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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10426
THE HILLHAVEN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
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 (ZIP CODE)
EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 572-4901
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, Par Value $0.75 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
7 3/4% Convertible Subordinated Debentures New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of August 17, 1995, there were 37,899,375 shares of Common Stock, par
value $0.75 per share, outstanding. The aggregate market value of the shares of
Common Stock held by non-affiliates of the registrant on August 17, 1995, was
approximately $792,694,773. For purposes of the foregoing calculation only,
Tenet Healthcare Corporation and all directors and executive officers of the
registrant have been deemed affiliates.
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TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K 1995
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
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PAGE
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 13
Item 3. Legal Proceedings............................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 15
Item 6. Selected Financial Data...................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 17
Item 8. Financial Statements and Supplementary Data.................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 21
Item 11. Executive Compensation....................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 35
Item 13. Certain Relationships and Related Transactions............................... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 37
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
The Hillhaven Corporation, a Nevada corporation ("Hillhaven," the
"Registrant" or the "Company"), operates nursing centers, pharmacies and
retirement housing communities. Hillhaven was incorporated in May 1989 by
National Medical Enterprises, Inc., now known as Tenet Healthcare Corporation
(together with its subsidiaries, "Tenet") in anticipation of a spin-off by Tenet
of substantially all of its domestic long term care operations in a dividend
distribution of Hillhaven common stock to Tenet shareholders that was effected
in January 1990.
Based upon the number of beds in service and net revenues, Hillhaven is the
second largest long term care provider in the United States and believes that it
is one of the leading providers of subacute medical and rehabilitation services.
At May 31, 1995, the Company operated 287 nursing centers (of which 202 were
owned, 70 were leased and 15 were managed for others) with 36,161 licensed beds.
The nursing centers are located in 33 states and range in capacity from 42 to
692 beds. For the year ended May 31, 1995, average nursing center occupancy was
92.8%. Pharmacy operations are conducted through the Company's subsidiary,
Medisave Pharmacies, Inc. ("Medisave"), which, as of May 31, 1995, consisted of
36 institutional pharmacies and 20 retail pharmacies located in 18 states. The
Company also operates 19 retirement housing communities containing an aggregate
of 2,679 apartment units located in 14 states.
The Company provides a wide range of diversified health care services,
including long term care and specialty care services. Specialty care services is
comprised of Alzheimer's care, pharmacy services and subacute medical and
rehabilitation services, such as physical, occupational and speech therapies,
wound care, oncology treatment, brain injury care, stroke therapy and orthopedic
therapy. Subacute medical and rehabilitation services are offered at all of the
Company's nursing centers and are the fastest growing component of the Company's
nursing center operations, constituting approximately 29.6% of nursing center
net operating revenues in fiscal 1995, 24.7% in fiscal 1994 and 19.4% in fiscal
1993. Hillhaven believes that it is also one of the largest providers of
physical, occupational and speech therapies in the United States. In addition,
the Company currently provides long term care to residents of the Company's
nursing centers with Alzheimer's disease through 69 Alzheimer's care units with
2,158 beds. The Company does not presently maintain designated beds for
specialty care services, other than for Alzheimer's care, where most patients
benefit from segregated facilities. The Company's experience has been that
subacute medical and rehabilitation services, particularly rehabilitation, can
be effectively and successfully integrated into its standard nursing center
operations at the majority of its centers, in most cases with little physical
reconfiguration of or modification to the facilities.
Nursing center net operating revenues, comprised primarily of net patient
revenues, accounted for 85.6% and 84.2% of Hillhaven's total net operating
revenues for fiscal 1995 and 1994, respectively. In fiscal 1995, the Company
derived 46.5% of its net patient revenues from Medicaid, 26.3% from private pay
and other sources and 27.2% from Medicare. In fiscal 1994, the comparable
figures were 50.2%, 26.8% and 23.0%, respectively. Subacute medical and
rehabilitation services accounted for 30.3% of the Company's net patient
revenues in 1995 compared to 25.5% in 1994. Pharmacy operations accounted for
12.1% and 13.5% of Hillhaven's total net operating revenues for fiscal 1995 and
1994, respectively. In fiscal 1995, institutional pharmacy operations
constituted approximately 92% of Medisave's total net revenues, compared to 79%
in fiscal 1994. Retirement housing operations represented 2.3% of Hillhaven's
total net revenues for both fiscal 1995 and 1994. Under segment reporting
criteria, Hillhaven believes its only material business segment is "health
care," which contributed substantially all of the Company's net revenues and
substantially all of its operating profits for fiscal 1995.
