<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
June 30, 1995
THE HILLHAVEN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 1-10426 91-1459952
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
1148 Broadway Plaza, Tacoma, Washington 98402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(206) 572-4901
<PAGE> 2
Item 5. Other Events
On June 30, 1995, The Hillhaven Corporation (the "Company") acquired
Nationwide Care, Inc. ("Nationwide") and its affiliated corporations and
partnerships through (i) a stock exchange between the Company and Nationwide,
Phillippe Enterprises, Inc. and Meadowvale Skilled Care Center, Inc., (ii) the
assignment of all of the outstanding partnership interests in Camelot Care
Centers to Nationwide and (iii) the assignment of all of the outstanding
partnership interests in Evergreen Woods, Ltd. to the Company's wholly owned
subsidiary, First Healthcare Corporation (the "Share Exchange"). Nationwide and
the Share Exchange are discussed in greater detail in the Company's Registration
Statement on Form S-4 (File No. 33-58641), which was filed with the Securities
and Exchange Commission on May 19, 1995. This current report is being filed to
update Nationwide's financial statements pursuant to Rule 3-12 of Regulation
S-X.
Item 7. Financial Statements and Exhibits
(a)(1) The financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations of Nationwide updated through May
31, 1995 are attached as Exhibit 99.01 hereto and incorporated herein by this
reference.
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 hereunto duly authorized.
THE HILLHAVEN CORPORATION
By:
------------------------
Richard P. Adcock
Senior Vice President,
Secretary and General
Counsel
Dated: August 11, 1995
<PAGE> 3
EXHIBIT INDEX
Exhibit 99.01 Financial statements of Nationwide Care, Inc. as of September
30, 1994, with Independent Auditors' Report thereon, unaudited
financial statements of Nationwide Care, Inc. as of
May 31, 1995 and the Nationwide Care, Inc. Management's
Discussion and Analysis of Financial Condition and Results
of Operations for the three years ended September 30, 1994 and
the eight months ended May 31, 1994 and 1995.
<PAGE> 1
EXHIBIT 99.01
NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NCI generates revenues primarily from the following sources: nursing
centers, assisted living and retirement centers, home health care services and
management fees. Approximately 93.9% of NCI's revenues for fiscal 1994 were
generated from the operation of nursing centers. Nursing center revenues include
all room and board charges (including such charges related to Alzheimer's and
subacute care patients) and rehabilitation and ancillary services charges at
NCI's owned and leased centers. Revenues and profitability of nursing centers
are affected in large part by statutes and regulations under Medicare and
Medicaid as well as the reimbursement policies of insurance companies and other
private payors. Of NCI's nursing center revenues for fiscal 1994, approximately
51.9% were generated by private pay and Medicare patients. The balance was
Medicaid revenues. Approximately 14.7% of nursing center revenues for fiscal
1994 were generated by Indiana skilled care Medicaid patients (for whom NCI
receives higher revenue per patient day than for Indiana intermediate care
Medicaid patients).
NCI's revenues vary among centers based on various factors, including the
mix of beds licensed as skilled and/or intermediate care Medicaid, total
capacity, occupancy rates, reimbursement methodologies and rates among the payor
categories, the relative proportion of revenues represented by payor categories
and the scope and utilization of NCI's rehabilitation and ancillary services.
Although Medicare patients generate the highest revenue per patient day,
profitability is not always increased due to the additional costs associated
with providing the higher level of care required by such patients. In general,
private pay sources are more profitable to NCI than governmental reimbursement
sources. NCI generally derives a higher profit margin from rehabilitation and
ancillary services than from basic nursing services.
The long term care industry is undergoing significant changes as providers
respond to cost containment, regulatory and other pressures. In recent years
there have been, and NCI expects that there will continue to be, a number of
federal and state proposals to limit Medicare and Medicaid reimbursement for
long term health care services. In 1994, the state of Indiana promulgated a
regulatory change that, effective August 1, 1994, reduced reimbursement rates
for certain services provided to Medicaid patients.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items in NCI's statements of operations. The
percentages for fiscal 1993 include the results of (i) the Nationwide Entities
for the full year; (ii) Royal Oaks Health Care and Rehabilitation Center from
January 1, 1993 to September 30, 1993, (iii) the leasing of the Regency Centers
from July 1, 1993 to September 30, 1993 and (iv) the nursing center operations
of the Non-Controlled Entities from July 27, 1993 to September 30, 1993.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------
EIGHT MONTHS
YEARS ENDED
ENDED SEPTEMBER 30, MAY 31,
------------------------- -----------------
1992 1993 1994 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue, net............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Health care services................... 65.6 69.4 74.9 74.0 76.9
Selling, general and administrative.... 6.4 6.5 4.9 4.2 5.0
Leases and rental...................... 3.1 4.0 5.9 5.9 5.6
Depreciation and amortization.......... 5.3 4.2 2.4 2.4 2.8
----- ----- ----- ----- -----
Income from operations................... 19.6 15.9 11.9 13.5 9.7
Interest expense, net.................... 8.2 5.5 4.0 3.7 3.8
----- ----- ----- ----- -----
Income before income taxes and
extraordinary items.................... 11.4% 10.4% 7.9% 9.8% 5.9%
===== ===== ===== ===== =====
</TABLE>
44
<PAGE> 2
Eight Months Ended May 31, 1994 Compared to Eight Months Ended May 31, 1995
Revenues increased 8.4%, or $6.7 million, from $79.7 million in 1994 to
$86.4 million in 1995. This increase was primarily attributable to an increase
in nursing center revenues, which increased $4.3 million. The increase in
nursing center revenues was attributable to an increase in total census days,
certain patient rate increases (including the effect of an increasing proportion
of patients requiring skilled care) and an increase in rehabilitation and
ancillary services provided. Revenue also increased due to additional home
health care services. These increases were partially offset by a decline in
revenue due to lower Indiana Medicaid rates. The total of private pay, Medicare
and Indiana skilled care Medicaid patient revenues as a percent of total nursing
center revenues increased from 66.4% in 1994 to 66.7% in 1995.
Health care services expenses increased by 12.7%, or $7.5 million, from
$59.0 million in 1994 to $66.5 million in 1995, due primarily to NCI's
increasing proportion of higher acuity patients and the increased level of
rehabilitation and ancillary services provided. Health care services expenses as
a percent of revenues increased from 74.0% in 1994 to 76.9% in 1995.
Selling, general and administrative expenses increased by 29.0% or $1.0
million, from $3.3 million in 1994 to $4.3 million in 1995, due primarily to
staffing increases in connection with the addition of subacute care services.
Selling, general and administrative expenses as a percent of revenues increased
from 4.2% in 1994 to 5.0% in 1995.
Leases and rental expenses increased by 3.3%, or $154,000, from $4.7
million in 1994 to $4.8 million in 1995, due primarily to ordinary lease rate
increases. Leases and rental expenses as a percent of revenues decreased from
5.9% in 1994 to 5.6% in 1995.
