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 November 30, 1993.
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 1-10426
THE HILLHAVEN CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED NOVEMBER 30, 1993
Nevada 91-1459952
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1148 Broadway Plaza
Tacoma, WA 98402
(Address of principal executive offices)
(206) 572-4901
(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 $.75 per share,
outstanding on January 1, 1994: 21,020,699.
<PAGE>
<TABLE>
THE HILLHAVEN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of
November 30, 1993 and May 31, 1993 1
Consolidated Statements of Operations for
the Three Months and Six Months Ended
November 30, 1993 and 1992 3
Consolidated Statements of Cash Flows
for the Six Months Ended
November 30, 1993 and 1992 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 22
NOTE: Items 1, 3 and 5 of Part II are omitted because they
are not applicable.
</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED BALANCE SHEETS
November 30, 1993 and May 31, 1993
(In thousands)
<CAPTION>
November 30, May 31,
1993 1993
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,716 $ 73,159
Accounts and notes receivable, less
allowance for doubtful accounts of
$9,036 at November 30, 1993 and
$8,700 at May 31, 1993 132,093 131,383
Inventories 21,005 21,527
Prepaid expenses and other current assets 23,531 29,078
Total current assets 224,345 255,147
Long-term notes receivable, less allowance
for doubtful accounts of $11,626 at
November 30, 1993 and $11,386 at May 31, 1993 91,630 112,506
Property and equipment, net 791,900 766,998
Net assets held for disposition --- 29,122
Intangible assets, net of accumulated
amortization of $17,016 at November 30, 1993
and $16,128 at May 31, 1993 33,600 20,305
Other noncurrent assets 57,718 34,159
$ 1,199,193 $ 1,218,237
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED BALANCE SHEETS
November 30, 1993 and May 31, 1993
(In thousands, except share information)
<CAPTION>
November 30, May 31,
1993 1993
(unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 44,974 $ 18,835
Accounts payable 55,942 61,423
Employee compensation and benefits 47,439 54,370
Other accrued liabilities 47,773 42,649
Total current liabilities 196,128 177,277
Debt payable to NME, a related company 9,094 147,160
Other long-term debt 614,458 671,088
Other long-term liabilities 45,014 42,486
Stockholders' equity:
Series C Preferred Stock, $0.15 par value;
35,000 shares authorized, issued and
outstanding (liquidation preference
of $35,000) 5 5
Series D Preferred Stock, $0.15 par value;
300,000 shares authorized, 120,000 issued and
outstanding (liquidation preference
of $120,000) 18 ---
Common stock, $0.75 par value; 60,000,000
shares authorized; 21,020,060 and
20,978,862 issued and outstanding at
November 30, 1993 and May 31, 1993 15,765 15,734
Additional paid-in capital 327,551 208,157
Accumulated deficit (4,642) (37,538)
Unearned compensation (4,198) (6,132)
Net stockholders' equity 334,499 180,226
$ 1,199,193 $ 1,218,237
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended November 30, 1993 and 1992
(Unaudited)
(In thousands)
<CAPTION>
Three Months Six Months
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Net operating revenues $ 361,427 $ 342,681 $ 716,241 $ 674,673
Expenses:
Operating and
administrative 310,258 292,205 613,400 576,946
Depreciation and
amortization 13,466 13,360 27,031 26,496
Rent 13,091 13,372 25,943 25,755
Interest 12,175 14,177 26,420 28,144
Guarantee fees 1,620 2,408 4,071 4,825
Restructuring (21,904) 2,074 (20,225) 3,713
Total expenses 328,706 337,596 676,640 665,879
Operating income 32,721 5,085 39,601 8,794
Interest income 3,245 4,042 7,135 7,659
Income before income taxes,
extraordinary charge and
cumulative effect of
accounting change 35,966 9,127 46,736 16,453
Income tax (expense)
benefit (10,154) 1,990 (12,900) 3,467
Income before extraordinary
charge and cumulative
effect of accounting
change 25,812 11,117 33,836 19,920
Extraordinary charge -
early extinguishment
of debt net of income
tax benefit of $426 (940) --- (940) ---
Cumulative effect of
change in accounting
for income taxes --- --- --- (1,103)
Net income $ 24,872 $ 11,117 $ 32,896 $ 18,817
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended November 30, 1993 and 1992
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Six Months
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Primary income per common
share:
Income from operations $ .98 $ .46 $1.30 $ .84
Extraordinary charge (.04) --- (.04) ---
Cumulative effect of
accounting change --- --- --- (.05)
Net income $ .94 $ .46 $1.26 $ .79
Fully diluted income per
common share:
Income from operations $ .77 $ .41 $1.05 $ .74
Extraordinary charge (.03) --- (.03) ---
Cumulative effect of
accounting change --- --- --- (.04)
Net income $ .74 $ .41 $1.02 $ .70
Weighted average common
shares and equivalents
outstanding:
Primary 23,601 23,131 23,469 23,084
Fully diluted 32,253 28,621 32,243 27,928
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, 1993 and 1992
(Unaudited)
(In thousands)
<CAPTION>
1993 1992
<S> <C> <C>
Net cash provided by operating activities
(including changes in all operating
assets and liabilities) $ 34,755 $ 31,514
Cash flows from investing activities:
Purchases of property and equipment (17,928) (13,115)
Purchase of previously leased
nursing centers (1,575) (7,392)
Proceeds from sales of property
and equipment 490 16,789
Proceeds from collection of notes
receivable 15,908 15,961
(Investments in) distributions from
joint ventures and partnerships 1,543 (865)
Increase in intangible assets (14,683) (3,318)
Increase in other noncurrent assets (12,647) (90)
Net cash provided by (used in)
investing activities (28,892) 7,970
Cash flows from financing activities:
Net increase (decrease) in borrowings
under revolving lines of credit 16,000 (13,000)
Proceeds from long-term borrowings 355,548 86,389
Payments of principal on long-term debt (462,446) (106,675)
Proceeds from sale of preferred stock 63,399 ---
Other, net (3,807) (11,110)
Net cash used in financing
activities (31,306) (44,396)
Net decrease in cash (25,443) (4,912)
Cash and cash equivalents at beginning
of period 73,159 45,932
Cash and cash equivalents at end of period $ 47,716 $ 41,020
</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, 1993 and 1992
(Unaudited)
(In thousands)
<CAPTION>
1993 1992
<S> <C> <C>
Supplemental disclosures
Cash paid for:
Interest $ 20,985 $ 28,259
Income taxes 6,983 3,649
Noncash investing and financing activities:
Acquisition of previously leased
nursing centers
Long-term debt incurred 13,705 32,149
Adjustment to property and
equipment and capital
lease obligations 23,600 6,780
Notes receivable issued in connection
with sale of nursing centers --- 33,064
Preferred stock issued to retire debt 56,601 ---
Consolidation of a previously
unconsolidated investee
Increase in assets 2,323 4,155
Increase in liabilities 2,641 4,942
</TABLE>
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
THE HILLHAVEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share information)
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 The Hillhaven Corporation
("Hillhaven" or "the Company") as of and for the periods
indicated. Hillhaven 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 disclosure 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 Hillhaven's most recent annual
report to stockholders have been omitted.
In December 1993, the Company announced the completion of
its facility disposition program (Note 3). Accordingly, the
revenues and expenses related to facilities previously held
for disposition have been reclassified to ongoing operations
in the consolidated statement of operations for all periods
presented. In addition, certain other reclassifications of
prior year amounts have been made to conform to current year
classifications. The financial information herein is not
necessarily representative of a full year's operations.
2. The provision for doubtful accounts and notes receivable is
included in operating and administrative expenses.
Provisions totalled $1,400, $2,666, $1,222 and $4,033 for
the three months and six months ended November 30, 1993 and
1992, respectively.