THE PROPOSED VENCOR MERGER
On April 23, 1995, the Company signed a definitive Agreement and Plan of
Merger (the "Merger Agreement"), which was amended and restated as of July 31,
1995, under which Vencor, Inc. ("Vencor") will acquire the Company and its
affiliated corporations and partnerships (the "Merger"). The Merger
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Agreement provides for a business combination between Vencor and Hillhaven in
which Hillhaven will be merged with and into Vencor and the holders of Hillhaven
common stock will be issued Vencor common stock in a transaction intended to
qualify as a pooling of interests for accounting purposes and as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), for federal income tax purposes. In the
Merger, each outstanding share of Hillhaven common stock will be converted into
a fraction of a share of Vencor common stock (the "Conversion Number")
determined by dividing $32.25 by the average closing price on the New York Stock
Exchange of Vencor common stock for the ten consecutive trading days ending with
the second trading day immediately preceding the effective time of the Merger,
except that the Conversion Number will not be less than 0.768 or greater than
0.977 except in certain limited circumstances, and each share of Hillhaven's
Series C Preferred Stock, par value $.15 per share, and Hillhaven's Series D
Preferred Stock, par value $.15 per share, will be converted into the right to
receive $900 in cash, plus accrued and unpaid dividends up to the effective time
of the Merger. As a result of the Merger, except in certain limited
circumstances, holders of Hillhaven common stock immediately prior to the Merger
will own between approximately 49% and 55% of the Vencor common stock on a
primary basis after the Merger, depending upon the Conversion Number.
Hillhaven's Board of Directors has recommended the Merger and a special meeting
of shareholders of Hillhaven common stock is scheduled to take place on
September 27, 1995, to vote on the Merger. If the shareholders vote in favor of
the Merger, the Merger is expected to close before the end of 1995. If the
Merger is successfully consummated, there are likely to be changes to the
Company's existing operations, its management and its business strategy as
described herein. See Section "Operations and Management After the Merger" on
pages 44-49 of the Joint Proxy Statement/Prospectus filed as part of Vencor's
Registration Statement on Form S-4 (Registration No. 33-59345). A copy of this
Section is attached hereto as Exhibit 99.01.
THE NATIONWIDE CARE, INC. ACQUISITION
On June 30, 1995, the Company acquired Nationwide Care, Inc. ("Nationwide")
and its affiliated corporations and partnerships through (i) a share exchange
between Nationwide, Phillippe Enterprises, Inc., Meadowvale Skilled Care Center,
Inc. and the Company, and (ii) the assignment of all of the outstanding
partnership interests in Camelot Care Centers to Nationwide and Evergreen Woods,
Ltd. to the Company's wholly owned subsidiary, First Healthcare Corporation. The
consideration for the share exchange was 5.0 million shares of the Company's
common stock, $0.75 par value per share (the "Company's Common Stock"). The
transaction was structured as a pooling of interests for accounting purposes and
as a tax-free reorganization under Section 368(a) of the Code.
Nationwide operates long term health care centers located in Indiana, Ohio
and Florida. Nationwide's 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 Nationwide's 27 centers, 14
are owned, 11 are leased and two are managed for other parties. Twenty-one of
Nationwide's centers are located in Indiana, three are located in Ohio and three
are located in Florida.
