THIS DOCUMENT IS BEING SUBMITTED TO AMEND FORM 10-Q FILED
APRIL 13, 1994 TO CORRECT ELECTRONIC TRANSMISSION ERRORS.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(MARK ONE)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period
ended February 28, 1994.
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 FEBRUARY 28, 1994
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 April 1, 1994: 27,166,741.
<PAGE>
<TABLE>
THE HILLHAVEN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of
February 28, 1994 and May 31, 1993 1
Consolidated Statements of Income
for the Three Months and Nine Months
Ended February 28, 1994 and 1993 3
Consolidated Statements of Cash Flows
for the Nine Months Ended
February 28, 1994 and 1993 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 6. Exhibits and Reports on Form 8-K 18
Signature 19
NOTE: Items 1 through 5 of Part II are omitted because they are
not applicable.
</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED BALANCE SHEETS
February 28, 1994 and May 31, 1993
(In thousands)
<CAPTION>
February 28, May 31,
1994 1993
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,012 $ 73,159
Accounts and notes receivable, less
allowance for doubtful accounts of
$9,797 at February 28, 1994 and
$8,700 at May 31, 1993 138,659 131,383
Inventories 20,124 21,527
Prepaid expenses and other current assets 23,172 29,078
Total current assets 218,967 255,147
Long-term notes receivable, less allowance
for doubtful accounts of $14,352 at
February 28, 1994 and $11,386 at
May 31, 1993 88,476 112,506
Property and equipment, net 783,979 766,998
Net assets held for disposition --- 29,122
Intangible assets, net of accumulated
amortization of $18,195 at
February 28, 1994 and $16,128 at
May 31, 1993 32,419 20,305
Other noncurrent assets 49,125 34,159
$ 1,172,966 $ 1,218,237
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED BALANCE SHEETS
February 28, 1994 and May 31, 1993
(In thousands, except share information)
<CAPTION>
February 28, May 31,
1994 1993
(unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 38,130 $ 18,835
Accounts payable 53,298 61,423
Employee compensation and benefits 46,902 54,370
Other accrued liabilities 50,507 42,649
Total current liabilities 188,837 177,277
Debt payable to NME, a related company --- 147,160
Other long-term debt 595,792 671,088
Other long-term liabilities 40,163 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,
58,650 issued and outstanding
(liquidation preference of $58,650) 9 ---
Common stock, $0.75 par value; 60,000,000
shares authorized; 27,149,371 and
20,978,862 issued and outstanding
at February 28, 1994 and May 31, 1993 20,362 15,734
Additional paid-in capital 324,523 208,157
Retained earnings (accumulated deficit) 6,992 (37,538)
Unearned compensation (3,717) (6,132)
Total stockholders' equity 348,174 180,226
$ 1,172,966 $ 1,218,237
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Nine Months Ended February 28, 1994 and 1993
(Unaudited)
(In thousands)
<CAPTION>
Three Months Nine Months
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net operating revenues $ 363,973 $ 344,065 $ 1,080,214 $ 1,018,738
Expenses:
Operating and
administrative 310,762 295,378 924,162 872,324
Interest 11,982 13,567 38,402 41,711
Depreciation and
amortization 13,495 13,425 40,526 39,921
Rent 13,107 13,595 39,050 39,350
Guarantee fees 1,411 2,400 5,482 7,225
Restructuring --- 1,456 (20,225) 5,169
Total expenses 350,757 339,821 1,027,397 1,005,700
Operating income 13,216 4,244 52,817 13,038
Interest income 3,256 3,860 10,391 11,519
Income before income taxes,
extraordinary charge
and cumulative effect
of accounting change 16,472 8,104 63,208 24,557
Income tax benefit
(expense) (4,765) 1,328 (17,665) 4,795
Income before extraordinary
charge and cumulative
effect of accounting
change 11,707 9,432 45,543 29,352
Extraordinary charge - early
extinguishment of debt,
net of income taxes (73) (565) (1,013) (565)
Cumulative effect of change
in accounting for
income taxes --- --- --- (1,103)
Net income $ 11,634 $ 8,867 $ 44,530 $ 27,684
(Continued on next page)
</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Nine Months Ended February 28, 1994 and 1993
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Nine Months
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Primary income per common
share:
Income from operations $ .37 $ .36 $1.67 $1.19
Extraordinary charge --- (.02) (.04) (.02)
Cumulative effect of
accounting change --- --- --- (.05)
Net income $ .37 $ .34 $1.63 $1.12
Fully diluted income per
common share:
Income from operations $ .33 $1.37
Extraordinary charge --- (.03)
Cumulative effect of
accounting change --- ---
Net income $ .33 N/A $1.34 N/A
Weighted average common
shares and equivalents
outstanding:
Primary 23,982 23,809 23,660 23,118
