unison did not record an income tax benefit related to the 1998 first
quarter loss. The Company anticipates that, as a result of the restructuring of
its debt obligations, its net operating losses will be eliminated. Therefore,
the Company has established a valuation allowance against its net operating loss
carryforward benefits. For the 1997 first quarter, Unison recorded an income tax
benefit of $2.0 million. The effective rate of 32.7% is lower than the statutory
federal income tax rate due primarily to (i) amortization of intangible assets
and other expenses that are not deductible for tax; (ii) taxable income of
certain subsidiaries that are not consolidated for tax purposes; and (iii) the
valuation allowance established against deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), was issued in June 1997. This statement
establishes standards for reporting and displaying comprehensive income and its
components in financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), was also
issued in June 1997. This statement requires that public business enterprises
report certain information about operating segments and related disclosures
about products and services, geographic areas and major customers.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132"),
was issued in February 1998. This statement standardizes disclosure requirements
for pension and other post retirement benefits, requires additional information
on changes in benefit obligations and fair values of plan assets, and eliminates
certain existing disclosure requirements.
SFAS Nos. 130, 131 and 132 will be effective for Unison's fiscal year
ending December 31, 1998. The adoption of these statements is not expected to
have an impact on the Company's consolidated results of operations, financial
position or cash flows and should not require any significant changes in current
disclosures.
LIQUIDITY AND CASH FLOWS
LIQUIDITY
At March 31, 1998, Unison had cash and equivalents amounting to $6.4
million compared to $5.3 million at December 31, 1997.
Unison traditionally has financed its working capital needs out of its
operating cash flows and under an accounts receivable-backed revolving credit
facility. As approved by the Bankruptcy Court, this credit facility was replaced
in 1998 with the $11.0 million HCFP DIP Loan, which bears interest at the prime
rate plus 4.0% (11% at November 30, 1998). As of March 31, 1998, borrowings
14
<PAGE>
under the HCFP DIP Loan amounted to $7.0 million, which was the maximum amount
available based on the level of collateral on that date.
Unison's cash flows from operations and draws under its existing line of
credit will not be sufficient to meet its short-term and long-term debt service
and capital requirements, absent a substantial restructuring of its debt and
lease obligations. Unison did not make the scheduled payments of interest in
1998 on the 12 1/4% Senior Notes and the 13% Senior Notes, as well as payments
on many other debt obligations. See Part II, Item 3, "Defaults Upon Senior
Securities". If the Company is successful in implementing the Plan, Unison's
leverage will be substantially reduced and management believes that the Company
will have sufficient cash flow to meet its near future debt service obligations
and working capital requirements. If the Plan is not confirmed, the alternatives
include the liquidation of Unison under Chapter 7 of the Bankruptcy Code or the
confirmation of an alternative Chapter 11 plan of reorganization. The Company
believes that the Plan will result in a more timely and greater ultimate
recovery to its creditors and stockholders than would be the case under Chapter
7. Based on a liquidation analysis provided to the Bankruptcy Court and
creditors, the Company believes that in a Chapter 7 proceeding, its general
unsecured creditors would receive, at best, a minimal distribution. Unison could
attempt to formulate a different plan of reorganization. The Company believes,
however, that significant additional costs, risks and delays would be incurred
in connection with an alternative plan. While there can be no assurance that the
current Plan will be confirmed, the Company believes that it is unlikely that
any alternative plan could be developed which would provide greater value or
certainty of closure.
If the Plan is confirmed, there remain risks that are inherent in any plan
of reorganization. Some events will develop in ways that were not foreseen and
many or all of the assumptions used in the Plan will not be realized exactly as
assumed. Some or all of the variations may be material. Delays in achieving
confirmation and effectiveness of the Plan could adversely impact Unison's
results of operations due to, among other things, continuing declines in census,
difficulty in hiring skilled employees, decreased confidence of vendors or
regulators, and continued fees and expenses related to the bankruptcy and
reorganization. There can be no assurance that Reorganized Unison will be able
to continue to generate sufficient funds to meet its obligations and necessary
capital expenditures. Although the Company projects that Reorganized Unison will
generate sufficient funds to meet its working capital needs for the foreseeable
future, its ability to gain access to additional capital, if needed, cannot be
assured, particularly in view of possible competitive factors and industry
conditions.