Depreciation and amortization expenses increased by 23.8%, or $0.5 million,
from $1.9 million in 1994 to $2.4 million in 1995, due primarily to normal
capital expenditures. Depreciation and amortization expenses as a percent of
revenues increased from 2.4% in 1994 to 2.8% in 1995.
Income from operations decreased 22.1%, or $2.4 million, from $10.8 million
in 1994 to $8.4 million in 1995, as a result of the net negative impact of the
factors noted above.
Net interest expense increased 12.1%, or $0.4 million, from $2.9 million in
1994 to $3.3 million in 1995, due to an increase in outstanding indebtedness
during 1995, principally with respect to a new term loan and because of rising
interest rates based upon a commercial bank's Prime Rate. Net interest expense
as a percent of revenues increased from 3.7% in 1994 to 3.8% in 1995.
Income before income taxes and extraordinary items decreased 35.0%, or $2.7
million, from $7.8 million in 1994 to $5.1 million in 1995. Income before income
taxes and extraordinary items as a percent of revenues decreased from 9.8% in
1994 to 5.9% in 1995, due primarily to the lower Indiana Medicaid rates.
Year Ended September 30, 1993 Compared to Year Ended September 30, 1994
Revenues increased 82.5%, or $54.5 million, from $66.2 million in 1993 to
$120.7 million in 1994. This increase was primarily attributable to an increase
in nursing center revenues, which increased $55.2 million due to the inclusion
in the 1994 amounts of the results of operations of 11 additional nursing
centers (the "Additional Nursing Centers") as a result of (i) the acquisition of
the Non-Controlled Entities in connection with the Reorganization, (ii) the
Royal Oaks Acquisition, (iii) the leasing of the Regency Centers, (iv) patient
rate increases (including the effect of the increasing proportion of patients
requiring skilled care) and (v) an increase in rehabilitation and ancillary
services provided. These increases were partially offset by a decrease in
management fees and lease revenues due to the acquisition of the Non-Controlled
Entities. The total of private pay, Medicare and Indiana skilled Medicaid
patient revenues as a percent of total nursing center revenues decreased from
67.5% in 1993 to 66.6% in 1994.
Health care services expenses increased by 96.9%, or $44.5 million, from
$45.9 million in 1993 to $90.4 million in 1994. The increase in health care
services expenses was primarily attributable to the Additional Nursing Centers
and as a result of NCI's increasing proportion of higher acuity patients and the
increased level of rehabilitation and ancillary services provided. Health care
services expenses as a percent of revenues
45
<PAGE> 3
increased from 69.4% in 1993 to 74.9% in 1994 due primarily to wage increases
and the higher level of rehabilitation and ancillary services provided.
Selling, general and administrative expenses increased by 38.6% or $1.7
million, from $4.3 million in 1993 to $6.0 million in 1994, due primarily to
staffing increases in connection with the Additional Nursing Centers, modest
wage increases and costs associated with a failed initial public offering.
Selling, general and administrative expenses as a percent of revenues decreased
from 6.5% in 1993 to 4.9% in 1994.
Leases and rental expenses increased by 165.3%, or $4.4 million, from $2.7
million in 1993 to $7.1 million in 1994, due primarily to the Additional Nursing
Centers. Leases and rental expenses as a percent of revenues increased from 4.0%
in 1993 to 5.9% in 1994, primarily as a result of the leases of the Regency
Centers.
Depreciation and amortization expenses increased by 7.6%, or $0.2 million,
from $2.7 million in 1993 to $2.9 million in 1994, due primarily to the
Additional Nursing Centers. Depreciation and amortization expenses as a percent
of revenues decreased from 4.2% in 1993 to 2.4% in 1994.
Income from operations increased 36.1%, or $3.8 million, from $10.5 million
in 1993 to $14.3 million in 1994, due primarily to the Additional Nursing
Centers and the increase in census days and rehabilitation and ancillary
services provided at NCI's other centers.
Net interest expense increased 30.2%, or $1.1 million, from $3.7 million in
1993 to $4.8 million in 1994, due primarily to an increase in outstanding
indebtedness, principally with respect to a line of credit and the Senior
Subordinated Notes. Net interest expense as a percent of revenues decreased from
5.5% in 1993 to 4.0% in 1994.
Income before income taxes and extraordinary items increased 39.2%, or $2.7
million, from $6.9 million in 1993 to $9.6 million in 1994. Income before income
taxes and extraordinary items as a percent of revenues decreased from 10.4% in
1993 to 7.9% in 1994, due primarily to the elimination of management fees and
lease revenues due to the acquisition of the Non-Controlled Entities.
Year Ended September 30, 1992 Compared to Year Ended September 30, 1993
Revenues increased 52.6%, or $22.8 million, from $43.3 million in 1992 to
$66.1 million in 1993. This increase was primarily attributable to the
Additional Nursing Centers, which accounted for $14.7 million of the increase.
The remaining increase was attributable to an increase in total census days,
patient rate increases (including the effect of an increasing proportion of
patients requiring skilled care) and an increase in rehabilitation and ancillary
services provided. These increases were partially offset by a decrease in
management fees and lease revenues due to the acquisition of the Non-Controlled
Entities. The total of private pay, Medicare and Indiana skilled care Medicaid
patient revenues as a percent of total nursing center revenues increased from
65.2% in 1992 to 67.5% in 1993.
Health care services expenses increased by 61.5%, or $17.5 million, from
$28.4 million in 1992 to $45.9 million in 1993. The increase in health care
services expenses was primarily attributable to the Additional Nursing Centers,
which accounted for $11.3 million of the increase. Health care services expenses
related to the operations of NCI's other centers increased, due primarily to
NCI's increasing proportion of higher acuity patients and the increased level of
rehabilitation and ancillary services provided. Health care services expenses as
a percent of revenues increased from 65.6% in 1992 to 69.4% in 1993 due
primarily to wage increases and the higher level of rehabilitation and ancillary
services provided.
Selling, general and administrative expenses increased by 55.2% or $1.5
million, from $2.8 million in 1992 to $4.3 million in 1993. This increase was
due primarily to staffing increases in connection with the Additional Nursing
Centers and modest wage increases. Selling, general and administrative expenses
as a percent of revenues increased from 6.4% in 1992 to 6.5% in 1993.
Leases and rental expenses increased by 97.4%, or $1.3 million, from $1.4
million in 1992 to $2.7 million in 1993, due primarily to the leases of the
Regency Centers. Leases and rental expenses as a percent of revenues increased
from 3.1% in 1992 to 4.0% in 1993.
46
<PAGE> 4
Depreciation and amortization expenses increased by 18.6%, or $0.4 million,
from $2.3 million in 1992 to $2.7 million in 1993, due primarily to the
Additional Nursing Centers. Depreciation and amortization expenses as a percent
of revenues decreased from 5.3% in 1992 to 4.2% in 1993.