CREATION OF THE GRANTOR TRUST
The Company established The Hillhaven Corporation Grantor Stock Trust (the
"Trust") as of January 16, 1995, and, as of that same date, entered into an
agreement (the "Stock Purchase Agreement") with Wachovia Bank of North Carolina,
N.A. (the "Trustee") to sell to the Trustee on behalf of the Trust an aggregate
of 4.2 million shares of the Company's Common Stock (the "Shares"), at a
purchase price equal to the then current market price of the Shares. The Shares
are to be used to fund various of the Company's employee benefit plans,
including, but not limited to, certain stock-based plans.
INDUSTRY TRENDS
The Company believes that several industry trends will contribute to growth
opportunities. These trends include an aging population, the increasing shift of
patients from acute care and rehabilitation hospitals to nursing centers due to
the nationwide emphasis on health care cost containment, the growth in demand
for long term care services and centers currently exceeding the growth in supply
and the increasing complexity of
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and more burdensome operating standards for the delivery of pharmaceutical
products and services to nursing centers and other institutions.
Aging Population. People over the age of 65 are the primary users of long
term care. Based on U.S. Census Bureau data, this segment of the population in
the United States has grown from approximately 25 million in 1980 to
approximately 31 million in 1990. This age group is expected to increase to
approximately 35 million by the year 2000. The fastest growing segment of the
United States population is the over-85 age group, which is expected to increase
from approximately 3.4 million in 1991 to approximately 4.6 million in 2000.
Advances in medical technology have increased life expectancies; as a result, an
increasing number of elderly patients require a high level of care not
historically available outside an acute care hospital.
Earlier Hospital Discharge to Nursing Centers. Based on reports in health
care industry journals, in recent years, average lengths of stay in hospitals
have been decreasing, in part as a result of governmental and private pay
sources attempting to control health care costs by adopting reimbursement
strategies that encourage earlier discharge from hospitals. Many patients
leaving hospitals require skilled nursing care and rehabilitation services of
the type that the Company provides.
Health Care Cost Containment. In an effort to combat increasing health care
costs, governmental entities and insurance companies are considering ways to
contain costs, including adjusting Medicaid eligibility requirements and
encouraging patients to obtain treatment from lower cost providers. The Company
believes that, as a low cost provider of subacute medical and rehabilitation
services, it is well-positioned to benefit from these reforms.
Nursing Center Supply/Demand Imbalance. Based on reports in long term care
industry journals, while demand for nursing center beds has increased in recent
years, the supply has remained relatively unchanged. Construction and expansion
of nursing centers is regulated in most states, and the ability to obtain
financing for these activities in the past was adversely affected by lending
limitations imposed by the financial institutions industry.
Increasing Complexity of Institutional Pharmaceutical Requirements. The
Company believes that the implementation of the Omnibus Budget Reconciliation
Act of 1987 ("OBRA") in October 1990 has further increased the demand for the
Company's pharmaceutical services. Nursing centers are responsible for complying
with more stringent standards of care established by OBRA, which include
planning, monitoring and reporting the progress of prescription drug therapy.
Based on reports in long term care industry journals, nursing center
administrators and directors of nursing now seek sophisticated and experienced
pharmacies with trained consultant pharmacists and computerized documentation
programs to help ensure regulatory compliance. Retail pharmacies, which
generally lack the breadth of service and do not focus on the special
requirements of nursing centers, are being replaced with institutional
pharmacies that can more effectively serve this market.
BUSINESS STRATEGY
Operating Strategy
The Company's operating strategy is designed to take advantage of several
important industry trends, a number of which are favorable, and includes
expanding higher revenue specialty care services, increasing private pay and
Medicare census, maintaining high occupancy levels and expanding Medisave's
institutional pharmacy operations.
Expansion of Specialty Care Services. Hillhaven intends to continue to
expand its specialty care programs and services. These services generally
produce higher revenues than do routine nursing care services and serve to
differentiate the Company's facilities from others in a given market. The
Company is focusing on the expansion of its subacute medical and rehabilitation
services, which include physical, occupational and speech therapies, wound care,
oncology treatment, brain injury care, stroke therapy and orthopedic therapy.