Fully diluted 32,492 N/A 32,569 N/A
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28, 1994 and 1993
(Unaudited)
(In thousands)
<CAPTION>
1994 1993
<S> <C> <C>
Net cash provided by operating activities
(including changes in all operating assets
and liabilities) $ 56,296 $ 44,256
Cash flows from investing activities:
Purchases of property and equipment (29,815) (20,892)
Purchases of previously leased nursing centers (1,668) (13,761)
Proceeds from sales of property and equipment 14,842 19,182
Proceeds from collection of notes receivable 16,640 19,396
Distributions from joint ventures and
partnerships 951 1,858
Increase in other assets (3,475) (4,297)
Net cash used in investing activities (2,525) 1,486
Cash flows from financing activities:
Net increase (decrease) in borrowings under
revolving lines of credit 8,000 (13,000)
Proceeds from long-term debt 357,920 91,501
Payments of principal on long-term debt (495,091) (112,152)
Proceeds from sale of preferred stock 63,399 ---
Increase in intangible assets (14,731) (3,584)
Other items (9,415) (3,246)
Net cash used in financing activities (89,918) (40,481)
Net increase (decrease) in cash (36,147) 5,261
Cash and cash equivalents at beginning of period 73,159 45,932
Cash and cash equivalents at end of period $ 37,012 $ 51,193
</TABLE>
<PAGE>
<TABLE> THE HILLHAVEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28, 1994 and 1993
(Unaudited)
(In thousands)
<CAPTION>
1994 1993
<S> <C> <C>
Supplemental disclosures
Cash paid for:
Interest $ 29,214 $ 40,670
Income taxes 7,233 7,226
Noncash investing and financing activities:
Acquisition of previously leased
nursing centers
Long-term debt assumed 13,705 35,409
Adjustment to property and
equipment and capital lease
obligations 23,600 6,780
Notes receivable issued in connection
with sale of nursing centers 1,540 33,634
Preferred stock issued to retire debt 56,601 ---
Consolidation of a previously unconsolidated
investee
Increase in assets 6,243 4,155
Increase in liabilities 6,292 4,942
Preferred stock tendered for the purchase
of common stock 63,300 ---
See accompanying Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.</TABLE>
<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 and subsequently retained have been
reclassified to ongoing operations in the consolidated
statement of income 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 $3,956, $6,622, $1,282 and $5,315 for
the three months and nine months ended February 28, 1994 and
1993, respectively. In the third quarter of 1994 the
reserve for losses on notes receivable was increased by
$2,500.
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 Nine months ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
(Income) loss
from
operations $ --- $ (219) $ 235 $ 3,797
Loss on
dispositions --- 834 1,860 28,824
$ --- $ 615 $ 2,095 $ 32,621
</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 Nine months ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues $ 27,954 $ 28,946 $ 88,615 $ 86,131
Expenses 24,637 27,490 82,045 80,962
Income from
operations
before income
taxes $ 3,317 $ 1,456 $ 6,570 $ 5,169
</TABLE>
Net assets of these facilities as of September 1, 1993, 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. Income tax expense reported for the three months and nine
months ended February 28, 1994 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 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. The extraordinary charges resulted from the write-off of
capitalized financing costs in connection with the
refinancing of certain of the Company's industrial revenue
bonds and are shown net of the tax effect of $33 and $459 in
the three and nine months ended February 28, 1994,
respectively, and $178 in both the three and nine months
ended February 28, 1993.
6. In September 1993, Hillhaven substantially completed a
recapitalization plan (the "Recapitalization") which
included 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
payable-in-kind Series D Preferred Stock, (ii) the
incurrence of $205,000 of term loans and working capital
loans, (iii) the issuance of $175,000 of 10-1/8% Senior
Subordinated Notes due 2001 and (iv) the use of cash
amounting to approximately $43,000.
7. 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.
8. 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. The sale resulted in a gain of
$5,102 which is included in net operating revenues.
9. On February 28, 1994, NME exercised its warrants to purchase
six million shares of Hillhaven common stock. The aggregate
exercise price of $63,300 was paid by the tender of a like
amount of Hillhaven's payable-in-kind Series D Preferred
Stock owned by NME. On February 28, 1994, NME held 32.7% of
the outstanding shares of the Company's common stock.