Income from operations increased 24.0%, or $2.0 million, from $8.5 million
in 1992 to $10.5 million in 1993, due primarily to the Additional Nursing
Centers and the increase in total census days and rehabilitation and ancillary
services provided at NCI's other centers.
Net interest expense increased 3.6%, or $0.2 million, from $3.5 million in
1992 to $3.7 million in 1993, due primarily to an increase in outstanding
indebtedness related to the operations of the Additional Nursing Centers. Net
interest expense as a percent of revenues decreased from 8.2% in 1992 to 5.5% in
1993.
Income before income taxes and extraordinary items increased 38.6%, or $1.9
million, from $5.0 million in 1992 to $6.9 million in 1993. Income before income
taxes and extraordinary items as a percent of revenues decreased from 11.4% in
1992 to 10.4% in 1993, due primarily to the elimination of management fees and
lease revenues due to the acquisition of the Non-Controlled Entities.
LIQUIDITY AND CAPITAL RESOURCES
NCI has historically financed its operations and growth, including
acquisitions, with cash flow from operations, issuance of the Senior
Subordinated Notes and Redeemable Preferred Stock and borrowings under various
credit facilities. Prior to the closing of the Share Exchange, NCI plans to
finance its operations by continuing to utilize its cash flow from operations
and borrowings under its current credit agreements. Capital expenditures in
fiscal year 1992 and 1993 consisted primarily of computer system additions and
upgrades, the remodeling of existing facilities and a 15-bed addition. Capital
expenditures were $2.0 million in fiscal year 1992, $2.4 million in fiscal year
1993 and $8.3 million in fiscal year 1994. Capital expenditures in 1994 have
been for the construction of a 200-bed nursing center on a site adjacent to its
Royal Oaks Health Care and Rehabilitation Center ($3.5 million), additional
subacute care units having a total of approximately 135 dedicated beds ($0.8
million), a 72-unit assisted living center to be named The Heritage at Wildwood
and located adjacent to NCI's Wildwood Health Care Center ($1.9 million), a
15-bed addition to the Wildwood Health Care Center ($0.7 million) and normal
capital expenditures in existing long-term health care centers ($1.4 million).
Net cash provided by operations was $7.3 million, $5.9 million and $9.1
million in fiscal years 1992, 1993 and 1994, respectively. For the eight months
ended May 31, 1995, net cash provided by operations was $8.1 million.
Accounts receivable (net of allowances) were $1.9 million, $9.1 million, $9.4
million and $9.2 million at September 30, 1992, 1993 and 1994 and May 31,
1995, respectively, and estimated settlements due from third party payors
aggregated $0, $1.4 million, $2.3 million and $1.8 million at September 30,
1992, 1993 and 1994 and May 31, 1995, respectively. The number of days in
accounts receivable and estimated settlements due from third party payors was
approximately 22 days at September 30, 1992, 35 days at September 30, 1993
(based upon pro forma revenues of $110.9 million), 36 days at September 30, 1994
and 31 days at May 31, 1995.
NCI has outstanding $25.7 million of Notes, which are collateralized by an
irrevocable direct pay letter of credit issued by a commercial bank (the "Letter
of Credit"). The Notes amortize over a 15-year period, with a final maturity in
August 2008 and the interest rate resets every seven days. The effective
interest rate on the Notes at May 31, 1995 was approximately 8.0%. NCI has
negotiated a cap on its effective interest rate on the Notes at 9.0% through
November 1996. NCI is required to deposit $950,000 on a semi-annual basis in a
sinking fund to provide for periodic repayment of the Notes. The sinking fund
payments commenced in February 1994.
NCI also has outstanding two term loans in the amount of $9.3 million and
$4.3 million, respectively. Both term loans bear interest at prime plus 0.75%,
with the $9.5 million loan being amortized over 15 years and the $4.1 million
loan being amortized over 10 years. Both loans mature in January 2000. Principal
and interest payments began January 1995.
47
<PAGE> 5
NCI also has outstanding $12 million of its Senior Subordinated Notes and
$3 million of Redeemable Preferred Stock. The Senior Subordinated Notes are
payable in quarterly principal installments of $1.5 million beginning November
1998 with the final installment due in August 2000. The Senior Subordinated
Notes bear interest at an annual rate of 12.5%. The Redeemable Preferred Stock
has no coupon rate and is redeemable in eight equal quarterly installments of
$375,000 commencing November 1998 and is mandatorily redeemable in certain
circumstances. The Senior Subordinated Notes will be prepaid and the Redeemable
Preferred Stock will be redeemed in connection with the Share Exchange.
Credit agreements for NCI's outstanding loans contain certain covenants
which, without the prior consent of the lenders, limit certain activities of NCI
and its subsidiaries. Such covenants contain limitations relating to the merger
or consolidation of NCI and its subsidiaries and NCI's and its subsidiaries'
ability to secure indebtedness, make guarantees, grant security interests and
declare dividends. In addition, NCI and certain subsidiaries must maintain
certain minimum levels of tangible net worth, interest coverage and debt service
coverage and must maintain certain liabilities to net worth and working capital
ratios.
Legislative and regulatory action has resulted in continuing change in the
Medicare and Medicaid reimbursement programs which could have an adverse impact
on NCI. The changes have limited, and are expected to continue to limit, payment
increases under these programs. Also, the timing of payments made under the
Medicare and Medicaid programs are subject to regulatory action and governmental
budgetary constraints; in recent years, the time period between submission of
claims and payment has increased. Additionally, implementation of NCI's strategy
to expand specialty medical services to independent providers should reduce the
impact of changes in the Medicare and Medicaid reimbursement programs on NCI as
a whole. Within the statutory framework of the Medicare and Medicaid programs,
there are substantial areas subject to administrative rulings and
interpretations which may further affect payments made under those programs.
Further, the federal and state governments may reduce the funds available under
those programs in the future or require more stringent utilization and quality
reviews of health care facilities.
SEASONALITY
NCI's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include the timing of
Medicaid rate increases, seasonal census cycles and the number of calendar days
in a given quarter.
NEW ACCOUNTING STANDARDS
NCI does not offer any post-employment benefits or post-retirement benefits
other than pensions. Accordingly, Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Post-Employment Benefits," and Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions," are not applicable to NCI.
IMPACT OF INFLATION
The long term health care industry is labor intensive. Wages and other
expenses increase more rapidly during periods of inflation and when shortages in
the labor market occur. In addition, suppliers pass along rising costs in the
form of higher prices. Increases in reimbursement rates under Medicare and
Medicaid generally lag behind actual cost increases.
48
<PAGE> 6
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Nationwide Care, Inc.