The expansion of these services is designed to increase private pay and Medicare
revenues which are higher than reimbursement rates for traditional long term
care services.
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Increasing Private Pay and Medicare Census. Hillhaven is also working to
increase private pay and Medicare census by further developing and maintaining
relationships with traditional referral sources and by entering into contracts
with private insurance companies to provide subacute medical and rehabilitation
services to their insureds. Increasing the number of managed care patients in
the Company's nursing centers is an increasingly important component of the
Company's marketing strategy. Hillhaven's subacute medical and rehabilitation
services offer a less expensive alternative to hospital care for patients who
need specialized nursing care but do not require many of the other services
provided in an acute care hospital. As of May 31, 1995, the Company was
operating under 141 such managed health care contracts.
Maintaining High Occupancy Levels. The Company strives to maintain high
occupancy levels in existing facilities through (i) an enhanced emphasis on
local marketing efforts in which nursing center employees are charged with
actively marketing their services within the community, (ii) broadening the
scope and character of services provided in each nursing center and (iii)
favorable demographic trends. The Company believes that maintaining high
occupancy levels enables it to realize greater economies of scale. In fiscal
1995, Hillhaven had an average occupancy in its nursing centers of 92.8%.
Expansion of Institutional Pharmacy Business. The Company is a leading
provider of comprehensive pharmacy services to nursing centers and their
patients. Medisave has a growth strategy which includes (i) continued
penetration of existing markets, (ii) expansion into selected new markets and
(iii) increasing infusion and enteral therapy revenues by targeting specific
health care providers.
Growth Strategy
The Company's growth strategy is designed to increase the equity base of
the Company over time and to provide flexibility to capitalize on attractive
business opportunities. The key elements of this strategy include reducing or
refinancing indebtedness and acquiring additional nursing centers and related
businesses.
Reducing or Refinancing Indebtedness. The Company's plan to reduce or
refinance indebtedness is designed to improve the Company's debt-to-equity
ratio, reduce the overall interest rates on indebtedness (including guarantee
fees) and extend the maturities and amortization of the Company's indebtedness.
Acquisition of Nursing Centers and Related Businesses. With its improved
balance sheet, the Company intends to expand its operations and increase its
equity base through the acquisition of nursing centers and related businesses,
such as pharmacy operations, in exchange for shares of the Company's Common
Stock. See "Business -- The Nationwide Care, Inc. Acquisition."
NURSING CENTERS
Hillhaven's nursing center operations provide long term care and subacute
medical and rehabilitation services in 287 nursing centers in 33 states. At May
31, 1995, Hillhaven owned 202 and leased 70 nursing centers. These nursing
centers had a total of 34,194 licensed beds, with individual nursing center
capacities ranging from 42 to 692 beds. In addition, Hillhaven had 50% interests
in six partnerships and joint ventures that own or lease nursing centers managed
by Hillhaven, and Hillhaven manages nine nursing centers for Tenet and other
third parties for management fees usually based upon a percentage of nursing
center revenues.
Hillhaven is a leading provider of rehabilitation services, including
physical, occupational and speech therapies. Rehabilitation services are
provided in all of the Company's nursing centers. The majority of patients in
rehabilitation programs stay for eight weeks or less. Patients in rehabilitation
programs generally provide for higher revenues than other nursing center
patients because they use a higher level of ancillary services. In addition,
management believes that Hillhaven is one of the leading providers of care for
patients with Alzheimer's disease. At May 31, 1995, the Company offered
treatment in approximately 2,158 beds in 69 nursing centers for patients
suffering from Alzheimer's disease. Most of these patients reside in separate
units within the nursing centers and are cared for by teams of professionals
specializing in the unique problems experienced by Alzheimer's patients.