CASH FLOWS
Cash provided by operations amounted to $2.1 million for the three months
ended March 31, 1998, in spite of the Company's operating losses. This is due
primarily to an increase in accounts payable and accrued expenses, including
those subject to compromise, in excess of an increase in accounts receivable and
other current assets.
Net accounts receivable increased $2.0 million, or 6.1%, from $32.9 million
at December 31, 1997 to $34.9 million at March 31, 1998. The allowance for
doubtful accounts amounted to approximately $7.4 million and $7.2 million at
December 31, 1997 and March 31, 1998, respectively. 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, third-party and governmental payors. While the Company believes that
the allowance for doubtful accounts is adequate at March 31, 1998, an increase
in days outstanding in accounts receivable will result in an increase in the
provision for doubtful accounts in future periods.
15
<PAGE>
Net cash used in investing activities amounted to $1.1 million in the three
months ended March 31, 1998. Routine capital expenditures amounted to $492,000
and cash used for lease deposits and other assets amounted to $582,000.
Net cash provided by financing activities amounted to $147,000 in the three
months ended March 31, 1998 as the result of an increase in the amount of checks
drawn in excess of bank balances, net of debt payments. At March 31, 1998,
Unison had $171.5 million in total debt, including amounts subject to compromise
(129.3% of total capitalization), compared to $172.8 million at December 31,
1997 (124.5% of total capitalization).
CONTINGENCIES
Unison and certain of its current and former directors and officers are
named as defendants in several 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. The automatic stay provision of the Bankruptcy Code prohibits the
continuation of the class actions against Unison. In October 1998, Unison and
the plaintiffs in the Federal Action and the State Action entered into a
Settlement Agreement. The Settlement Agreement is subject to the approval of the
Bankruptcy Court and the District Court. See Part II, Item 1, "Legal
Proceedings."
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer system
that has time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Some of Unison's information systems have time-sensitive software that will
not properly recognize the year 2000. Based on an on-going assessment, the
Company has determined that it will be required to modify or replace significant
portions of its hardware and software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company has
formed a task force to guide its year 2000 readiness efforts to ensure that its
computer software, hardware and embedded systems are capable of accurately
processing, providing, and receiving date data from the 20th into the 21st
century. Unison believes that with modifications to existing hardware and
software and conversions to new hardware and software, the Company will be year
2000 ready by the end of 1999 and the year 2000 issue will not pose significant
operational problems for its computer systems.
Unison is in the process of completing a detailed inventory and analysis of
computer hardware, software and operating systems. The Company will utilize both
internal and external resources to reprogram, or replace, and test the hardware
and software for year 2000 readiness. The scope of the year 2000 project also
encompasses consideration of potential impacts on the Company's business
operations. The Company is reviewing internal business operations and
relationships with external business partners to assess the current level of
compliance. The next step is to perform testing and develop contingency plans
with the goal of achieving year 2000 readiness by June 1999.
Unison has initiated formal communications with significant suppliers and
payors to determine the extent to which the Company's systems and operations are
vulnerable to those third parties' failure to remediate their own year 2000
issues. Examples of such issues include, but are not limited to, electronic
interfaces with external agents such as payors, suppliers and banks, in addition
to patient service equipment that has microprocessors with date functionality.
The ability of third parties with which Unison transacts business to adequately
16
<PAGE>
address their year 2000 issues is outside the Company's control. Although Unison
will seek to replace any of its current vendors who are unable to become year
2000 ready in a timely manner, there can be no assurance that the Company's
operations will not be adversely affected by the ability of third parties,
including the federal and state governments on which Unison's operations rely,
to also manage the year 2000 issue.
The Company will continue to assess each of its systems and their year 2000
readiness. At this time, the Company believes that appropriate actions are being
taken and expects to complete its overall year 2000 remediation prior to any
anticipated impact on its operations. However, there can be no assurance that
these assumptions will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, third party modification plans and similar uncertainties.
PART II. OTHER INFORMATION
ITEM 1. 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.