We have audited the accompanying balance sheets of Nationwide Care, Inc. as
of September 30, 1993 and 1994 and the related statements of income, other
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nationwide Care, Inc. at
September 30, 1993 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
November 10, 1994, except for Note 9
as to which the date is February 27, 1995
F-2
<PAGE> 7
NATIONWIDE CARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------- MAY 31
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,023,930 $ 2,596,829 $ 8,611,578
Accounts receivable (less allowances of $126,000,
$365,000 and $382,000)......................... 9,116,021 9,442,263 9,204,968
Third-party settlements........................... 1,360,000 2,322,000 1,784,000
Management fees receivable........................ 246,285 218,058 197,753
Deferred income taxes............................. 1,052,000 700,000 900,000
Prepaid expenses.................................. 1,587,828 1,537,631 375,267
Other current assets.............................. 307,654 361,826 258,870
----------- ----------- -----------
Total current assets...................... 15,693,718 17,178,607 21,332,436
Property and equipment, net......................... 43,352,052 49,023,211 53,529,424
Other assets:
Intangible assets, net............................ 6,561,733 6,153,774 6,702,697
Purchase option deposits.......................... 350,000 350,000 350,000
Lease security deposit............................ 2,482,000 2,482,000 2,482,000
Other............................................. 692,041 751,242 306,385
----------- ----------- -----------
Total other assets........................ 10,085,774 9,737,016 9,841,082
----------- ----------- -----------
Total assets.............................. $69,131,544 $75,938,834 $84,702,942
=========== =========== ===========
LIABILITIES AND OTHER SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 4,034,450 $ 4,264,670 $ 3,304,067
Accrued payroll and related taxes................. 3,505,580 4,205,826 4,920,329
Accrued other liabilities......................... 2,378,070 2,671,102 3,607,450
Current portion of long-term debt................. 3,494,374 3,207,507 3,554,589
----------- ----------- -----------
Total current liabilities................. 13,412,474 14,349,105 15,386,435
Long-term liabilities:
Long-term debt, less current portion
Banks and other................................ 40,097,941 40,982,686 46,931,372
Related parties................................ 2,305,560 2,062,019 1,042,913
Deferred income taxes............................. 4,295,000 4,655,000 4,855,000
Other............................................. 100,000 100,000 100,000
----------- ----------- -----------
46,798,501 47,799,705 52,929,285
Stock warrants...................................... 6,180,511 5,918,072 15,728,866
Redeemable preferred stock.......................... 1,072,995 1,250,986 1,400,905
Other shareholders' equity:
Common stock...................................... 3,634,886 3,989,886 3,989,886
Retained earnings (deficit)....................... (1,967,823) 2,631,080 (4,732,435)
----------- ----------- -----------
Total other shareholders' equity.......... 1,667,063 6,620,966 (742,549)
----------- ----------- -----------
Total liabilities and other shareholders'
equity.................................. $69,131,544 $75,938,834 $84,702,942
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
NATIONWIDE CARE, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED SEPTEMBER 30 MAY 31
----------------------------------------- --------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Health care services, net.... $39,587,525 $63,268,409 $119,782,550 $79,093,739 $85,920,253
Management fees from related
parties and other......... 2,420,359 1,725,265 635,652 442,796 318,652
Lease revenue................ 1,339,794 1,167,537 306,252 204,168 204,168
----------- ----------- ------------ ----------- -----------
43,347,678 66,161,211 120,724,454 79,740,703 86,443,073
Expenses:
Health care services......... 28,416,362 45,906,771 90,384,315 59,018,378 66,517,935
Selling, general and
administrative............ 2,775,318 4,307,384 5,133,621 3,328,886 4,295,407
Abandoned IPO costs.......... -- -- 837,000 -- --
Leases and rental............ 1,353,305 2,670,650 7,085,425 4,692,688 4,845,234
Depreciation and
amortization.............. 2,308,182 2,738,422 2,947,041 1,947,807 2,412,292
----------- ----------- ------------ ----------- -----------
34,853,167 55,623,227 106,387,402 68,987,759 78,070,868
----------- ----------- ------------ ----------- -----------
Income from operations......... 8,494,511 10,537,984 14,337,052 10,752,944 8,372,205
Interest expense, net.......... 3,539,945 3,668,621 4,777,597 2,945,712 3,301,007
----------- ----------- ------------ ----------- -----------
Income before income taxes and
extraordinary items.......... 4,954,556 6,869,363 9,559,455 7,807,232 5,071,198
Income taxes................... 380,000 1,744,000 4,600,000 3,302,000 2,474,000
----------- ----------- ------------ ----------- -----------
Income before extraordinary
item......................... 4,574,566 5,125,363 4,959,455 4,505,232 2,597,198
Extraordinary items:
Tax benefit from utilization
of net operating loss
carryforwards............. 380,000 -- -- -- --
Loss on early extinguishment
of debt (net of income tax
benefit of $1,101,000).... -- 1,652,420 -- -- --
----------- ----------- ------------ ----------- -----------
Net income..................... $ 4,954,566 $ 3,472,943 $ 4,959,455 $ 4,505,232 $ 2,597,198
=========== =========== ============ =========== ===========
Earnings per share $ 0.58 $ 0.53 $ 0.31
Weighted average shares
used in computing
earnings per share 8,507,740 8,510,240 8,495,240
Pro forma information reflecting income taxes as if all combined entities were C-Corporations
(unaudited):
Income before income taxes and
extraordinary items.......... $ 4,954,566 $ 6,869,363
Income taxes................... 2,080,000 2,885,000
----------- -----------
Income before extraordinary
items........................ $ 2,874,566 $ 3,984,363
=========== ===========
Pro forma income before
extraordinary items per
share........................ $ 0.45 $ 0.59
=========== ===========
Pro forma weighted average
shares used in computing
income before extraordinary
items per share.............. 6,352,100 6,711,790
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
NATIONWIDE CARE, INC.