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Marketing
The factors which affect consumers' selection of a nursing center vary from
community to community and include competition and a provider's relationships
with local referral sources. Competition creates the standards against which
nursing centers in a given market are judged by various referral sources, which
include physicians, hospital discharge planners, community organizations and
families. Therefore, Hillhaven's marketing efforts are conducted at the local
market level by the nursing center administrators, admissions coordinators and
others. Nursing center personnel are assisted in carrying out their marketing
strategies by regional marketing staffs. The Company's marketing efforts are
directed toward improving the payor mix at the nursing centers by increasing the
census of private pay patients, patients covered by managed care contracts and
Medicare patients. To this end, the Company is working to educate the various
referral sources about the value of Hillhaven's nursing centers as an attractive
lower cost alternative to acute care and rehabilitation hospitals for subacute
medical and rehabilitation services.
Operations
Each nursing center is managed by a state licensed administrator who is
supported by other professional personnel, including a director of nursing,
staff development professional (responsible for employee training), activities
director, business office manager and, in general, physical, occupational and
speech therapists. The directors of nursing are state licensed nurses who
supervise nursing staffs which include registered nurses, licensed practical
nurses and nursing assistants. Staff size and composition vary depending on the
size and occupancy of each nursing center and on the level of care provided by
the nursing center. The nursing centers contract with physicians who serve as
medical directors and serve on quality assurance committees.
The nursing centers are supported by regional staff in the areas of
nursing, dietary and rehabilitation services, maintenance, human resources,
marketing and financial services. In addition, corporate staff in Tacoma,
Washington provide other services in the areas of marketing assistance, human
resource management, state and federal reimbursement, state licensing and
certification, legal, finance and accounting support. Financial control is
maintained principally through fiscal and accounting policies established at the
corporate level for use at the nursing centers.
Quality of care is monitored and enhanced by quality assurance committees,
regional quality assurance teams and family satisfaction surveys. The quality
assurance committees oversee patient health care needs and resident and staff
safety. Additionally, physicians serve on the quality assurance committees as
medical directors and advise on health care policies and practices. Regional
consultants visit each nursing center periodically to review practices and
recommend improvements where necessary in the level of care provided and to
assure compliance with requirements under applicable Medicare and Medicaid
regulations. Surveys of residents' families are conducted from time to time in
which the families are asked to rate various aspects of service and the physical
condition of the nursing centers. These surveys are reviewed by nursing center
administrators to help ensure quality care.
Hillhaven provides training programs for nursing center administrators,
managers, nurses and nursing assistants. These programs are designed to provide
career opportunities for employees and to maintain high levels of quality
patient care.
Approximately 99% of the nursing centers are currently certified to receive
benefits provided under Medicare and Medicaid programs. Medicare is a federal
health insurance program primarily for the elderly. Medicaid is a joint
federal/state program providing medical assistance to the indigent. A nursing
center's qualification to participate in such programs depends upon many
factors, including, among other things, accommodations, equipment, services,
safety, personnel, physical environment and adequate policies and procedures.
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Occupancy Level
The following table sets forth for the periods indicated data with respect
to numbers of owned or leased nursing centers operated by Hillhaven, numbers of
beds and occupancy levels. (Data with respect to facilities managed by the
Company for partnership and joint ventures in which the Company has an equity
interest and for third parties are not included. See "Facilities.")
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NO. OF
OPERATING
FISCAL YEAR NURSING CENTERS NO. OF BEDS AVERAGE
ENDED MAY 31, AT YEAR END AT YEAR END OCCUPANCY
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<S> <C> <C> <C>
1995 272 34,194 92.8%
1994 272 34,162 93.4
1993 284 35,139 93.4
</TABLE>
SOURCES OF REVENUES
Net patient care revenues are derived principally from Medicare and
Medicaid programs and from private pay patients. Consistent with the nursing
home industry generally, changes in the mix of Hillhaven's patient population
among these three categories significantly affect the profitability of
Hillhaven's operations. Although the level of cost reimbursement for Medicare
and other high acuity patients generally produces the most revenue per patient
day, profitability is reduced by the costs associated with the higher level of
nursing care and other services required by such patients. The Company believes
that private pay patients generally constitute the most profitable and Medicaid
patients generally constitute the least profitable category.