On May 28, 1998, Unison, together with 29 of its subsidiaries, filed
petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy
Court for the District of Arizona. On January 7, 1998, the BritWill Debtors
filed voluntary petitions for relief under Chapter 11 with the Bankruptcy Court
in the District of Arizona. All 33 cases were procedurally consolidated for
administrative purposes and have been jointly administered under Case No.
98-06583-PHX-GBN. On August 10, 1998, Debtors filed with the Bankruptcy Court
"Debtors' Joint Plan of Reorganization Dated August 10, 1998" and the
"Supplement to Debtors' Joint Plan of Reorganization Dated August 10, 1998".
Unison subsequently filed "Debtors' First Amended Joint Plan of Reorganization
Dated October 15, 1998". The Plan provides for the restructuring and
reconstitution of Unison and all of its subsidiaries. Unison also filed with the
Bankruptcy Court its "Disclosure Statement in Support of Debtors' Joint Plan of
Reorganization Dated August 10, 1998" and "Disclosure Statement In Support of
Debtors' First Amended Joint Plan of Reorganization Dated October 15, 1998" (the
"Disclosure Statement"). On October 21, 1998, the Bankruptcy Court approved the
Disclosure Statement and the Plan. In November 1998, the Company received the
requisite number of Plan acceptances from its creditors and is awaiting
confirmation of the Plan by the Bankruptcy Court. During the Chapter 11 process,
Debtors have operated their business and managed their properties as
debtors-in-possession under the authority of the Bankruptcy Code. No motions
seeking the appointment of a trustee have been filed.
On July 31, 1998, Unison and certain of its subsidiaries filed with the
Bankruptcy Court for the District of Arizona a "Complaint to Set Aside
Preferential Transfers". The defendants in this action are David A. Kremser and
Bruce H. Whitehead and certain of their affiliated entities. This action relates
to working capital loans advanced to Unison in 1997 by the Kremser Affiliates
and Whitehead Affiliates (the "1997 Loans") and the granting of security
interests in accounts receivable and stock of certain Unison subsidiaries to
secure the 1997 Loans and other obligations arising in connection with the
Signature Acquisition and the BritWill Acquisition. This action will be
withdrawn if the Plan is confirmed.
17
<PAGE>
Unison is a defendant in seven consolidated purported securities class
action lawsuits pending in the United States District Court in Phoenix, Arizona
(the "Federal Action"), and a purported securities class action lawsuit pending
in California Superior Court (the "State Action")(collectively, the "Actions").
The Actions arise from the Company's announcement on March 11, 1996 that it
would be restating its financial results for the nine-month period ended
September 30, 1996. A consolidated amended class action complaint in the Federal
Action was filed on January 6, 1998 under the caption MARTIN GROSSMAN, ET AL. V.
UNISON HEALTHCARE CORPORATION, ET AL., USDC No. CIV 97-0583 PHX SMM. The State
Action is captioned JEFFREY D. VANDYKE V. CRUTTENDEN ROTH, INC., WHEAT FIRST
BUTCHER SINGER, INDIVIDUALLY AND AS REPRESENTATIVES OF A DEFENDANT UNDERWRITER
CLASS, AND 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, Case No. 779111 (Orange County Sup. Ct.) (filed May
13, 1997). The Federal Action seeks damages for alleged violations of federal
and Arizona securities laws; the State Action seeks damages for alleged
violations of the California securities laws. The broadest class period is that
alleged in the Federal Action from December 18, 1995 (the date of the Company's
initial public offering) to May 30, 1997.
The parties in the Federal Action have reached a settlement in principle
that is expected to resolve both the Federal and State Actions in their
entirety, assuming appropriate court approval and acceptance by members of the
class. The settlement in principle calls for a cash payment by the Company's
primary insurer and newly issued shares of Unison common stock or the
post-bankruptcy equivalent value of such shares (i.e., under the Plan, existing
equity holders will have their interests converted into warrants; under the
proposed settlement, class members who receive Unison shares will receive the
same prorated treatment). The parties have executed a Stipulation of Settlement
that must be presented to the Bankruptcy Court and the District Court for
approval. If the warrants do not meet certain Bankruptcy Court or SEC criteria,
then all equity interest claims will be cancelled and terminated.