STATEMENTS OF OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS PARTNERS'
STOCK (DEFICIT) DEFICIT TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1991............ $ -- $(4,867,005) $(1,357,312) $(6,224,317)
Net income........................... -- 4,376,992 577,574 4,954,566
Dividends and distribution........... -- (1,820,997) (322,995) (2,143,992)
Exchange of ownership interest for
debt.............................. -- (227,500) (75,833) (303,333)
---------- ----------- ----------- -----------
Balance, September 30, 1992............ -- (2,538,510) (1,178,566) (3,717,076)
Net income........................... -- 2,745,538 727,405 3,472,943
Dividends and distributions.......... -- (3,036,722) (512,587) (3,549,309)
Issuance and exchange of shares, net
of $2,535,732 issuance costs...... 3,634,886 908,871 963,748 5,507,505
Accretion of discount on redeemable
preferred stock................... -- (47,000) -- (47,000)
---------- ----------- ----------- -----------
Balance, September 30, 1993............ 3,634,886 (1,967,823) -- 1,667,063
Net income........................... -- 4,959,455 -- 4,959,455
Accretion of discount on redeemable
preferred stock................... -- (177,991) -- (177,991)
Issuance of 76,592 shares of
nonvoting common stock for
warrants exercised................ 445,000 -- -- 445,000
Increase in value of common stock
warrants outstanding.............. -- (182,561) -- (182,561)
Purchase of 15,000 shares of common
stock............................. (90,000) -- -- (90,000)
---------- ----------- ----------- -----------
Balance, September 30, 1994............ 3,989,886 2,631,080 -- 6,620,966
Net income (unaudited)................. -- 2,597,198 -- 2,597,198
Accretion of discount on redeemable
preferred stock (unaudited).......... -- (149,919) -- (149,919)
Increase in value of common stock
warrants outstanding................. -- (9,810,794) -- (9,810,794)
---------- ----------- ----------- -----------
Balance, May 31, 1995
(unaudited).......................... $3,989,886 $(4,732,435) $ -- $ (742,549)
========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
NATIONWIDE CARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED SEPTEMBER 30 MAY 31
---------------------------------------- -------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 4,954,566 $ 3,472,943 $ 4,959,455 $ 4,505,232 $ 2,597,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of
debt............................................. -- 2,753,420 -- -- --
Depreciation and amortization...................... 2,496,263 2,848,310 3,179,931 1,947,807 2,412,292
Deferred income taxes.............................. -- 66,842 712,000 782,000 --
Loss on disposal................................... -- 1,081 -- -- 97,616
Non-cash compensation expense from employee stock
transaction...................................... -- 122,009 -- -- --
Accretion of discount on subordinated debt......... -- 34,500 335,683 138,000 259,249
Changes in operating assets and liabilities:
Accounts receivable.............................. (418,128) (6,421,385) (326,242) (1,442,842) 237,295
Third-party settlements.......................... -- (1,360,000) (962,000) 263,000 538,000
Management fees receivable....................... 20,802 332,114 28,227 36,101 20,305
Prepaid expenses................................. (79,435) (1,166,029) 50,197 1,052,325 1,162,364
Other current assets............................. (211,462) 45,004 (54,172) 188,934 102,956
Accounts payable................................. 458,296 2,800,065 230,220 (816,798) (960,603)
Payroll liabilities.............................. 85,850 1,255,285 700,246 (52,419) 714,503
Accrued other liabilities........................ (10,261) 1,141,410 293,032 572,816 936,348
----------- ------------ ----------- ----------- -----------
Net cash provided by operating activities............ 7,296,491 5,925,569 9,146,577 7,174,156 8,117,523
INVESTING ACTIVITIES
Purchase of common stock............................. -- -- (90,000) -- --
Purchase acquisition, net of cash required........... -- (3,793,058) -- -- (838,150)
Purchases of property and equipment.................. (1,981,240) (2,433,032) (8,331,318) (4,258,021) (7,621,516)
Proceeds from disposal of equipment.................. -- 10,900 -- -- --
Net change in other assets........................... (475,402) 49,267 (59,201) (87,395) 444,857
Lease security deposits.............................. -- (2,482,000) -- -- --
----------- ------------ ----------- ----------- -----------
Net cash used in investing activities................ (2,456,642) (8,647,923) (8,480,519) (4,345,416) (8,014,809)
FINANCING ACTIVITIES
Proceeds from banks and other related parties
long-term debt and notes payable................... 5,656,030 40,580,762 4,738,670 937,584 7,907,121
Payments on long-term debt and notes payable:
Banks and other.................................... (6,007,761) (35,235,035) (4,499,686) (1,505,218) (1,784,890)
Prepayment penalties............................... -- (2,117,152) -- -- --
Related parties.................................... (392,070) (1,287,247) (220,330) (144,389) (119,396)
Purchase of interest rate cap........................ -- -- (111,813) (111,812) --
Proceeds from issuance of redeemable preferred stock
and stock warrants................................. -- 7,206,506 -- -- --
Costs related to redeemable preferred stock and
subordinated debt issuance......................... (197,125) (1,668,976) -- -- --
Issuance costs....................................... -- (2,535,732) -- -- (90,800)
Dividends and distributions.......................... (2,391,370) (3,418,140) -- -- --
Payments on other long-term liabilities.............. (11,950) (527,454) -- -- --
Receipts/payments on advances from related parties... 23,739 (268,362) -- -- --
----------- ------------ ----------- ----------- -----------
Net cash provided (used) by financing activities..... (3,320,507) 729,170 (93,159) (823,835) 5,912,035
----------- ------------ ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 1,519,342 (1,993,184) 572,899 2,004,905 6,014,748
Cash and cash equivalents at beginning of period..... 2,497,772 4,017,114 2,023,930 2,023,930 2,596,829
----------- ------------ ----------- ----------- -----------
Cash and cash equivalents at end of period........... $ 4,017,114 $ 2,023,930 $ 2,596,829 $ 4,028,835 $ 8,611,578
=========== ============ =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................. $ 3,431,459 $ 3,259,873 $ 4,169,993 $ 2,914,046 $ 3,142,463
=========== ============ =========== =========== ===========
Cash paid for income taxes......................... $ -- $ 130,000 $ 3,925,000 $ 2,752,000 $ 2,539,000
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED WITH RESPECT TO INFORMATION AS OF AND FOR
THE EIGHT MONTHS ENDED MAY 31, 1994 AND 1995)
1. BASIS OF PRESENTATION AND ACQUISITIONS
On July 27, 1993, Nationwide Care, Inc. (the Company) acquired the
ownership interests of a group of companies under common control (Nationwide
Businesses) and a group of non-controlled entities through an exchange of stock
for their ownership interests (the Reorganization). The Company was formed in
September 1992 to effect the Reorganization. The financial statements as of and
for the year ended September 30, 1992 reflect the combined financial position,
results of operations and cash flows of only the Nationwide Businesses. The
financial statements for the year ended September 30, 1993 reflect the combined
results of operations and cash flows of the Nationwide Businesses from October
1, 1992 through July 27, 1993 and the results of operations and cash flows of
the reorganized Company from July 28, 1993 through September 30, 1993.
The Company acquired the Nationwide Businesses and the non-controlled
entities through an exchange of 7,416,460 shares of the Company's common stock
and approximately $4 million in cash. For financial statement purposes, the
Reorganization was accounted for as a purchase acquisition. The majority owners'
interests in the net assets of Nationwide Businesses have been recorded by the
Company at the historical cost basis. The acquisition of the minority interests
in the Nationwide Businesses and the non-controlled entities has resulted in a
new basis of accounting reflecting estimated fair values of assets and
liabilities at July 27, 1993. The purchase price of the minority interests of
the historical assets and liabilities of the Nationwide Businesses and the
non-controlled entities of approximately $20 million was allocated to the net
assets acquired, including approximately $3.6 million to goodwill, based upon
the fair market value at the date of acquisition. The non-controlled entities
consisted of B&P Care Centers, Inc., Coshocton Health Care Center, Inc., Delta
Care Centers, Inc. and Vita, Incorporated.
Concurrent with the Reorganization, the Company refinanced approximately
$34.5 million of debt through the issuance of floating rate option notes,
subordinated debt, and preferred stock. This refinancing resulted in $2,117,152
of prepayment penalties and the write-off of $636,268 of unamortized issuance
costs. These items have been accounted for as an extraordinary loss of
$1,652,420 (net of income tax benefit of $1,101,000).