The tables below set forth certain data for the periods shown with respect
to the payor mix and the services mix of owned or leased nursing centers that
were operated by Hillhaven. (Data with respect to facilities managed by the
Company for partnerships and joint ventures in which the Company has an equity
interest and for third parties are not included. See "Facilities.")
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MEDICAID PRIVATE AND OTHER MEDICARE
-------------------- -------------------- --------------------
FISCAL YEAR PATIENT NET PATIENT NET PATIENT NET
ENDED MAY 31, DAYS REVENUES DAYS REVENUES DAYS REVENUES
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1995 65.3% 46.5% 23.2% 26.3% 11.5% 27.2%
1994 66.6 50.2 23.4 26.8 10.0 23.0
1993 68.4 54.8 23.3 26.8 8.3 18.4
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SUBACUTE MEDICAL
AND REHABILITATION
SERVICES LONG TERM CARE
-------------------- --------------------
FISCAL YEAR PATIENT NET PATIENT NET
ENDED MAY 31, DAYS REVENUES DAYS REVENUES
------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1995 12.5% 30.3% 87.5% 69.7%
1994 10.7 25.5 89.3 74.5
1993 8.6 19.9 91.4 80.1
</TABLE>
Both governmental and private third-party payors have employed cost
containment measures designed to limit payments made to health care providers
such as the Company. Those measures include the adoption of initial and
continuing recipient eligibility criteria which may limit payment for services,
the adoption of coverage criteria which limit the services that will be
reimbursed and the establishment of payment ceilings which set the maximum
reimbursement that a provider may receive for services. Furthermore, government
reimbursement programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which may materially increase or decrease the rate of
program payments to the Company for its services. There can be no assurance that
payments under governmental and private third-party payor programs will remain
at levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs. In
addition, there can be no assurance that facilities owned, leased or managed by
the Company, or the provision of services and supplies by the Company, will meet
the requirements for participation in such programs. The
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Company could be adversely affected by the continuing efforts of governmental
and private third-party payors to contain the amount of reimbursement for health
care services. In an attempt to limit the federal budget deficit, there have
been, and the Company expects that there will continue to be, a number of
proposals to limit Medicare and Medicaid reimbursement for health care services.
Medicare
The Medicare Part A program provides reimbursement for extended care
services furnished to Medicare beneficiaries who are admitted to skilled nursing
centers after at least a three-day stay in an acute care hospital. Covered
services include supervised nursing care, room and board, social services,
physical and occupational therapies, pharmaceuticals, supplies and other
necessary services provided by skilled nursing centers.
Under the Medicare program, skilled nursing center reimbursement is based
upon actual costs incurred as reported by each nursing center at the end of each
annual reporting period. Revenues under this program are subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided for in the period the related services are rendered and are
adjusted as final settlements are determined. To date, these settlements have
not resulted in material adjustments to earnings.
Medicaid
Medicaid is a state-administered program financed by state funds and
matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
federal regulations, states are given flexibility to construct programs and
payment methods consistent with their individual goals. These programs,
therefore, differ from state to state in many respects.
Federal law requires Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically operated
nursing center providing quality care and services in conformity with all
applicable laws and regulations. However, despite these federal requirements,
disagreements frequently arise between nursing centers and states regarding the
adequacy of Medicaid payments. In addition, the Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy by the state agencies and certain government funding limitations, all of
which may materially increase or decrease the level of program payments to
nursing centers operated by Hillhaven. Management believes that, at present, the
payments under these programs are not sufficient on an overall basis to cover
the costs of serving residents participating in these programs. Furthermore,
OBRA mandates an increased emphasis on ensuring quality patient care, which has
resulted in additional expenditures by nursing centers.
There can be no assurance that the payments under these state programs will
remain at levels comparable to current levels or, in the future, will be
sufficient to cover the costs incurred in serving residents participating in
such programs. Hillhaven provides to eligible individuals Medicaid-covered
services consisting of nursing care, room and board and social services. In
addition, states may at their option cover other services such as physical,
occupational and speech therapies and pharmaceuticals.