3. On December 5, 1991, Hillhaven announced a restructuring
plan which included the disposition of 82 nursing centers
over an estimated 24-month period. A restructuring charge
of $90,000 was recorded in the quarter ended November 30,
1991, which included provisions for losses on disposition of
the 82 nursing centers, operating losses of these centers
during the disposition period and other related costs. As
of November 30, 1993, the Company had completed the
disposition of 50 of these nursing centers as well as three
retirement housing facilities which prior to March 1, 1992
had been recorded as discontinued operations. Definitive
agreements were in place to sell an additional nine of the
nursing centers held for disposition. During the three
months ended November 30, 1993, the Company reviewed its
asset disposition program; because of improvements in
reimbursement rates and results of operations and the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
difficult financing environment for nursing facilities and
other real estate assets, the Company decided not to pursue
the sales of the remaining nursing centers and a retirement
housing facility. In addition, several parcels of land
which had been held for development have been reclassified
to other noncurrent assets. Assets related to the Company's
restructuring program were as follows:
<TABLE>
<CAPTION> September 1, May 31,
1993 1993
<S> <C> <C>
Assets $ 85,183 $ 85,768
Restructuring reserve (54,550) (56,646)
Net assets $ 30,633 $ 29,122
</TABLE>
Accrued loss reserves remaining at the date of
reinstatement were comprised of $17,668 for losses from
operations and $36,882 for estimated future losses on sale.
Pretax losses charged to the reserve were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
November 30, November 30,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Loss from
operations $ --- $ 1,256 $ 235 $ 4,016
Loss on
dispositions --- 6,314 1,860 29,433
$ --- $ 7,570 $ 2,095 $ 33,449
</TABLE>
Revenues and expenses related to the 32 nursing centers and
other properties previously held for disposition have been
reclassified to ongoing operations in the consolidated
statement of income for all periods presented. Total
revenues and expenses of these facilities were as follows:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Three months ended Six months ended
November 30, November 30,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Revenues $ 30,335 $ 29,191 $ 60,661 $ 57,185
Expenses 28,761 27,117 57,408 53,472
Income from
operations
before income
taxes $ 1,574 $ 2,074 $ 3,253 $ 3,713
</TABLE>
Net assets of these facilities, less adjustments to asset
carrying values and remaining accrued restructuring costs
aggregating $32,646, have been reclassified from net assets
held for disposition to appropriate balance sheet accounts.
4. The income tax expense reported for the three months and
six months ended November 30, 1993 differs from expected
income tax expense on pretax income as the result of
current tax credits, increased deferred tax benefits
related to an increase in the statutory federal income tax
rate from 34% to 35% and a reduction in the valuation
allowance for deferred tax assets related to corresponding
increases in forecasted earnings for future years. For the
Company to realize its net deferred tax assets, it must
continue to achieve future pretax earnings. Although the
Company believes such pretax earnings will be achieved, a
lack of earnings could result in an increased provision for
income taxes.
5. In September 1993, Hillhaven substantially completed a
recapitalization plan (the "Recapitalization") which
includes the modification of the Company's relationship
with National Medical Enterprises, Inc. (NME) to (i)
purchase the remaining 23 nursing centers leased from NME
for a purchase price of $111,800, (ii) repay all existing
debt to NME in the aggregate principal amount of $147,202,
(iii) release NME guarantees on approximately $400,000 of
debt, (iv) limit the annual fee payable to NME to 2% of the
remaining amount guaranteed and (v) amend existing
agreements to eliminate obligations of NME to provide
additional financing to the Company. The Recapitalization
was financed through (i) the issuance to NME of $120,000 of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
payable-in-kind Series D Preferred Stock, (ii) the
incurrence of up to $360,000 of term loans, letters of
credit and working capital loans, (iii) the issuance of
$175,000 of 10-1/8% Senior Subordinated Notes due 2001 and
(iv) the use of available cash.
6. On September 28, 1993, the Company's stockholders approved
a proposal by the Board of Directors to amend the Articles
of Incorporation to effect a reverse split of all
authorized shares of Hillhaven Common Stock. A one-for-
five reverse stock split was effected on November 1, 1993
which resulted in a decrease in the number of authorized
shares of common stock from 300,000,000 to 60,000,000 and
an increase in the par value of the common stock from $.15
to $.75 per share. Accordingly, all share and per share
data have been restated to retroactively reflect the
reverse stock split.
7. On December 31, 1993, Hillhaven completed the sale of
thirteen nursing centers, nine of which had previously been
held for disposition (Note 3). The Company received cash
for the $15,594 sales price.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except per patient day amounts)
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 May 31 of such
year.
In the 1994 second quarter, Hillhaven realized earnings of
$24,872 compared to $11,117 in the prior year period. Net income
for the six months ended November 30, 1993 and 1992 amounted to
$32,896 and $18,817, respectively. Income from operations before
income taxes and extraordinary charges increased to $35,966 in
the second quarter from $9,127 in the prior year period, and to
$46,736 in the six months ended November 30, 1993 from $16,453 in
the same period in the prior year. Current year earnings include
a $21,904 pretax restructuring credit, as described below.
Conclusion of the Disposition Program
On December 5, 1991, Hillhaven announced a restructuring plan
which included the disposition of 82 nursing centers over an
estimated 24-month period. As of November 30, 1993, the Company
had completed the disposition of 50 of these nursing centers as
well as three retirement housing facilities which prior to March
1, 1992 had been recorded as discontinued operations. Definitive
agreements were in place to sell an additional nine of the
nursing centers held for disposition. During the 1994 second
quarter, the Company reviewed its asset disposition program;
because of improvements in reimbursement rates and results of
operations and the difficult financing environment for nursing
facilities and other real estate assets, the Company decided not
to pursue the sale of the remaining nursing centers and a
retirement housing facility. In addition, several parcels of
land which had been held for development have been reclassified
to other noncurrent assets.
Accrued loss reserves remaining at the date of reinstatement
amounted to $54,550. Revenues and expenses related to the 32
nursing centers and other properties previously held for
disposition have been reclassified to ongoing operations in the
consolidated statement of income for all periods presented. See
Note 3 of Notes to Consolidated Financial Statements. Net assets
of these facilities, less adjustments to asset carrying values
and remaining accrued restructuring costs aggregating $32,646,
have been reclassified from net assets held for disposition to
appropriate balance sheet accounts.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
Net operating revenues were $361,427, $716,241, $342,681 and
$674,673 in the three and six months ended November 30, 1993 and
1992, respectively. Operating income before property-related
expenses (which are comprised of rent, depreciation and
amortization, interest and guarantee fees) and restructuring
charges and credits for the three and six months ended November
30, 1993 was $51,169 (14.2% of net operating revenues) and
$102,841 (14.4% of net operating revenues), respectively, an
increase of approximately 1.4% and 5.2% from $50,476 (14.7% of
net operating revenues) and $97,727 (14.5% of net operating
revenues) in the same periods in the prior year.
The following table summarizes selected operating statistics:
<TABLE>
<CAPTION>
At November 30,
1993 1992
<S> <C> <C>
Nursing Centers
Number of nursing centers 284 294
Number of licensed beds 35,141 36,337
Centers managed for others 17 17
Pharmacy Outlets 81 122
Retirement Housing Communities 20 23
</TABLE>
Nursing center net operating revenues, comprised primarily of
patient revenues, increased 6.6% and 7.4% in the three and six
months ended November 30, 1993 and 1992 to $310,544 and $615,537,
respectively, from $291,325 and $572,905 in the same periods in
the prior year. These operations constituted approximately 86%
of Hillhaven's total net operating revenues in both the three and
six months ended November 30, 1993 and 85% in the prior year
periods. Rehabilitation therapy and subacute care services
constituted, respectively, approximately 24% and 18% of nursing
center net operating revenues in the current and prior year
quarters and 23% and 17% in the six months ended November 30,
1993 and 1992. These results reflect the continued emphasis by
the Company on these higher margin services and the expansion of
such operations.