The Company and certain of its current and former officers and/or directors
were named as defendants in an action styled JOHN D. FILKOSKI, ET AL. V. UNISON
HEALTHCARE CORPORATION, ET AL., filed in Colorado Superior Court on May 27, 1998
(the "Colorado Action"). The Colorado Action alleges causes of action under
Colorado common and statutory law in connection with the Signature Acquisition.
The plaintiffs are four former shareholders of Signature whose Signature shares
were acquired in exchange for cash, notes and Unison common stock on October 31,
1996.
On June 18, 1998, plaintiffs in the Colorado Action filed an Amended
Complaint, naming the Company, current and former officers and/or directors, and
Ernst & Young, LLP (the Company's auditor) as defendants. Essentially,
plaintiffs allege that the Company's financial statements for the second and
third quarters of 1996 contained false and misleading statements that
fraudulently induced plaintiffs into entering into a merger agreement with the
Company. Plaintiffs further allege that the Company failed to perform on certain
promissory notes made in connection with the Signature Acquisition. Plaintiffs
seek damages of approximately $3.2 million in purported actual damages as well
as punitive damages, interest and costs. Plaintiffs were advised that all
proceedings against the Company, including the Colorado Action, were stayed as a
result of the Chapter 11 filing. On June 24, 1998, plaintiffs voluntarily
dismissed the Company from the Colorado Action. Plaintiffs also purported to
dismiss the individual defendants, but purportedly only in their capacities as
current or former officers and/or directors of the Company, and not in their
capacities as individuals. The Company may be required to indemnify and/or
advance defense costs to the individual defendants, although it is possible that
these obligations may be discharged by the Bankruptcy Court.
On April 24, 1998, an action styled FRANCISCAN ELDERCARE CORPORATION, INC.
V. SUNQUEST SPC, INC., UNISON HEALTHCARE CORPORATION, INC. [SIC], JERRY WALKER,
PHILLIP ROLLINS AND PAUL CONTRIS was filed in the Circuit Court of the State of
Oregon (County of Multnomah) (Case No. 9801-00050). This action relates to four
nursing facilities that the Company previously leased from Franciscan Eldercare
18
<PAGE>
Corporation ("FEC"). These leases have been rejected by Unison in the Bankruptcy
Court. The action alleges breach of contract, conversion and breach of
promissory note against Unison and Sunquest SPC, Inc., a Unison subsidiary, and
breach of guaranty against Messrs. Walker, Rollins and Contris. FEC is seeking
damages from the Company in the amount of at least $1.2 million plus attorney's
fees, interest and costs. These proceedings are stayed as a result of the
Chapter 11 filing.
On May 4, 1998, an action styled HEALTHPRIME, INC., HP/HEALTHCARE
ACQUIRORS, INC., MARKLEYSBURG HEALTHCARE INVESTORS, L.P., MARSHALL MANOR
HEALTHCARE SERVICES, INC., AND LAKE CITY NURSING HOMES, INC. V. UNISON
HEALTHCARE CORPORATION AND SUNQUEST SPC., INC. was filed in the Superior Court
of Fulton County, Georgia (Case No. E.68081). The action alleges breach of
contract related to a nursing facility that the Company previously leased from
Markleysburg Healthcare Investors, Inc. and four nursing facilities that the
Company previously managed on behalf of the plaintiff. The facility lease has
been rejected by Unison in the Bankruptcy Court. Plaintiffs are seeking a
judgment holding that the Company is entitled to no additional management fees
relating to the managed facilities and other unspecified damages. Unison
believes that it is owed approximately $1.6 million in management fees from
plaintiffs. These proceedings are stayed as a result of the Chapter 11 filing.
On September 11, 1998, the Bankruptcy Court entered an order appointing an
examiner in the bankruptcy cases and limiting the scope of the examiner's duties
to an examination of the claims of related party creditors in these cases.
Subsequently, the United States Trustee appointed Keith J. Shapiro, an attorney
with the firm of Holleb & Coff in Chicago, as the examiner. As of the date of
this Report, no official report has been issued by the examiner.