On December 28, 1992, one of the entities included in the Nationwide
Businesses purchased Royal Oaks Health Care and Rehabilitation Center for
$1,700,000. The acquisition was recorded using the purchase method of accounting
and the results of operations have been included in the combined financial
statements since the date of acquisition. The purchase price was allocated to
the net assets acquired, including $1,150,000 to goodwill, based on the fair
market value at the date of acquisition.
Effective July 1, 1993, the Company began operating seven long term care
centers (the Regency Centers) comprising 1,241 long-term care beds pursuant to a
long-term lease agreement. The equipment portion of the lease payments has been
capitalized as a capital lease obligation with the remaining portion of the
lease payments being accounted for as an operating lease.
The following unaudited pro forma information presents the results of
operations as though the acquisitions of the group of the non-controlled
entities and Royal Oaks Health Care and Rehabilitation Center and the leasing of
seven long term care centers pursuant to a long-term lease had occurred on
October 1, 1991. Pro forma information does not purport to be indicative of the
results that actually would have been achieved had the acquisition occurred at
the beginning of those periods.
F-7
<PAGE> 12
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND ACQUISITIONS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------
1992 1993
------------ ------------
<S> <C> <C>
Operating revenues...................................... $101,221,000 $110,947,000
============ ============
Income before extraordinary items....................... $ 4,206,000 $ 7,025,000
============ ============
Net income.............................................. $ 2,934,000 $ 5,373,000
============ ============
</TABLE>
On January 1, 1995, the Company purchased Med One Home Health Care for
$850,000. The acquisition was recorded using the purchase method of accounting
and the results of operations have been included in the financial statements
since the date of the acquisition. The purchase price was allocated to the net
assets acquired, including $838,150 to goodwill, based on the fair market value
at the date of the acquisition.
The Company's current operations include 23 nursing centers with a total of
3,257 licensed beds, two retirement centers with a total of 240 units, two
assisted living centers totaling 162 units and 40 additional assisted living
units located in one of the retirement centers. Of the Company's 27 centers, 14
are owned, 11 are leased and two are managed for other parties.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the eight months ended May 31, 1995 are not necessarily
indicative of the results that may expected for the year ending September 30,
1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
Health Care Services Revenue and Third-Party Settlements
Health care services revenue is recognized when the related patient
services are provided at established rates. Contractual allowances and the
results of other arrangements for providing services at less than established
rates are reported as deductions to arrive at net revenues. Contractual
adjustments include differences between established billing rates and amounts
estimated by management as reimbursable under various cost reimbursement
formulas or contracts in effect.
The administrative procedures related to the Medicare cost reimbursement
programs in effect generally preclude final determination of amounts due the
Company until cost reports are audited or otherwise reviewed and settled upon
with the applicable administrative agencies. Provisions for estimated
third-party settlements are provided in the period the related services are
rendered. Differences between the amounts accrued and interim and final
settlements are recorded in operations in the year of settlement.
Medicare revenues represented 7%, 13%, 21%, 20% and 26% and Medicaid
revenues (Indiana, Ohio, and Florida) represented 54%, 49%, 45%, 47% and 39% of
total health care services revenue for 1992, 1993 and 1994 and the eight months
ended May 31, 1994 and 1995, respectively.
F-8
<PAGE> 13
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The State of Indiana in August 1994, began implementing certain regulatory
changes in regulations that govern payments using the Medicaid prospective
method of reimbursement for Medicaid covered patients in Indiana. For the year
ended September 30, 1994 the Company received approximately 40% of its total
health care services revenue from the Indiana funded Medicaid program for
covered patients. The effect of these regulations are anticipated to reduce
payments under the Medicaid program.
Accounts Receivable
Accounts receivable are stated net of accrued contractual allowances on
patient service revenue not yet remitted by the patient or the third-party
intermediary, or both, and the allowance for doubtful accounts. The Company's
accounts receivable at September 30, 1994 consist of 24% Medicare, 51% Medicaid
(Indiana, Ohio and Florida) programs and 25% private pay and commercial
insurers.
Property and Equipment
Property and equipment are carried at cost and depreciation is computed by
the straight-line method using the estimated useful lives of the assets,
generally 5 to 10 years for equipment and furnishings and 15 to 40 years for
buildings and improvements. The cost of assets acquired using capital lease
arrangements is included in property and equipment, and the related amortization
is included in depreciation expense.
Intangible Assets
Intangible assets consist of costs incurred in obtaining long-term
financing ($1,871,589), lease acquisition costs ($247,002), and goodwill
($5,574,042) and are amortized using the straight-line method over periods of 5
to 25 years. Accumulated amortization on intangible assets was $90,138, $609,909
and $989,936 at September 30, 1993 and 1994, and May 31, 1995,
respectively.
Income Taxes
Prior to the Reorganization on July 27, 1993, the shareholders of certain
of the Nationwide Businesses had elected to use Subchapter S of the Internal
Revenue Code to include the income of certain of the Nationwide Businesses in
their own income for income tax purposes. Accordingly, certain corporations and
all partnerships comprising the Nationwide Businesses were not subject to
federal and state taxes. Effective October 1, 1992, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" which requires recognition of deferred tax liabilities and assets for the
expected future consequences of events that have been included in the financial
statements or tax returns. Using this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities. These deferred taxes are measured by
applying current tax laws. Through July 27, 1993 deferred taxes were provided by
certain Nationwide Businesses which were subject to federal and state taxes on
income for significant timing differences in the recognition of revenue and
expense for tax and financial statement purposes.
F-9
<PAGE> 14
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------- May 31
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Land and improvements....................... $ 2,706,785 $ 2,991,120 $ 3,044,466
Buildings and improvements.................. 33,339,853 34,614,138 38,499,716
Equipment and furnishings................... 7,251,057 9,233,664 9,357,765
Construction in progress.................... 504,158 5,285,874 7,511,672
----------- ----------- -----------
43,801,853 52,124,796 58,413,619
Less accumulated depreciation............... 449,801 3,101,585 4,884,195
----------- ----------- -----------
$43,352,052 $49,023,211 $53,529,424
=========== =========== ===========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------- May 31
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Floating rate option notes.......................... $28,500,000 $26,600,000 $25,650,000
Bank line of credit................................. 3,274,240 6,247,809 --
Bank term loans with interest at 10%................ -- -- 13,438,390
Non-interest bearing county government note
payable........................................... 624,962 125,013 --
Installment notes with monthly interest and
principal payments maturing 1994 to 1998,
collateralized by equipment and furnishings....... 314,240 178,633 338,426
Capital lease obligations, imputed interest
from 8% to 11.5%.................................. 2,830,549 2,631,520 2,478,390
Capital lease obligations, related parties, imputed
interest from 10% to 11.2%........................ 2,525,890 2,305,560 1,200,742
Senior Subordinated Notes (less unamortized
discount)......................................... 7,827,994 8,163,677 8,422,926
----------- ----------- -----------
45,897,875 46,252,212 51,528,874
Less amounts due within one year.................... 3,494,374 3,207,507 3,554,589
----------- ----------- -----------
$42,403,501 $43,044,705 $47,974,285
=========== =========== ===========
</TABLE>
The Company issued $28.5 million of floating rate option notes on July 27,
1993, which are collateralized by an irrevocable direct pay letter of credit
(Letter of Credit). The proceeds were used to retire various debt facilities.