Net patient revenues per patient day increased by 6.7% and 8.2%
in the three and six months ended November 30, 1993 to $100.45
and $99.41, respectively, from $94.15 and $91.88 in the same
periods in the prior year. These increases were due to overall
increases in rates for each payor type as well as higher levels
of rehabilitation and subacute care services.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Average occupancy in the owned and leased nursing centers
operated by the Company was unchanged at 93.8% for the current
and prior year quarter and 93.6% for the six months ended
November 30, 1993 and 1992.
Data for nursing center operations with respect to sources of net
patient revenues and patient mix by payor type are set forth
below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30 November 30
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Net Patient Revenues
Medicaid 51.6% 57.0% 51.7% 56.7%
Private and other 26.4 26.3 26.5 26.9
Medicare 22.0 16.7 21.8 16.4
Patient Census
Medicaid 67.6% 68.8% 67.6% 68.9%
Private and other 23.0 23.3 23.0 23.5
Medicare 9.4 7.9 9.4 7.6
</TABLE>
Patient revenues are affected by changes in Medicare and Medicaid
reimbursement rates, private pay and other rates charged by
Hillhaven, occupancy levels and the payor mix. Medicare census
increased over the prior year periods as a result of Hillhaven's
continued focus on rehabilitation therapy and subacute care
programs. Hillhaven is working to improve private pay and other
census by increasing the number of managed care patients in its
nursing centers. As of November 30, 1993, the Company had
entered into 114 managed care contracts with insurance companies
to provide subacute care to their insureds, offering a less
expensive alternative to acute care hospitals.
Net operating revenues from pharmacy operations decreased to
$42,981 and $85,161 in the three and six months ended November
30, 1993 and 1992, respectively, from $44,749 and $88,844 in the
prior year periods. Pharmacy revenues accounted for 11.9% of the
Company's total net operating revenues in both the current three-
and six-month periods compared to 13.1% and 13.2% in the three
and six months ended November 30, 1992, respectively. Decreased
revenues resulted primarily from the disposition of 47 marginally
performing retail outlets in 1993 and the first six months of
1994. Institutional revenues accounted for approximately 76% of
pharmacy net operating revenues in both the three and six months
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ended November 30, 1993, versus 62% in the same periods in the
prior year. The growing contribution from institutional
operations reflects the Company's increasing focus on the nursing
home market, disposition of retail outlets and continuing pricing
pressure in the retail operations. Institutional revenues
increased by 16.9% and 17.2% to $32,618 and $64,404 in the three
and six months ended November 30, 1993, respectively, from
$27,892 and $54,946 in the prior year periods. These increases
are the result of an increase in the number of nursing center
beds serviced and higher sales volumes per bed. The increase in
per bed sales reflects the Company's strategy of aggressively
marketing higher-margin ancillary products and services, such as
respiratory and intravenous therapies and enteral and urological
supplies.
Pharmacy operations produced operating income before property-
related expenses of $5,973 in the current quarter (13.9% of net
operating revenues), an increase of approximately 16.4% from
$5,131 (11.5% of net operating revenues) in the prior year
quarter. For the six months ended November 30, 1993, operating
income before property-related expenses amounted to $11,055
(13.0% of net operating revenues) compared to $11,012 (12.4% of
net operating revenues) in the same period in the prior year.
The improvement in the operating margin percentage is due to the
increase in ancillary revenues in the institutional pharmacies
and the disposition of low-margin retail outlets. The Company
does not expect to renew the leases at 22 Wal-Mart outlets which
are due to expire in 1995 through 1997. The termination of these
leases is not expected to have a material effect on pharmacy
operating income.
Net operating revenues from retirement housing operations
increased to $7,902 and $15,543 in the three and six months ended
November 30, 1993 and 1992, respectively, from $6,607 and $12,924
in the prior year periods. These increases were primarily due to
improvements in average occupancy, which increased to 96.7% and
95.6% in the three and six months ended November 30, 1993,
respectively from 91.8% and 90.7% in the same periods in the
prior year.
Operating and administrative expenses of the Company's nursing
centers increased by 8.1% and 7.9% in the three and six months
ended November 30, 1993 to $267,797 and $528,252, respectively,
from $247,822 and $489,704 in the same periods in 1993. These
increases were attributable primarily to increased staffing
levels and a higher cost of labor and related benefits, which
represented approximately 78% of operating and administrative
expense in both the current three-and six-month periods.
Hillhaven has increased staffing levels in its nursing centers to
accommodate the expansion of its rehabilitation therapy and
subacute care programs and services. Therapy wages and benefits,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
comprising approximately 12% and 11% of total nursing center
labor costs in the three and six months ended November 30, 1993,
respectively, increased by 74.4% and 78.9% from the prior three-
and six-month periods to $24,039 and $44,008, respectively.
Nursing wages and benefits, accounting for approximately 55% of
total nursing center labor costs in both the current three- and
six-month periods, increased by 4.1% and 3.9% over the prior year
periods.
Combined interest and guarantee fee expense decreased by $2,790
to $13,795 in the current quarter and by $2,478 to $30,491 in the
current six-month period due to the recent refinancing of certain
of the Company's indebtedness. See "The Recapitalization".
Effective June 1, 1992, Hillhaven adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Adoption of SFAS 109 resulted in a charge of
$1,103 to the 1993 first quarter statement of operations.
Including the impact of this charge, the effect of the adoption
of SFAS 109 on the three and six months ended November 30, 1992
was a reduction of net income tax expense and an increase in net
income of $2,443 and $3,144, respectively, as compared to amounts
that would have been reported under APB Opinion No. 11.
The Recapitalization
On September 2, 1993, Hillhaven substantially completed a
recapitalization plan (the "Recapitalization") which improves the
Company's balance sheet, extends the maturities of outstanding
indebtedness, increases operating flexibility through the
acquisition of leased facilities, fixes the interest rate on a
portion of its previously floating rate indebtedness and also
modifies the relationship between Hillhaven and NME.
The Company's relationship with NME was modified by (i) the
purchase of the remaining 23 nursing centers leased from NME for
$111,800, which represents a $23,600 discount from the aggregate
purchase price specified in the purchase option agreements, (ii)
the repayment of all existing debt to NME in the aggregate
principal amount of $147,202, (iii) the release of NME guarantees
on approximately $400 million of debt, (iv) the limitation of the
annual fee payable to NME to 2% of the remaining amount
guaranteed and (v) the amendment of existing agreements to
eliminate obligations to NME to provide additional financing to
the Company. The Recapitalization was financed through (i) the
issuance to NME of $120,000 of payable-in-kind Series D Preferred
Stock, (ii) the incurrence of a $175,000 five-year term loan
under a secured credit facility with a syndicate of banks (the
"Bank Term Loan"), (iii) the issuance of $175,000 of 10-1/8%
Senior Subordinated Notes due 2001, and (iv) the use of available
cash. The Bank Term Loan bears interest at a floating rate
which, as of November 30, 1993, was 5.8%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Recapitalization includes a $100,000 letter of credit
facility, the availability of which is subject to certain
conditions, and which the Company anticipates will be used to
replace NME guarantees on existing indebtedness, and an $85,000
revolving bank line of credit. The availability of the $85,000
revolving line of credit will allow the Company to maintain lower
cash balances, and may facilitate repayments of higher-rate debt
or provide cash for investment or other corporate purposes.
There were no outstanding borrowings under either of these credit
facilities at November 30, 1993.
The Company also has an accounts receivable-backed revolving
credit facility which provides for borrowings of up to $30,000,
$16,000 of which was outstanding at November 30, 1993.