During the course of the Debtors' Chapter 11 cases, with the assistance of
their court-approved professionals, Debtors continue to investigate causes of
action available to them under the Bankruptcy Code and applicable state law. The
Plan preserves all causes of action available to Debtors, including all
objections to Claims and all other causes of action arising under the Bankruptcy
Code, unless the Plan specifically provides otherwise. Specifically reserved and
preserved in the Plan are all claims, rights or causes of action arising out of
or related to: (1) the BritWill Acquisition; (2) the Signature Acquisition; (3)
such further related transactions to (1) and (2) above, including, but not
limited to, the 1997 Loans by Elk Meadows and BritWill Investments; (4) the
business operation of Debtors for the period July 1, 1992 to May 28, 1998,
including as related to the foregoing but not limited to, any claims for breach
of contract, fraud, misrepresentation, negligence, misappropriation of business
opportunities or trade secrets, corporate waste, fraudulent conveyance,
constructive trust, breach of fiduciary duty, self-dealing or any claims for
indemnity, or any claims arising from an employment relationship with any
Debtors; (5) the Related Party Avoidance Actions; (6) the Avoidance Actions; (7)
the Related Party Creditor Defenses; and (8) all other Litigation Claims
(collectively, the "Preserved Claims") (all as defined in the Plan). Each Debtor
specifically reserves the Preserved Claims as to: (a) each and every member of
Kremser and Affiliates and Whitehead and Affiliates; (b) any officer or director
of any Debtor for the period July 1, 1992 to May 28, 1998; or (c) any entity or
individual who is determined to be (i) the alter-ego of the foregoing; (ii) any
entity the aforementioned might successfully claim are necessary parties for
purposes of joinder under the Federal Rules of Civil Procedure; or (iii) any
entity in whose hands the proceeds and benefit of any impermissable conduct has
flowed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Unison is in default on its $100.0 million 12 1/4% Senior Notes due 2006.
The Company did not make semiannual interest payments due May 1, 1998 and
November 1, 1998 in the amounts of $6.9 million and $7.1 million, respectively.
19
<PAGE>
Unison is in default on its $20.0 million 13% Senior Notes due 1999. The
Company did not make quarterly interest payments due March 1, 1998, June 1,
1998, September 1, 1998 and December 1, 1998 in the aggregate amount of $2.8
million.
Unison is in default on loans obtained for working capital purposes, in the
aggregate principal amount of $3.95 million, from Elk Meadows and BritWill
Investments. Of these loans, $1.0 million was due on October 7, 1997 and $2.95
million was due on November 1, 1997. Interest payable on these loans through
November 30, 1998 amounts to approximately $714,000. The loan documents state
that all other obligations which may be due to these individuals and entities
which they control are in default due to cross default provisions in those loan
and security documents. These obligations are as follows.
A portion of the purchase consideration for Signature was comprised of
promissory notes (the "Escrow Notes") amounting to approximately $1.1 million.
Of these notes, $500,000 was due to be paid to Mr. Kremser and the other
Signature shareholders on October 31, 1997 and the balance was due on October
31, 1998. The Escrow Notes, plus accrued interest of approximately $191,000 at
November 30, 1998, have not been paid.
The Company is in arrears in the amount of approximately $1.6 million
(including interest) on the remaining purchase consideration (the "Additional
Payment Obligation") to the former shareholders of BritWill. The balance of the
Additional Payment Obligation at November 30, 1998 was $9.6 million.
The Company is obligated under subordinated notes payable to an affiliate
of Mr. Whitehead in the aggregate amount of approximately $2.4 million. The
Company is in arrears of principal and interest payments through November 30,
1998 in the aggregate amount of $423,000.