<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 third quarter, Hillhaven realized net income of
$11,634 compared to $8,867 in the prior year period. Net income
for the nine months ended February 28, 1994 and 1993 amounted to
$44,530 and $27,684, respectively. Income from operations before
income taxes and extraordinary charges increased to $16,472 in
the third quarter from $8,104 in the prior year period, and to
$63,208 in the nine months ended February 28, 1994 from $24,557
in the same period in the prior year. Earnings for the nine
months ended February 28, 1994 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 statements 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 $363,973, $1,080,214, $344,065 and
$1,018,738 in the three and nine months ended February 28, 1994
and 1993, respectively. Operating income before property-related
expenses (which are comprised of rent, depreciation and
amortization, interest and guarantee fees) for the three and nine
months ended February 28, 1994, was $53,211 (14.6% of net
operating revenues), and $156,052 (14.4% of net operating
revenues), respectively, an increase of approximately 9.3% and
6.6% from $48,687 (14.2% of net operating revenues) and $146,414
(14.4% of net operating revenues) in the same periods in the
prior year.
The following table summarizes selected operating statistics:
<TABLE>
<CAPTION>
At February 28,
1994 1993
<S> <C> <C>
Nursing Centers
Number of centers
owned/leased and operated 272 293
Number of licensed beds 34,143 36,208
Centers managed for others 16 17
Pharmacy Outlets 80 115
Retirement Housing Communities 20 23
</TABLE>
Nursing center net operating revenues, comprised primarily of
patient revenues, increased 7.3% and 7.4% in the three and nine
months ended February 28, 1994 to $311,793 and $927,330,
respectively, from $290,515 and $863,420 in the same periods in
the prior year. The most significant revenue increases were
provided by subacute medical and rehabilitation care services
which constituted, respectively, approximately 26% and 24% of
nursing center net operating revenues in the current three- and
nine-month periods and 21% and 18% in the three and nine months
ended February 28, 1993. These results reflect the continued
emphasis by the Company on these higher revenue specialty
services and the expansion of such operations. Revenues for the
1994 three- and nine-month periods also include gains on the
sales of 13 nursing centers in the amount of $5,102 (Note 8).
Net patient revenues per patient day increased by 8.2% in both
the three and nine months ended February 28, 1994 to $103.24 and
$100.65, respectively, from $95.40 and $93.03 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
subacute medical and rehabilitation 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 93.2% and 93.5% in the 1994 three-
and nine-month periods and 93.3% and 93.5% in the same periods in
1993.
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 Nine months ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net Patient Revenues
Medicaid 49.2% 53.8% 50.9% 55.7%
Private and other 26.8 26.4 26.6 26.7
Medicare 24.0 19.8 22.5 17.6
Patient Census
Medicaid 65.9% 68.1% 67.1% 68.7%
Private and other 23.6 23.2 23.2 23.4
Medicare 10.5 8.7 9.7 7.9
</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 subacute medical and rehabilitation care
programs. Hillhaven is working to improve private pay and other
census by increasing the number of managed care patients in its
nursing centers. The Company has entered into managed care
contracts with insurance companies to provide subacute care to
their insureds, offering a less expensive alternative to acute
care hospitals. The number of managed care patients in
Hillhaven's nursing centers averaged approximately 500 in the
current quarter compared to 230 in the prior year period.
Net operating revenues from pharmacy operations decreased to
$43,745 and $128,906 in the three and nine months ended February
28, 1994, respectively, from $46,488 and $135,332 in the prior
year periods. Decreased revenues resulted primarily from the
disposition of 47 marginally performing retail outlets in 1993
and the first nine months of 1994. Institutional revenues
accounted for approximately 76% of pharmacy net operating
revenues in both the three and nine months ended February 28,
1994, versus 62% in both the same periods in 1993. The growing
contribution from institutional operations reflects the Company's
increasing focus on the nursing home market, disposition of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
retail outlets and continuing pricing pressure in the retail
operations. Institutional revenues increased by 15.6% and 16.7%
to $33,243 and $97,647 in the three and nine months ended
February 28, 1994, respectively, from $28,759 and $83,705 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 $5,706 in the current quarter (13.0% of net
operating revenue), a decrease of approximately 9.7% from $6,319
(13.6% of net operating revenue) in the prior year quarter. For
the nine months ended February 28, 1994, operating income before
property-related expenses amounted to $16,761 (13.0% of net
operating revenue) compared to $17,331 (12.8% of net operating
revenue) in the same period in the prior year.