Cash Flows and Financial Condition
Hillhaven believes that it will generate sufficient cash to fund
operations and meet its debt and lease obligations for the
current fiscal year. Cash provided by operations in the first
six months of 1994 amounted to $34,755, compared to $31,514 in
the prior year. The increase is due primarily to higher pretax
earnings.
Net cash used in investing activities amounted to $28,892 in the
first six months of 1994 compared to net cash provided by
investing activities in the amount of $7,970 in the prior year
period. During the six months ended November 30, 1993, Hillhaven
expended $14,829 for financing costs associated with the
Recapitalization. In connection with the purchase of nursing
centers leased from NME, $9,187 was funded into escrow for the
purchase of four of the facilities; final completion of the
transaction is expected in the 1994 third quarter pending various
regulatory approvals. Such amount is included in other
noncurrent assets at November 30, 1993.
During the six months ended November 30, 1992, Hillhaven
purchased 34 nursing centers previously leased from NME for an
aggregate purchase price of $87,390. Nine of these nursing
centers were subsequently sold. The purchase was financed with
the proceeds from the sale of $74,750 of 7-3/4% Convertible
Subordinated Debentures due 2002 and the assumption of underlying
debt amounting to $4,582. The Company also acquired from third
parties three previously leased nursing centers for an aggregate
purchase price of $14,133. These transactions were partially
financed by the assumption of underlying debt aggregating $8,145.
During this same period, the Company disposed of 42 nursing
centers for an aggregate sales price of $49,583. Hillhaven
provided financing for $33,064 of the total sales price and
received cash for the balance.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Capital expenditures for routine replacements and refurbishment
of facilities and capital additions amounted to $17,928 in the
current six-month period compared to $13,115 in the prior year.
Net cash used in financing activities decreased to $31,306 from
$44,396 in the prior year. In the current year period the
Company utilized its available credit facilities to finance its
operating activities. Such borrowings were not required in the
prior year period.
Legislative Action
On August 6, 1993, Congress approved a budget reconciliation
bill, certain provisions of which will impact the Company's
future results of operations. Effective October 1, 1993, the
elimination of return-on-equity payments and a two-year freeze on
routine cost limit increases may reduce the Company's Medicare
revenues by approximately $7,000 annually. The Company believes
it can mitigate a major portion of these revenue reductions by
containing operating cost increases.
Management believes that the Company will benefit from a series
of restrictions included in the bill designed to limit access to
Medicaid coverage. Individuals targeted by these changes are
those who can afford to pay for their care but seek Medicaid
eligibility through "artificial impoverishment" or transfer of
assets. The Company cannot estimate the benefit of these
restrictions on future operating results. The bill also extends
(retroactive to July 1, 1992) through December 31, 1994 tax
incentives for hiring the disadvantaged; the Company expects to
receive the benefit of approximately $2,500 of these targeted
jobs tax credits annually. In the aggregate, management believes
that the provisions of the budget reconciliation bill will not
have a material adverse impact on the future operations of the
Company.
On September 22, 1993, President Clinton released a draft of his
proposed health care reform legislation. Among the concerns
addressed by the President's plan are means to control or reduce
public and private spending on health care, reform the payment
methodology for health care goods and services by both the public
(Medicare and Medicaid) and private sectors and to provide
universal access to health care. Included in the plan are
proposals to (i) control national health spending by limiting the
growth of private health insurance premiums and Medicare and
Medicaid spending, (ii) require all employers to provide health
insurance to all employees and (iii) simplify billing and other
administrative procedures. The plan also includes changes to the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Medicare program to provide coverage for outpatient prescription
drugs and home- and community-based long term care services. It
is uncertain which, if any, of the President's proposals will be
passed by Congress and what effect such reforms may have on
Hillhaven's revenues and earnings.
<PAGE>
PART II. OTHER INFORMATION
Items 1, 3 and 5 are not applicable.
Item 2. Changes in Securities
On September 2, 1993, Hillhaven issued and sold to NME
120,000 shares of non-assessable, non-voting, cumulative
Series D Preferred Stock, par value $.15 per share.
Holders of the Series D Preferred Stock are entitled to
receive, when, as and if declared by the Board of
Directors of the Company, quarterly dividends payable in
additional shares of Series D Preferred Stock beginning
December 1, 1993 at the following rates, compounded
annually: (i) from the date of issuance through August
31, 1994, 6.5%; (ii) from September 1, 1994 through
August 31, 1995, 5.5%; (iii) from September 1, 1995
through August 31, 1996, 4.5%; and (iv) on and after
September 1, 1996, 4.0%. Subject to the right of the
holder of certain warrants to purchase the Company's
common stock (the "Warrants") to fix the dividend rate
at a particular time by exercising not less than all the
Warrants, on and after December 1, 1998, dividends with
respect to the Series D Preferred Stock will be payable
in cash instead of in additional shares of Series D
Preferred Stock, at the rate of 4.0%, compounded
annually.
If quarterly dividends or other dividends or
distributions payable on the Series D Preferred Stock
are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not
declared, on Series D Preferred Stock outstanding have
been paid in full, Hillhaven shall not: (i) declare or
pay dividends on, make any other distributions on, or
redeem, purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding
up) to the Series D Preferred Stock; or (ii) purchase or
otherwise acquire for consideration any shares of Series
D Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such
shares. Except for shares of the Company's Series C
Preferred Stock, which shall rank senior to shares of
Series D Preferred Stock, the Series D Preferred Stock
shall rank senior to all other classes and series of the
Company's preferred stock as to the payment of dividends
and the distribution of assets upon liquidation,
dissolution or winding up of the Company. The dividend
restrictions described above apply to the Company's
outstanding shares of common stock.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The stockholders of the Company approved the Company's
one-for-five reverse stock split (the "Reverse Split")
at the September 28, 1993 Annual Meeting.
The purpose of the Reverse Split is to reduce
transaction costs paid by individual stockholders,
encourage investment in the Company's common stock by
institutional investors, permit margining of the common
stock and possibly promote greater liquidity for the
Company's stockholders.
The Reverse Split was approved by the stockholders with
a vote of 94,089,652 shares FOR, 2,163,456 shares
AGAINST and 1,015,720 shares ABSTAINING.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
(4) Instruments defining the Rights of Security
Holders, Including Indentures.
(a) Certificate of Designation, Preferences
and Rights of Series D Preferred Stock of
The Hillhaven Corporation.
(b) Certificate of First Amendment to
Certificate of Designation, Preferences
and Rights of Series C Preferred Stock of
The Hillhaven Corporation.
(c) Certificate Concerning Reverse Stock
Split of The Hillhaven Corporation.
(11) Statement Re: Computation of per share
earnings for the three months and six months
ended November 30, 1993 and 1992.
(B) Reports filed on Form 8-K:
A Form 8-K, dated September 2, 1993, was filed
during the quarter to disclose the consummation of
the Company's recapitalization plan as follows:
On September 2, 1993, the Company consummated its
recapitalization plan which included (i) the
restructuring of the Company's relationship with
National Medical Enterprises, Inc. (together with
its subsidiaries, "NME") to (a) allow the purchase
of the remaining 23 facilities leased from NME;
<PAGE>
PART II. OTHER INFORMATION
(b) pay off all existing debt to NME; (c) repay $266
million of debt guaranteed by NME; and (d) relieve
NME of all obligations to provide additional
financing to the Company; (ii) the incurrence of up
to $360 million of third party bank financing
arranged by Morgan Guaranty Trust Company of New
York with a syndicate of 21 lenders (the "Bank
Financing"); (iii) the public offering of $175
million of 10-1/8% senior subordinated debt; and
(iv) the issuance to NME of the newly created Series
D payable-in-kind preferred stock with an aggregate
liquidation value of $120 million. In addition,
following the September 2 closing, the Company will
cause, or, in certain instances, will use its best
efforts to cause, NME to be released as guarantor on
up to $130 million of the Company's debt
obligations.