The terms of certain of Unison's indebtedness require the Company to meet
certain financial and reporting covenants including current ratio and cash flow
and maintenance of specified levels of net worth. As of the date of this report,
Unison was not in compliance with many of these covenants. The terms of the
Mortgage Note incurred in connection with the Signature Acquisition require
Unison to maintain, among other things, a consolidated net worth of at least
$39.0 million. As of November 30, 1998, Unison was not in compliance with this
covenant and did not receive a waiver from the lender. Unison is current on its
payments on the Mortgage Note and the lender has not indicated an intention to
declare a default. As of November 30, 1998, the balance of the Mortgage Note was
$18.3 million. In connection with the implementation of the Plan, Unison intends
to enter into the Signature Sale Leaseback transaction related to the properties
securing the Mortgage Note. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Plan of Reorganization".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2 Disclosure Statement in Support of Debtors' Joint Plan of
Reorganization Dated August 10, 1998 and Debtors' Joint Plan of
Reorganization Dated August 10 (incorporated by reference to
Exhibit 99.1 to Form 8-K filed on August 13, 1998)
2.1 Disclosure Statement in Support of Debtors' First Amended Joint
Plan of Reorganization Dated October 15, 1998 and Debtors' First
Amended Joint Plan of Reorganization Dated October 15, 1998
(incorporated by reference to Exhibit 2.1 to the Company's 1997
Annual Report on Form 10-K)
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule (included only in the EDGAR filing)
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(b) Reports filed on Form 8-K:
Unison filed the following reports on Form 8-K during the three months
ended March 31, 1998:
(1) Report dated January 7, 1998 including a news release announcing
that three of Unison's operating subsidiaries filed for
protection from creditors under Chapter 11.
(2) Report dated February 3, 1998 including a news release announcing
that the financial difficulties previously disclosed in Unison's
Form 10-Q for the quarter ended September 30, 1997 continue to
persist despite the placement of $20 million of its 13% Senior
Notes in December 1997.
Items 2, 4 and 5 are not applicable.
21
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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)
Date: December 30, 1998 /s/ Jimmy L. Fields
----------------- ------------------------------
Jimmy L. Fields
Executive Vice President and Chief
Financial Officer (Principal Financial Officer)
/s/ Warren K. Jerrems
------------------------------
Warren K. Jerrems
Vice President and Chief Accounting
Officer (Principal Accounting Officer)
22
EXHIBIT 11
UNISON HEALTHCARE CORPORATION
Statement Re: Computation of Per Share Earnings
(In thousands, except per share)
Three Months Ended
March 31,
---------------------
1998 1997
-------- --------
FOR BASIC EARNINGS PER SHARE (1)
Shares outstanding at beginning of period ............. 6,422 6,078
Shares issued to former Signature shareholders ........ -- 40
Conversion of debentures .............................. -- 96
-------- --------
Weighted average number of shares and share
equivalents outstanding ............................ 6,422 6,214
-------- --------
Net loss .............................................. $ (4,819) $ (4,082)
-------- --------
Net loss per share, basic ............................. $ (0.75) $ (0.66)
======== ========
ADDITIONAL DILUTED COMPUTATION (2)
Net loss .............................................. $ (4,819) $ (4,082)
Add interest on convertible debentures,
net of tax effect .................................. 34 --
-------- --------
Net loss as adjusted .................................. $ (4,785) $ (4,082)
-------- --------
Weighted average number of shares outstanding ......... 6,422 6,214
Shares issuable upon conversion of debentures ......... 636 --
-------- --------
Weighted average number of shares, as adjusted ........ 7,058 6,214
-------- --------
Net loss per share, diluted ........................... $ (0.68) $ (0.66)
======== ========
(1) Shares used in these tables are weighted based on the number of days the
shares were outstanding or assumed to be outstanding during each period.
(2) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although it is contrary to Statement of Financial Accounting
Standards No. 128 because it produces an anti-dilutive result.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNISON'S
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 3 MOS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,417
<SECURITIES> 0
<RECEIVABLES> 42,047
<ALLOWANCES> 7,176
<INVENTORY> 2,373
<CURRENT-ASSETS> 49,759
<PP&E> 33,108
<DEPRECIATION> 7,658
<TOTAL-ASSETS> 194,510
<CURRENT-LIABILITIES> 196,692
<BONDS> 171,485
0
0
<COMMON> 5
<OTHER-SE> (38,858)
<TOTAL-LIABILITY-AND-EQUITY> 194,510
<SALES> 0
<TOTAL-REVENUES> 54,677
<CGS> 0
<TOTAL-COSTS> 47,195
<OTHER-EXPENSES> 6,237
<LOSS-PROVISION> 264
<INTEREST-EXPENSE> 5,800
<INCOME-PRETAX> (4,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,819)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> 0
</TABLE>