Net operating revenues from retirement housing operations
increased to $8,435 and $23,978 in the three and nine months
ended February 28, 1994, respectively, from $7,062 and $19,986 in
the prior year periods. These increases were primarily due to
improvements in average occupancy, which increased to 96.7% and
95.9% in the three and nine months ended February 28, 1994 from
92.7% and 91.4% in the same periods in 1993.
Operating and administrative expenses of the Company's nursing
centers increased by 6.5% and 7.4% in the three and nine months
ended February 28, 1994 to $267,017 and $795,269, respectively,
from $250,627 and $740,331 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 76% and 77% of operating and
administrative expense in the current three- and nine-month
periods, respectively. Hillhaven has increased staffing levels
in its nursing centers to accommodate the expansion of its
subacute medical and rehabilitation care programs and services.
Therapy wages and benefits, comprising approximately 12% and 11%
of total nursing center labor costs in the three and nine months
ended February 28, 1994, respectively, increased by 57% and 71%
from the prior three- and nine-month periods to $24,293 and
$68,289 respectively. Nursing wages and benefits, accounting for
approximately 54% of total nursing center labor costs in both the
three and nine months ended February 28, 1994, remained
consistent in the third quarter as compared to the prior year
quarter and increased by 2.5% in the nine-month period over the
prior year. Increases in labor costs were mitigated by
favorable results of workers' compensation loss experience in
prior years as actuarially computed during the 1994 fiscal year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Included in operating and administrative expenses in the current
period is a provision for losses on certain of the Company's
notes receivable in the amount of $2,500. Combined interest and
guarantee fee expense decreased by $2,574 to $13,393 in the
current quarter and by $5,052 to $43,884 in the current nine-
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 income. Including the impact of
this charge, the effect of the adoption of SFAS 109 on the three
and nine months ended February 28, 1993 was a reduction of net
income tax expense and an increase in net income of $1,601 and
$4,745, 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 improved the
Company's balance sheet, extended the maturities of outstanding
indebtedness, increased operating flexibility through the
acquisition of leased facilities, fixed the interest rate on a
portion of its previously floating rate indebtedness and also
modified 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, (iv) borrowings of $30,000
under an accounts receivable-backed credit facility and (v) the
use of approximately $43,000 of cash. The Bank Term Loan bears
interest at a floating rate which, as of February 28, 1994, was
5.75%.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Recapitalization included 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. In
February 1994, the letter of credit facility was reduced to
$90,000. At February 28, 1994, letters of credit outstanding
under the letter of credit facility totalled $68,668 and the
revolving bank line of credit had an outstanding balance of
$8,000.
The Company also has an accounts receivable-backed revolving
credit facility which provides for borrowings of up to $30,000,
none of which was outstanding at February 28, 1994.
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
nine months of 1994 totaled $56,296, compared to $44,256 in the
prior year. The increase is due primarily to higher pretax
earnings.
Net cash used in investing activities amounted to $17,256 in the
first nine months of 1994 compared to $2,098 in the prior year
period. In connection with the Recapitalization, the Company
expended $14,829 for financing costs. On December 31, 1993,
Hillhaven completed the sale of thirteen nursing centers. The
Company received cash for the $15,594 aggregate sales price.
During the nine months ended February 28, 1993, Hillhaven
purchased 51 nursing centers previously leased from NME for an
aggregate purchase price of $140,090. 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, the assumption of underlying
debt amounting to $4,582 and NME financing in the amount of
$52,700, with the balance settled in cash. The Company also
acquired from third parties five previously leased nursing
centers for an aggregate purchase price of $19,957. One of the
facilities was subsequently sold. These transactions were
partially financed by the assumption of underlying debt
aggregating $8,145 and borrowings of $2,750. During this same
period, the Company disposed of 44 nursing centers for an
aggregate sales price of $52,007. Hillhaven provided financing
for $33,634 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 $29,815, compared
to $20,892 in the prior year.
Net cash used in financing activities increased to $75,187 from
$36,897 in the prior year due to the overall reduction in the
Company's borrowings.
On February 28, 1994, NME exercised its warrants to purchase six
million shares of Hillhaven common stock. NME tendered shares of
the Company's payable-in-kind Series D Preferred Stock in payment
of the $63,300 purchase price.