No financial statements were filed with the Form
8-K.
<PAGE>
SIGNATURE
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.
THE HILLHAVEN CORPORATION
(Registrant)
Date: January 12, 1994 /s/ Michael B. Weitz
Michael B. Weitz*
Vice President and
Principal Accounting Officer
* Michael B. Weitz is signing in the dual capacities as i)
principal accounting officer, and ii) a duly authorized
officer of the Company.
<PAGE>
<TABLE> Exhibit 11
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<CAPTION> Three Months Ended Six Months Ended
November 30, November 30,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning
of period (1) <F1> 20,970 20,895 20,979 20,883
Shares issued upon exercise of
stock options 25 7 17 11
Dilutive effect of outstanding stock
options and contingent shares 216 187 210 163
Dilutive effect of warrants held
by NME 2,390 2,042 2,271 2,027
Restrictive shares forfeited --- --- (8) ---
Weighted average number of shares
and share equivalents
outstanding (2) <F2> 23,601 23,131 23,469 23,084
Income before extraordinary item
and cumulative effect of
accounting change $ 25,812 $ 11,117 $ 33,836 $ 19,920
Adjustments related to proceeds
from exercise of options and
warrants under the "modified
treasury stock" method --- 311 --- 804
Preferred stock dividends (2,672) (722) (3,394) (1,444)
Adjusted income 23,140 10,706 30,442 19,280
Extraordinary charge - early
extinguishment of debt, net of tax (940) --- (940) ---
Cumulative effect of change
in accounting for income taxes --- --- --- (1,103)
Net income as adjusted $ 22,200 $ 10,706 $ 29,502 $ 18,177
Primary earnings per share:
Income before extraordinary
item and cumulative effect
of accounting change $ .98 $ .46 $ 1.30 $ .84
Extraordinary charge (.04) --- (.04) ---
Cumulative effect of
accounting change --- --- --- (.05)
Net income $ .94 $ .46 $ 1.26 $ .79
</TABLE>
(Continued on next page)
<PAGE>
<TABLE> Exhibit 11 (Continued)
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<CAPTION> Three Months Ended Six Months Ended
November 30, November 30,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares
used in primary calculation 23,601 23,131 23,469 23,084
Additional dilutive effect of
stock options and warrants 268 236 390 253
Assumed conversion of dilutive
convertible debentures 8,384 5,254 8,384 4,591
Fully diluted weighted average
number of shares (2) <F2> 32,253 28,621 32,243 27,928
Income before extraordinary
charge and cumulative effect
of accounting change, adjusted
per primary calculation $ 23,140 $ 10,706 $ 30,442 $ 19,280
Adjustments for interest expense
and related income taxes 1,745 1,067 3,320 1,490
Adjusted income 24,885 11,773 33,762 20,770
Extraordinary charge - early
extinguishment of debt, net of tax (940) --- (940) ---
Cumulative effect of change in
accounting for income taxes --- --- --- (1,103)
Adjusted income used in fully
diluted calculation $ 23,945 $ 11,773 $ 32,822 $ 19,667
Fully diluted earnings per share:
Income before extraordinary
charge and cumulative effect
of accounting change $ .77 $ .41 $ 1.05 $ .74
Extraordinary charge (.03) --- (.03) ---
Cumulative effect of accounting
change --- --- --- (.04)
Net income $ .74 $ .41 $ 1.02 $ .70
- ----------
<FN>
(1)<F1> Share amounts have been adjusted for the effect of a one-for-five
reverse stock split effective November 1, 1993.
(2)<F2> All shares in these tables are weighted on the basis of the number
of days the shares were outstanding or assumed to be outstanding
during each period./TABLE
<PAGE>
CERTIFICATE CONCERNING REVERSE STOCK SPLIT
OF
THE HILLHAVEN CORPORATION
Pursuant to Section 78.207 of the Private Corporation
Law of the State of Nevada
We, Christopher J. Marker, the President, and Richard P.
Adcock, the Secretary, of The Hillhaven Corporation, a corporation
organized and existing under the Private Corporation Law of the
State of Nevada, in accordance with the provisions of Section
78.207 thereof, DO HEREBY CERTIFY THAT:
(a) The current number of authorized shares and par value of
each class and series of shares before the reverse stock split is
as follows:
(i) 300,000,000 shares of Common Stock, par value $0.15
per share;
(ii) 25,000,000 shares of Preferred Stock, par value
$0.15 per share, of which the following series have
been designated:
(A) 3,000,000 shares of Series A Junior
Participating Preferred Stock (the "Series A
Preferred Stock");
(B) 950 shares of Series B Convertible Preferred
Stock, of which 618 shares are designated as
Subseries 1;
(C) 35,000 shares of Series C Preferred Stock; and
(D) 300,000 shares of Series D Preferred Stock.
(b) The number of authorized shares and the par value of each
class and series of shares after the reverse stock split will be as
follows:
(i) 60,000,000 shares of Common Stock, par value $0.75
per share;
(ii) 25,000,000 shares of Preferred Stock, par value
$0.15 per share, of which the following series have
been designated:
(A) 3,000,000 shares of Series A Preferred Stock;
(B) 950 shares of Series B Convertible Preferred
Stock, of which 618 shares are designated as
Subseries 1;
(C) 35,000 shares of Series C Preferred Stock; and
(D) 300,000 shares of Series D Preferred Stock.
<PAGE>
(c) The number of shares of each affected class and series to
be issued after the reverse stock split in exchange for each issued
share of the same class or series will be as follows: one share of
Common Stock for each five issued shares of Common Stock.
(d) No fractional shares will be issued as a result of the
reverse stock split. In lieu of receiving fractional shares,
stockholders who hold a number of shares not evenly divisible by
five immediately prior to the reverse stock split will be entitled
to receive an amount in cash equal to the "Fair Value" times the
number of shares of Common Stock in excess of the highest number of
shares held at such time which is evenly divisible by five (the
"Remaining Shares"). The "Fair Value" for each Remaining Share
will be the average of the daily closing prices per share of the
Common Stock on the American Stock Exchange for the 10 business
days preceding the effective date of the reverse stock split. Less
than 1% of the outstanding shares will be affected thereby.
(e) The approval of the stockholders is not required for the
reverse stock split.
(f) The reverse stock split will be effective as of November
1, 1993 at 5:00 p.m., Pacific Standard Time.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties
of perjury this 28th day of October, 1993.
/s/ Chris Marker
Christopher J. Marker
President
/s/ Richard Adcock
Richard P. Adcock
Secretary
State of Washington)
) ss.
County of Pierce )
On this 28th day of October, 1993 personally appeared before
me, a notary public, Christopher J. Marker and Richard P. Adcock,
personally known (or proved) to me to be the persons whose names
are subscribed to the above instrument who acknowledged that they
executed the instrument.
/s/ Gloria Staggers
Notary Public
(SEAL) My commission expires 10/15/94
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES D PREFERRED STOCK
OF
THE HILLHAVEN CORPORATION
Pursuant to Section 78.195 of the
Private Corporation Law of the State of Nevada
We, Christopher J. Marker, the President, and Richard P.