The floating rate option notes amortize over a fifteen year period, with a final
maturity in August 2008 and the interest rate resets every seven days. The
Company has purchased interest rate cap protection (9%) through November 1997
with respect to the above debt at a cost of approximately $100,000. This
expenditure was charged to deferred debt issuance costs and is being amortized
over the life of the agreement. Through May 31, 1995, the Company has not
received any amounts with respect to the interest rate cap protection. The
effective interest rate on the floating rate option notes at September 30, 1994
was approximately 7%. The notes are payable in $950,000 semi-annual payments.
The Letter of Credit and a $9.5 million revolving line of credit (Line of
Credit) were issued pursuant to a credit agreement with a commercial bank. The
Line of Credit bears interest at prime plus .75% or the Company has the option
of selecting a one, two or three month LIBOR rate. The Line of Credit matured
during January 1995 and the outstanding balance was converted to a term loan,
payable in equal principal installments with a balloon payment at maturity in
January 2000 and bearing interest consistent with that of the Line of Credit. In
January 1995, the Company also entered into a $4,330,000 term loan, which bears
interest consistent with the $9.5 million term loan, payable in equal monthly
installments with a balloon
F-10
<PAGE> 15
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT -- (CONTINUED)
payment at maturity in January 2000. The Letter of Credit and the term loans are
collateralized by substantially all of the Company's assets.
Concurrent with the Reorganization in July 1993, the Company completed a
private placement of $12 million of its Senior Subordinated Notes. The Senior
Subordinated Notes are payable in quarterly principal installments of $1,500,000
beginning November 1998 with the final installment due in August 2000 and bear
interest at an annual rate of 12.5%.
Long-term debt maturities, excluding capital lease obligations, for the
five years subsequent to September 30, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30:
- ------------------------
<S> <C>
1995................................................................... $ 2,730,372
1996................................................................... 2,583,832
1997................................................................... 2,576,108
1998................................................................... 2,546,667
1999................................................................... 8,533,333
Thereafter............................................................. 22,344,820
</TABLE>
The Company has agreed to certain restrictions which, among other things,
require minimum levels of tangible net worth, total indebtedness to equity, and
other financial ratios. The debt agreements also place restrictions on issuing
new debt, mergers and acquisitions, sales of all or substantially all of the
Company's assets, purchases or retirements of the Company's capital stock,
payment of dividends and capital expenditures.
5. LEASES
Effective July 1, 1993, the Company began operating seven long term care
centers comprising 1,241 long term care beds pursuant to a 10 year lease
agreement. The Company paid $2,482,000 to the lessor as a refundable security
deposit, half of which is interest bearing. The monthly rent payments of
$503,000 are subject to annual increases based on changes in the Consumer Price
Index. The Company also has a right of first refusal, which expires six months
prior to the expiration of the lease term, to purchase the long-term care
centers or to renew the lease agreement at the expiration of the current
agreement. The equipment portion of the lease payments was capitalized as a $2.6
million capital lease obligation with the remaining portion of the lease
payments being accounted for as an operating lease.
The Company has entered into several leases, as lessee, for the property
and equipment of four additional long-term care centers. The Company has also
entered into various separate leases for equipment in connection with the
operation of certain owned and leased facilities. The leases are for terms
ranging from ten to fifteen years and, with one exception, have been classified
as operating leases. The equipment leases and one facility lease have been
classified as capital leases and are for terms of five to fifteen years. At the
inception of the facility leases, the Company made initial payments to the
lessors and assumed certain net liabilities aggregating $881,802 of which
$350,000 has been recorded as deposits for options to purchase facilities. The
balance was capitalized and amortized using the lives of the respective leases.
F-11
<PAGE> 16
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASES -- (CONTINUED)
Capital lease assets included in property and equipment are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------- MAY 31
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Buildings...................................... $ 773,343 $ 773,343 $ 773,343
Equipment and furnishings...................... 4,084,293 4,084,293 3,014,293
---------- ---------- ----------
4,857,636 4,857,636 3,787,636
Less accumulated amortization.................. 113,219 663,784 810,827
---------- ---------- ----------
Net capital lease assets....................... $4,744,417 $4,193,852 $2,976,809
========== ========== ==========
</TABLE>
Included in depreciation and amortization expense is $217,452, $416,005 and
$550,565 for 1992, 1993 and 1994, respectively, and $367,043 and $317,043 for
the eight months ended May 31, 1994 and 1995, respectively, relating to
amortization of capital leases.
Future minimum annual lease payments for capital leases and noncancelable
operating leases (including related party leases), together with the present
value of the future minimum lease payments at September 30, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30: CAPITAL LEASES OPERATING LEASES
-------------------------------------------------------- -------------- ----------------
<S> <C> <C>
1995........................................... $ 911,392 $ 7,278,015
1996........................................... 938,035 7,452,822
1997........................................... 953,810 7,485,843
1998........................................... 935,801 7,104,445
1999........................................... 964,323 7,272,028
Thereafter..................................... 2,765,184 26,389,634
-------------- ----------------
Total future minimum lease payments..................... 7,468,545 $ 62,982,787
============
Less amount representing interest....................... 2,531,465
--------------
Present value of future minimum lease payments.......... $4,937,080
==========
</TABLE>
Rental expense for all operating leases was $1,353,305, $2,670,650 and
$7,085,425 for 1992, 1993 and 1994, respectively, and $4,692,688 and $4,845,234
for the eight months ended May 31, 1994 and 1995, respectively.
The Company is a lessor of property and equipment related to one facility
using an operating lease expiring in 1998 and provides management services to
the lessee. The lease includes a purchase option in which the lessee may
purchase the property and equipment at the end of the lease term for either a
certain agreed upon minimum price or the fair value of the assets. The property
and equipment leased has a net book value of approximately $2.1 million at
September 30, 1994. Future minimum annual rentals to be received on the
non-cancelable lease is approximately $306,000 per year through 1998. As a part
of the Reorganization, the Company acquired the operations of certain entities
that had previously leased property and equipment from the Nationwide
Businesses.
6. RELATED PARTY TRANSACTIONS
The Company is affiliated with several entities as a result of common
ownership and transactions with the affiliated entities are made in the normal
course of business.
F-12
<PAGE> 17
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company made payments to Opal Care Centers, Inc. (related to the
Company through common ownership) of $850,737, $769,117 and $4,828,314 in 1992,
1993 and 1994, respectively, and $2,211,824 and $3,885,943 for the eight months
ended May 31, 1994 and 1995, respectively, related to construction projects
and has a net payable to Opal of $145,715 at September 30, 1994. The Company
also has contracts with Opal Care Centers, Inc. at September 30, 1994 for
construction projects which have approximately $3 million of aggregate costs to
complete.