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) though 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.
President Clinton campaigned on health care reform and following
his election formed a task force to study and formulate a plan
for reform of the United States' health care system. On October
27, 1993, President Clinton submitted the American Health
Security Act of 1993 (the "Health Security Act") to Congress for
consideration. The Health Security Act, which is designed to
guarantee health coverage to all United States citizens and legal
residents and to create regional alliances to negotiate contracts
with qualified health plans, is currently being studied by the
relevant Congressional committees. At the same time, numerous
other health care reform proposals have been introduced by
members of the House of Representatives and the Senate. These
proposals range from the formation a single payor system to the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
creation of health plan purchasing cooperatives to pool the
purchasing power of individuals and employees of small
businesses, or the formation of purchasing groups to negotiate
contracts with health plans and offer them to individuals. These
proposals also differ on the treatments of long term care
services. While it is expected that health care reform
legislation will be enacted, the exact nature or extent of such
legislation has yet to be determined. In any case, it is
possible that any legislation passed will have an effect on the
operation and finances of the Company.
<PAGE>
PART II. OTHER INFORMATION
Items 1 - 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
(11) Statement Re: Computation of per share
earnings for the three months and nine
months ended February 28, 1994 and 1993
(B) Reports filed on Form 8-K:
None
<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: April 13, 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> PART I - EXHIBIT 11
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning
of period (1) <F1> 21,020 20,911 20,979 20,883
Shares issued upon exercise of
stock options 9 10 34 20
Restricted share awards, net --- 76 (5) 25
Shares issued upon conversion
of debentures 4 --- 1 ---
Dilutive effect of outstanding stock
options and contingent shares 210 222 213 187
Dilutive effect of warrants held
by NME 2,739 2,590 2,438 2,003
Weighted average number of shares
and share equivalents
outstanding (2) <F2> 23,982 23,809 23,660 23,118
Income before extraordinary charge
and cumulative effect of
accounting change $ 11,707 $ 9,432 $ 45,543 $ 29,352
Adjustments related to proceeds
from exercise of options
and warrants under the
"modified treasury stock" method --- --- --- 478
Preferred stock dividends (2,645) (722) (6,012) (2,166)
Adjusted income 9,062 8,710 39,531 27,664
Extraordinary charge, net of income
taxes (73) (565) (1,013) (565)
Cumulative effect of change in
accounting for income taxes --- --- --- (1,103)
Net income as adjusted $ 8,989 $ 8,145 $ 38,518 $ 25,996
Primary earnings per share:
Income before extraordinary
charge and cumulative
effect of accounting change $ .37 $ .36 $ 1.67 $ 1.19
Extraordinary charge --- (.02) (.04) (.02)
Cumulative effect of change in
accounting for income taxes --- --- --- (.05)
Net income $ .37 $ .34 $ 1.63 $ 1.12
</TABLE>
(Continued on next page)
<PAGE>
<TABLE> PART I - EXHIBIT 11
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares
used in primary calculation 23,982 23,809 23,660 23,118
Additional dilutive effect of
stock options and warrants 292 --- 580 10
Assumed conversion of convertible
debentures 8,218 8,384 8,329 5,841
Fully diluted weighted average
number of shares (2) <F2> 32,492 32,193 32,569 28,969
Income before operations,
extraordinary charge and
cumulative effect of accounting
change, adjusted per primary
calculation $ 9,062 $ 8,710 $ 39,531 $ 27,664
Adjustments for interest expense
and related income taxes 1,729 2,649 5,049 5,396
Adjusted income used in fully
diluted calculation 10,791 11,359 44,580 33,060
Extraordinary charge, net of
income taxes (73) (565) (1,013) (565)
Cumulative effect of change in
accounting for income taxes --- --- --- (1,103)
$ 10,718 $ 10,794 $ 43,567 $ 31,392
Fully diluted earnings per share:
Income before extraordinary
charge and cumulative effect
of accounting change $ .33 $ .35 $ 1.37 $ 1.14
Extraordinary charge --- (.01) (.03) (.02)
Cumulative effect of change in
accounting for income taxes --- --- --- (.04)
Net income (3) <F3> $ .33 $ .34 $ 1.34 $ 1.08
</TABLE>
- - - ----------
[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.
(3)<F3> The calculations for the three and nine months ended February 28,
1993 are submitted in accordance with Regulation S-K item 601(b)(11)
although they are contrary to paragraph 37 of APB Opinion No.
15.<PAGE>