Adcock, the Secretary, of The Hillhaven Corporation, a corporation
organized and existing under the Private Corporation Law of the
State of Nevada, in accordance with the provisions of Section
78.195 thereof, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors by the Amended and Restated Articles of Incorporation of
said Corporation, the said Board of Directors on June 21, 1993,
adopted the following resolution creating a series of 300,000
shares of Preferred Stock, par value $0.15 per share, of the
Corporation classified as Series D Preferred Stock;
RESOLVED, that, pursuant to the authority vested in the Board
of Directors of this Corporation in accordance with the provisions
of its Amended and Restated Articles of Incorporation, a series of
Preferred Stock of the Corporation be and is hereby created, and
that the number and designation thereof and the voting power,
preferences, limitations, restrictions and relative rights thereof
are as follows:
Section 1. Designation and Amount. The shares of such
series shall be designated as "Series D Preferred Stock" (the
"Series D Preferred Stock"), and the number of shares initially
constituting such series shall be 300,000, which number of shares
may be increased or decreased (but not below the number of shares
then outstanding) from time to time by action of the Board of
Directors. The Board of Directors shall take such action from time
to time as may be necessary to increase the number of authorized
shares of Series D Preferred Stock to ensure that sufficient shares
are authorized to permit the issuance of additional shares of
Series D Preferred Stock for the payment of dividends thereon
pursuant to Section 2 below.
Section 2. Dividends and Distributions.
(a) Rate. Subject to subsections (b) and (c) of this
Section 2, the holders of shares of Series D Preferred Stock
shall be entitled to receive when, as and if declared by the
Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in additional shares of
Series D Preferred Stock on the first day of March, June,
September and December in each year beginning December 1, 1993
(each such date being referred to herein as a "Quarterly
Dividend Payment Date") at the following rates, compounded
annually:
<PAGE>
(i) From the date of issuance through August 31,
1994, 6.5%;
(ii) From September 1, 1994 through August 31,
1995, 5.5%;
(iii) From September 1, 1995 through August 31,
1996, 4.5%; and
(iv) On and after September 1, 1996, 4.0%.
(b) Payment of Cash Dividends. Notwithstanding anything
to the contrary in subsection (a), but subject to subsection
(c), of this Section 2, on and after December 1, 1998 (the
"Conversion Date"), dividends with respect to shares of Series
D Preferred Stock shall be payable in cash, instead of in
additional shares of Series D Preferred Stock, at the rate of
4.0%, compounded annually, on the number of shares of Series
D Preferred Stock then outstanding.
(c) Fixing Rate. Notwithstanding anything to the
contrary in this Section 2, upon the exercise by the holder or
holders (collectively the "Warrant Holders") of all, but not
less than all, of the warrants then outstanding to acquire
shares of the Corporation's Common Stock (the "Warrants")
issued pursuant to that certain Warrant and Registration
Rights Agreement dated as of January 31, 1990, dividends
payable with respect to shares of Series D Preferred Stock
(whether payable in additional shares of Series D Preferred
Stock or in cash) shall thereafter be paid at the rate in
effect at the time all of the Warrants then outstanding have
been exercised; provided, however, that in the event that all
of the Warrants have not been exercised before the Conversion
Date, the amount of cash dividends payable with respect to
shares of Series D Preferred Stock for any twelve-month period
commencing after the Conversion Date shall not exceed
$5,745,000, with any additional dividends required to be paid
being payable in shares of Series D Preferred Stock.
(d) Miscellaneous. Regardless of whether the Board of
Directors is legally permitted to declare or pay dividends
from time to time, dividends shall begin to accrue and be
cumulative on all outstanding shares of Series D Preferred
Stock from the date of issue of such shares of Series D
Preferred Stock, unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for
the determination of holders of shares of Series D Preferred
Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in which event such dividends
shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Dividends paid on the shares of Series
D Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of
holders of shares of Series D Preferred Stock entitled to
receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 60 days prior
to the relevant Quarterly Dividend Payment Date.<PAGE>
Section 3. Voting Rights. The holders of shares of Series
D Preferred Stock shall have no voting rights, and their consent
shall not be required for taking any corporate action, except as
set forth in Section 9 below or as otherwise provided by law.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series D Preferred Stock as
provided in Section 2 are in arrears, whether or not declared,
thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series D
Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise
acquire for consideration any shares of stock ranking
junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series D Preferred
Stock; or
(ii) purchase or otherwise acquire for consideration
any shares of Series D Preferred Stock, except in
accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to
all holders of all such shares.
(b) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for
consideration any shares of stock of the Corporation unless
the Corporation could, under subparagraph (a) of this Section
4, purchase or otherwise acquire such shares at such time and
in such manner.
(c) The Corporation shall not issue any shares of Series
D Preferred Stock upon original issuance except to National
Medical Enterprises, Inc., a Nevada corporation ("NME"), or
one or more of its subsidiaries.
(d) Except for shares of the Corporation's Series C
Preferred Stock, which shall rank senior to shares of Series
D Preferred Stock, and any shares of Series D Preferred Stock
issued as payment for dividends pursuant to Section 2 above,
at any time when any share or shares of Series D Preferred
Stock are outstanding, the Corporation shall not issue, or
permit to be outstanding, any shares of any other series of
Preferred Stock, or of any other class of preferred stock of
the Corporation, which ranks on a parity with, or is senior
to, the Series D Preferred Stock, either as to dividends or
upon liquidation, dissolution or winding up of the
Corporation.
<PAGE>
Section 5. Reacquired Shares. Any shares of Series D
Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares, upon their
cancellation, shall become authorized but unissued shares of
Preferred Stock without designation as to series and may be
reissued as part of a new series of Preferred Stock to be created
by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon
any voluntary or involuntary bankruptcy, insolvency, liquidation,
dissolution or winding up of the Corporation, no distribution shall
be made to the holders of shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the
Series D Preferred Stock unless, prior thereto, the holders of
shares of Series D Preferred Stock shall have received an aggregate
amount equal to $1,000 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment.
Section 7. Consolidation, Merger, etc. Subject to
subsection (c) of Section 8 below, in case the Corporation shall
enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for
or changed into other stock or securities, cash and/or any other
property, and the Corporation shall not be the surviving
corporation in connection with any such transaction, then as part,
and upon consummation, of any such transaction the shares of Series
D Preferred Stock shall be converted into and become shares of
preferred stock of the surviving corporation with terms and value
substantially identical to those of the Series D Preferred Stock.
The Corporation shall not consummate any such consolidation,
merger, combination or other transaction unless prior thereto the
Corporation and the other party or parties to such transaction
shall have provided as set forth in the preceding sentence of this
Section 7 in any agreement relating thereto.
Section 8. Redemption.
(a) Redemption at Option of Corporation. Subject to
subsection (d) of this Section 8, the shares of Series D
Preferred Stock shall be redeemable at any time, in whole or
in part, at the option of the Corporation, upon not less than
five business days' prior written notice of such redemption to
the registered holders of the shares to be redeemed. If there
is more than one holder of shares of Series D Preferred Stock
and less than all the shares are to be redeemed, the shares to
be redeemed shall be redeemed pro rata among all holders
according to their respective percentage interests. The
redemption price shall be $1,000 per share, plus an amount
equal to accrued and unpaid dividends, whether or not
declared, to the date of redemption.
(b) Redemption at Request of Holder Upon Exercise of
Warrants. Upon the written request of Warrant Holders who
also are holders of at least the number of shares of Series D
Preferred Stock referred to in the third sentence of this
<PAGE>
subsection (b), the shares of Series D Preferred Stock shall
be redeemable in part upon the exercise by such Warrant
Holders of all, but not less than all, of the Warrants then
outstanding. The redemption price shall be $1,000 per share,
plus an amount equal to accrued and unpaid dividends, whether
or not declared, to the date of redemption. The number of
shares of Series D Preferred Stock to be redeemed pursuant to
this subsection (b) shall be equal to the aggregate purchase
price for the shares of the Corporation's Common Stock to be
acquired pursuant to the exercise of the Warrants divided by
$1,000. The shares of Series D Preferred Stock to be redeemed
shall be shares held by such Warrant Holders, selected by the
Corporation in such manner as it deems appropriate; provided,
however, that at the option of such Warrant Holders, such
Warrant Holders shall be entitled to tender any or all of the
shares of Series D Preferred Stock, at the redemption price
set forth in this subsection (b), towards the exercise price
of the Warrants then being exercised.