The Company leases a facility from Meadowvale Skilled Care Center, Inc., of
which an immediate family member of a significant shareholder of the Company
owns 25.93%. Lease payments were $240,948 in 1992, 1993 and 1994 and $160,632
for the eight months ended May 31, 1994 and 1995. The lease is classified as
a capital lease.
The Company had an operating lease of an airplane for a portion of 1992
with a partnership which is related to the Company through common ownership.
Lease payments were $36,270 in 1992. The Company leased an airplane from a
partnership that is related to the Company which was classified as a capital
lease and lease payments were $176,688 in both 1993 and 1994 and $117,792 and
$44,172 for the eight months ended May 31, 1994 and 1995, respectively. The
Company canceled the lease effective December 31, 1994.
The Company managed two related party long-term care centers, one of which
was sold on April 1, 1993 and the other transferred to another management
company on July 1, 1994. In addition, the Company manages an assisted living
center, which is owned by significant shareholders. Management fees earned from
these facilities were $383,329, $233,847 and $346,089 in 1992, 1993 and 1994,
respectively, and $197,118 and $38,428 for the eight months ended May 31,
1994 and 1995, respectively.
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------
1993 1994
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $4,295,000 $4,655,000
Deferred tax assets:
Net operating loss carryforwards.......................... 782,000 --
Other..................................................... 270,000 700,000
---------- ----------
Total deferred tax assets......................... 1,052,000 700,000
---------- ----------
Net deferred tax liabilities...................... $3,243,000 $3,955,000
========== ==========
</TABLE>
F-13
<PAGE> 18
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------------
1992 1993 1994
--------------- ---------- ----------
DEFERRED METHOD LIABILITY METHOD
--------------- -----------------------
<S> <C> <C> <C>
Current:
Federal..................................... $380,000 $1,122,000 $2,221,000
State....................................... -- 555,000 1,667,000
-------- ---------- ----------
Total current....................... 380,000 1,677,000 3,888,000
Deferred:
Federal..................................... -- 53,000 570,000
State....................................... -- 14,000 142,000
-------- ---------- ----------
Total deferred...................... -- 67,000 712,000
-------- ---------- ----------
$380,000 $1,744,000 $4,600,000
======== ========== ==========
</TABLE>
The unaudited pro forma income tax provisions reflect income taxes as if
all combined Nationwide Businesses were C-Corporations using an estimated
effective income tax rate of 42%.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1992 1993 1994
--------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ---------- ------- ---------- -------
DEFERRED METHOD LIABILITY METHOD
--------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax.... $ 1,685,000 34% $2,336,000 34% $3,250,000 34%
Non-taxable income.............. (1,305,000) (26) (948,000) (14) -- --
State income taxes, net of
federal tax benefit........... -- -- 375,000 5 1,194,000 12
Net operating loss carryforward
utilized...................... -- -- (265,000) (4) -- --
Change from non-taxable to
taxable status................ -- -- 289,000 4 -- --
Other -- net.................... -- -- (43,000) -- 156,000 2
--
----------- --- ---------- --- ----------
$ 380,000 8% $1,744,000 25% $4,600,000 48%
=========== === ========== === ========== ===
</TABLE>
8. STOCK WARRANTS, REDEEMABLE PREFERRED STOCK AND OTHER SHAREHOLDERS' EQUITY
The Company has authorized 48,000,000 shares of common stock and 2,000,000
shares of nonvoting common stock, without par value. The nonvoting common stock
is convertible into common stock on a share-for-share basis. At September 30,
1994, there were 7,431,460 shares of common stock and 76,592 shares of nonvoting
common stock outstanding. Pursuant to a board of directors meeting on March 18,
1994 the Company declared a 2 for 1 split of its voting and nonvoting common
stock.
The Company also has authorized 2,000,000 shares of no par value preferred
stock of which 300,000 shares were designated as Redeemable Preferred Stock and
issued on July 27, 1993. The Redeemable Preferred Stock has no coupon rate and
is redeemable for $3,000,000 in eight equal quarterly installments of $375,000
commencing November 1998 and is mandatorily redeemable in the event of an
initial public
F-14
<PAGE> 19
NATIONWIDE CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK WARRANTS, REDEEMABLE PREFERRED STOCK AND OTHER SHAREHOLDERS'
EQUITY -- (CONTINUED)
offering, a change in control, an optional redemption of the Senior Subordinated
Notes, or a call of the warrants.
In conjunction with the Company's issuance of the Senior Subordinated Notes
and the Redeemable Preferred Stock, detachable stock warrants were issued. The
warrants are exercisable at any time prior to expiration, which occurs on the
later of (i) July 27, 2000, (ii) the day upon which the Senior Subordinated
Notes are paid in full and (iii) the day upon which the Redeemable Preferred
Stock is fully redeemed. Certain warrants were exercised in October 1993 in
exchange for 76,592 shares of nonvoting common stock. Warrants to receive
987,188 shares remain outstanding at September 30, 1994. The warrants include
put and call options allowing the holders the right to require the Company to
repurchase the warrants, and allowing the Company the right to repurchase the
warrants, respectively. The put and call exercise prices are based upon the
value of the warrants as determined by formulas defined in the agreement or an
independent appraisal, whichever is greater. The formula to determine put and
call exercise prices is based upon 5.5 times operating cash flows for the most
recent four fiscal quarters plus cash less indebtedness of the Company, all as
defined in the agreements.
At the date of issuance, $4,206,506 and $1,974,005 of the proceeds from the
Senior Subordinated Notes and the Redeemable Preferred Stock, respectively, were
allocated to the value of the warrants which, in recognition of the put option,
were classified as temporary capital in the accompanying balance sheets. The
value of the warrants, as estimated using the put price formula, will be
increased or decreased each year, based on the estimated value of the warrants,
and the resulting charge will be recorded directly to retained earnings. In the
eight-month period ended May 31, 1995, the Company increased the carrying
value of the stock warrants by $9,810,794 to reflect the estimated fair value
of the warrants based upon the current market value of the underlying common
stock of $15.93 per Nationwide share established in the pending share exhange
with The Hillhaven Corporation (See Note 9). The resulting discounts on the
Senior Subordinated Notes and the Redeemable Preferred Stock are being
amortized to interest and retained earnings, respectively, using the effective
interest method over the life of the Senior Subordinated Notes and the
Redeemable Preferred Stock.
9. SUBSEQUENT EVENT
As of February 27, 1995, the Company entered into an agreement with The
Hillhaven Corporation pursuant to which the shareholders of the Company will
exchange their shares for approximately 4.8 million common shares of The
Hillhaven Corporation. Immediately prior to this transaction, the outstanding
warrants of the Company will be exercised. This share exchange is expected to be
consummated in June 1995.
F-15