(c) Redemption at Request of Holder Upon Occurrence of
Designated Event. The Corporation shall give the holder or
holders of the shares of Series D Preferred Stock written
notice of the occurrence of a "Designated Event," as defined
below, within five business days after such occurrence. After
the occurrence of a Designated Event, the Corporation shall,
subject to subsection (d) below, redeem all, but not less than
all, of the shares of Series D Preferred Stock of any holder
or holders thereof on a date which is not less than 30 days or
more than 45 days after written request therefor by such
holder or holders. The redemption price shall be $1,000 per
share, plus an amount equal to accrued and unpaid dividends,
whether or not declared, to the date of redemption.
(d) Notwithstanding the foregoing provisions of
subsections (a) and (c) of this Section 8, upon the
acceleration of the maturity of any Senior Debt, as defined
below, or upon the non-payment of any Senior Debt at its final
scheduled maturity, all such Senior Debt shall first be paid
in full, or such payment duly provided for in cash or in a
manner satisfactory to the holders of such Senior Debt, before
the holders of shares of Series D Preferred Stock are entitled
to receive any payment in respect of the redemption,
retirement, purchase or other acquisition by the Corporation
of such shares in accordance with subsections (a) and (c) of
this Section 8. No such payment in respect of such shares
shall be made pursuant to subsection (a) or (c) of this
Section 8 unless the Agent (as such term is defined in the
Credit Agreement) shall have been given at least 30 days'
prior written notice thereof by the Corporation or by the
holder of such shares.
(e) Definitions. For the purposes of this Section 8, the
following terms shall have the following meanings:
"Affiliate" means, as to any Person, any Person directly
or indirectly controlling, controlled by or under common
control with such Person, whether through the ownership of
voting securities, by contract or otherwise.
<PAGE>
A "Designated Event" shall be deemed to have occurred
when (i) a "person" or "group" (other than NME or any
Affiliate of NME) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934) of
30% or more of the then outstanding Voting Stock, as defined
below, of the Corporation, unless such person or group becomes
such a beneficial owner upon its or their acquisition of
Voting Stock from NME or an Affiliate of NME; (ii) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Corporation's Board of
Directors (together with any new Director whose nomination for
election by the Corporation's Board of Directors or whose
nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the Directors
then still in office who either were Directors at the
beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to
constitute a majority of the Directors then in office; (iii)
the Corporation consolidates with or merges into another
corporation or conveys, transfers or leases all or
substantially all of its assets to any person, or any
corporation consolidates with or merges into the Corporation,
in either event pursuant to a transaction in which Voting
Stock of the Corporation outstanding immediately prior to the
effectiveness thereof is changed into or exchanged for cash,
securities or other property, provided that such transactions
between the Corporation and its Subsidiaries, as defined
below, between Subsidiaries or between the Corporation and any
Affiliate of the Corporation, shall be excluded from the
operation of this clause (iii); (iv) the Corporation or any
Subsidiary purchases or otherwise acquires, directly or
indirectly, beneficial ownership of Voting Stock of the
Corporation if, after giving effect to such purchase or
acquisition, the Corporation (together with its Subsidiaries)
acquires 30% or more of the Voting Stock of the Corporation
within any 12-month period; or (v) on any date (a "Calculation
Date") the Corporation makes any distribution or distributions
of cash, property or securities (other than regular periodic
cash dividends on Common Stock of the Corporation not in
excess of $0.40 per share on an annual basis, such amount to
be subject to a proportionate adjustment in the event the
outstanding shares of Common Stock of the Corporation are
increased, decreased or exchanged for a different number or
kind of shares or other securities, or if additional shares or
new or different shares or other security are distributed with
respect to such shares of Common Stock or other securities,
through merger, consolidation, sale of all or substantially
all the property of the Corporation, reorganization,
recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other distribution with respect
to such shares of Common Stock or other securities) to the
holders of Voting Stock of the Corporation or purchases or
otherwise acquires beneficial ownership of Voting Stock of the
Corporation and the sum of the fair market value of such
distributions, purchases and other acquisitions, plus the fair
market value of such distributions, purchases and other
acquisitions which have occurred during the prior 12-month
period, is at least 30 percent of the fair market value of the
<PAGE>
outstanding Voting Stock of the Corporation. This percentage
is calculated on each Calculation Date by determining the
percentage of the fair market value of the Corporation's
outstanding Voting Stock as of such Calculation Date which is
represented by the fair market value of the distributions,
purchases and other acquisitions which have occurred as of
such date and adding to that percentage all of the percentages
which have been similarly calculated on the dates of all such
distributions, purchases and other acquisitions during the
prior 12-month period.
"Credit Agreement" means the Credit Agreement dated as of
September 1, 1993 among First Healthcare Corporation, as
Borrower, the Corporation, as Guarantor, the Banks referred to
therein, the LC Issuing Banks referred to therein, Morgan
Guaranty Trust Company of New York, as Agent, Chemical Bank,
as Administrative Agent, and J.P. Morgan Delaware, as
Collateral Agent, as the same may be amended from time to
time.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated
association, joint venture or other entity or a government or
any agency or political subdivision thereof.
"Senior Debt" means all principal, premium (if any),
interest (including interest which accrues after the
commencement of any case, proceeding or other action relating
to the bankruptcy, insolvency or reorganization of the
Corporation, whether or not allowed or allowable as a claim in
any such proceeding), fees, expenses and other amounts payable
by the Corporation under or in respect of (i) indebtedness of
the Corporation arising under or in respect of the Credit
Agreement and the other Financing Documents referred to
therein, and any renewal or extension thereof, (ii)
indebtedness of the Corporation to banks or other
institutional lenders incurred in connection with a
refinancing or refunding of the Credit Agreement in an
aggregate principal amount not exceeding the amount so
refinanced or refunded, and (iii) any other indebtedness of
the Corporation created, incurred or assumed after the date
hereof if the Corporation and the holders of such indebtedness
or their representative (as designated by the Corporation in
a written notice to holders of shares of Series D Preferred
Stock) shall have received the irrevocable written consent of
holders of at least two thirds of the shares of Series D
Preferred Stock, stating that such indebtedness shall be
"Senior Debt" for purposes of this Section 8.
"Subsidiary" means any corporation of which more than 50%
of the outstanding shares of stock of each class having
ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) is at the time
owned by the Corporation or by one or more of its subsidiaries
or by the Corporation and one or more of its subsidiaries.
<PAGE>
"Voting Stock" means shares of capital stock having
general voting power, and "voting power" means the power under
ordinary circumstances (and not merely upon the happening of
a contingency) to vote in the election of Directors of the
Corporation.
Section 9. Amendment. The Amended and Restated Articles
of Incorporation of the Corporation shall not be amended in any
manner which would alter or change the powers, preferences or
special rights of the shares of Series D Preferred Stock so as to
affect them adversely without the affirmative vote of the holders
of two thirds or more of the outstanding shares of Series D
Preferred Stock, voting together as a single class.
Section 10. Ranking. The Series D Preferred Stock shall
rank senior to all other classes and series of the Corporation's
preferred stock, other than the Corporation's Series C Preferred
Stock, as to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up of the
Corporation.
Section 11. Transfer. The shares of Series D Preferred
Stock shall be freely transferable by the holder or holders
thereof, subject to the requirements of any applicable law.
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under the penalties
of perjury this 1st day of September, 1993.
/S/ Christopher J. Marker
By: Christopher J. Marker
Title: President
/s/ Richard P. Adcock
By: Richard P. Adcock
Title: Secretary
State of Washington )
) ss.
County of Pierce )
On the 1st day of September, 1993, personally appeared before
me, a Notary Public, Christopher J. Marker and Richard P. Adcock
personally known (or proved) to me to be the persons whose names
are subscribed to the above instrument who acknowledged that they
executed the instrument.
/s/ Gloria J. Staggers
Notary Public
<PAGE>
CERTIFICATE OF FIRST AMENDMENT TO
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES C PREFERRED STOCK
OF
THE HILLHAVEN CORPORATION
Pursuant to Section 78.195 of the
Private Corporation Law of the State of Nevada
We, Christopher J. Marker, the President, and Richard P.
Adcock, the Secretary, of The Hillhaven Corporation, a corporation
organized and existing under the Private Corporation Law of the
State of Nevada, in accordance with the provisions of Section
78.195, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors by the Amended and Restated Articles of Incorporation,
the said Board of Directors adopted a resolution creating a series
of 35,000 shares of Preferred Stock, par value $0.15 per share, of
the Corporation classified as Series C Preferred Stock, a
certificate of such resolution (the "Series C Certificate") having
been filed with the Secretary of State of the State of Nevada on
November 26, 1991 (the "Series C Preferred Stock");
That, pursuant to the authority conferred upon the Board of
Directors by the Amended and Restated Articles of Incorporation,
the said Board of Directors on September 28, 1993 adopted the
following resolution amending certain of the voting powers,
designations, preferences, limitations, restrictions and relative
rights of the Series C Preferred Stock;
That, pursuant to Section 9 of the Series C Certificate and
the Nevada Private Corporation law, the holders of all of the
issued and outstanding shares of the Series C Preferred Stock,
being 35,000 shares, voted in favor of the following resolution
amending certain of the voting powers, designations, preferences,
limitations, restrictions and relative rights of the Series C
Preferred Stock;
RESOLVED THAT, pursuant to the authority vested in the Board
of Directors by the Amended and Restated Articles of Incorporation,
the Series C Preferred Stock is hereby amended as follows:
1. Section 4 of the Series C Certificate, entitled "Certain
Restrictions," is hereby amended by adding the following new
subsection 4(E) thereto:
"(E) Notwithstanding anything to the contrary set
forth in this Section 4 or any other provision set forth
herein, and notwithstanding that any dividends or other
distributions payable by the Corporation pursuant to the
terms of the Series C Preferred Stock are in arrears, the
Corporation may do any or all of the following:
(i) declare and pay dividends and
distributions, in cash or payments-in-kind, on the
Series D Preferred Stock;
<PAGE>
(ii) redeem all or any part of the Series D
Preferred Stock, at the request of the holder or
holders of the warrants to acquire shares of the
Corporation's Common Stock (the "Warrants") issued
pursuant to that certain Warrant and Registration
Rights Agreement dated as of January 31, 1990, made
pursuant to Section 8(b) of the Certificate of
Designation, Preferences and Rights (the "Series D
Certificate") with respect to the Corporation's
Series D Preferred Stock, to fund the exercise of
the Warrants; and/or
(iii) redeem all of the Series D Preferred
Stock upon the occurrence of a "Designated Event,"
as that term is defined in Section 8(e) of the
Series D Certificate."
2. Section 8 of the Series C Preferred Stock, entitled
"Redemption," is hereby amended to read in its entirety as follows:
"Section 8. Redemption. The shares of Series C
Preferred Stock shall be redeemed by the Corporation as
follows:
(A) Redemption at Option of Corporation. Subject
to Subsection (D) of this Section 8, the shares of Series
C Preferred Stock shall be redeemable at any time, in
whole or in part, at the option of the Corporation, upon
not less than five business days' prior written notice of
such redemption to the registered holders of the shares
to be redeemed. If there is more than one holder of
shares of Series C Preferred Stock and less than all the
shares are to be redeemed, the shares to be redeemed
shall be redeemed pro rata among the holders according to
their respective percentage interests. The redemption
price shall be $1,000 per share, plus an amount equal to
accrued and unpaid dividends, whether or not declared, to
the date of redemption.
(B) Redemption Upon Request of Holder Upon Exercise
of Warrants. Upon the written request of any holder of
any of the Warrants who is also a holder of shares of
Series C Preferred Stock, the shares of Series C
Preferred Stock shall be redeemable in whole or in part
upon the exercise by such holder of any or all of the
Warrants. The redemption price shall be $1,000 per
share, plus an amount equal to accrued and unpaid
dividends, whether or not declared, to the date of
redemption. The number of shares of Series C Preferred
Stock to be redeemed pursuant to this subsection (B)
shall be equal to the aggregate purchase price for the
shares of the Corporation's Common Stock to be acquired
pursuant to the exercise of the Warrants divided by
$1,000. The shares of Series C Preferred Stock to be
redeemed shall be shares held by such holder, selected by
the Corporation in such manner as it deems appropriate;
provided, however, that at the option of such holder,
such holder shall be entitled to tender any or all of the
<PAGE>
shares of Series C Preferred Stock, at the redemption
price set forth in this subsection (B), towards the
exercise price of the Warrants then being exercised.
(C) Redemption at Request of Holder Upon Occurrence
of Designated Event. The Corporation shall give the
holder or holders of the shares of Series C Preferred
Stock written notice of the occurrence of a "Designated
Event," as that term is defined in Section 8(e) of the
Series D Certificate, within five business days after
such occurrence. After the occurrence of a Designated
Event, the Corporation shall, subject to subsection (D)
below, redeem all, but not less than all, of the shares
of Series C Preferred Stock of any holder or holders
thereof on a date which is not less than 30 days or more
than 45 days after written request therefor by such
holder or holders. The redemption price shall be $1,000
per share, plus an amount equal to accrued and unpaid
dividends, whether or not declared, to the date of
redemption.
(D) Senior Debt. Notwithstanding the foregoing
provisions of subsections (A) and (C) of this Section 8,
upon the acceleration of the maturity of any Senior Debt,
or upon the non-payment of any Senior Debt at its final
scheduled maturity, all such Senior Debt shall first be
paid in full, or such payment duly provided for in cash
or in a manner satisfactory to the holders of such Senior
Debt, before the holders of shares of Series C Preferred
Stock are entitled to receive any payment in respect of
the redemption, retirement, purchase or other acquisition
by the Corporation of such shares in accordance with this
Section 8. No such payment in respect of such shares
shall be made pursuant to this Section 8 unless the Agent
(as such term is defined in the Credit Agreement) shall
have been given at least 30 days' prior written notice
thereof by the Corporation or by the holder of such
shares. For the purposes of this subsection (D), the
terms "Credit Agreement" and "Senior Debt" shall have
the same meanings as are defined in Section 8(e) of the
Series D Certificate."
3. Section 10 of the Series C Preferred Stock, entitled
"Ranking," is hereby amended to read in its entirety as follows:
"Section 10. Ranking. Except for the dividends and
distributions which may be declared and paid by the
Corporation on the Series D Preferred Stock pursuant to
Section 2 of the Series D Certificate, the Series C Preferred
Stock shall rank senior to all other classes and series of the
Corporation's preferred stock as to the payment of dividends
and the distribution of assets upon liquidation, dissolution
or winding up of the Corporation."
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this
Certificate and do affirm the foregoing as true under penalties of
perjury this 28th day of September, 1993.
/s/ Chris Marker
By: Christopher J. Marker
Title: President
/s/ Richard P. Adcock
By: Richard P. Adcock
Title: Secretary
STATE OF WASHINGTON )
) ss.
COUNTY OF PIERCE )
On the 28th day of September, 1993, personally appeared before
me, a Notary Public, Christopher J. Marker and Richard P. Adcock
personally known (or proved) to me to be the persons whose names
are subscribed to the above instrument who acknowledged that they
executed the instrument.
/s/ Gloria J. Staggers
Notary Public
<PAGE>