Private Payment and Medicare Patients
Hillhaven seeks private payment and Medicare patients and has specific
marketing and referral programs aimed at enhancing its private census. In
particular, the Company has implemented a strategy to increase the number of
managed care patients. Private payment patients typically have financial
resources (including insurance coverage) to pay for their monthly services and
therefore do not rely on Medicaid for support. Private payment billings are sent
monthly, with any collection efforts handled primarily through the nursing
centers. Patients either pay directly or funds are received from family members,
insurance companies, health maintenance organizations or other private
third-party payors.
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Competition
Hillhaven's nursing centers compete on a local and regional basis with
other long term care providers. Hillhaven's competitive position varies from
nursing center to nursing center within the various communities served.
Hillhaven believes that the quality care provided, reputation, location and
physical appearance of its nursing centers and, in the case of private patients,
the rates or charges for services are significant competitive factors. There is
limited, if any, price competition with respect to Medicare and Medicaid
patients, since revenues received for services provided to such patients are
strictly controlled and based on fixed rates or cost reimbursement principles.
The long term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, retirement housing facilities and communities,
home health agencies and similar institutions. The industry includes
government-owned, church-owned, secular not-for-profit and for-profit
institutions.
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Facilities
The following table lists, by state, the number of nursing centers operated
by the Company for its own account as of May 31, 1995. Fifteen nursing centers,
accounting for 1,967 beds, managed at that date for partnerships and joint
ventures in which the Company has an equity interest and for others are not
included in the table.
<TABLE>
<CAPTION>
LICENSED LEASED FROM
NUMBER BEDS OWNED THIRD PARTIES
------ -------- ------ -------------
<S> <C> <C> <C> <C>
Alabama(1).................................. 3 447 3 --
Arizona..................................... 7 970 5 2
Arkansas.................................... 1 174 1 --
California.................................. 37 3,916 21 16
Colorado.................................... 7 935 4 3
Connecticut(1).............................. 6 716 6 --
Florida(1).................................. 12 1,531 11 1
Georgia(1).................................. 3 370 3 --
Hawaii(1)................................... 1 60 1 --
Idaho....................................... 9 903 7 2
Indiana(1).................................. 9 1,323 4 5
Kentucky(1)................................. 15 1,914 13 2
Maine(1).................................... 11 882 11 --
Massachusetts(1)............................ 36 4,055 33 3
Minnesota................................... 1 159 1 --
Mississippi(1).............................. 1 120 -- 1
Montana(1).................................. 3 456 2 1
Nebraska(1)................................. 1 157 -- 1
Nevada(1)................................... 3 312 3 --
New Hampshire(1)............................ 3 512 3 --
North Carolina(1)........................... 29 3,241 20 9
Ohio(1)..................................... 11 1,546 7 4
Oklahoma(1)................................. 1 126 1 --
Oregon(1)................................... 4 468 2 2
Tennessee(1)................................ 16 2,666 5 11
Utah........................................ 5 620 5 --
Vermont(1).................................. 1 160 1 --
Virginia(1)................................. 5 764 4 1
Washington(1)............................... 13 1,530 10 3
Wisconsin(1)................................ 14 2,710 11 3
Wyoming(1).................................. 4 451 4 --
--- ------ ------ -----
Number of nursing centers................... 272 202 70
=== ====== =====
Total number of licensed beds............... 34,194 25,193 9,001
====== ====== =====
</TABLE>
---------------
(1) These states have Certificate of Need regulations. See
"Business -- Government Regulation."
In addition to its interests in nursing centers, as described above, as of
May 31, 1995, Hillhaven had 50% interests in six partnerships and joint ventures
that own nursing centers managed by Hillhaven with an aggregate of 652 beds in
five states. Hillhaven also manages nine nursing centers owned by Tenet and
other third parties. These nursing centers are managed by Hillhaven for varying
management fees. The aggregate net revenues received in connection with the
management of these facilities was $4.6 million in fiscal 1995 and $5.7 million
in fiscal 1994.
9
<PAGE> 12
PHARMACIES
Through Medisave, the Company provides institutional and retail pharmacy
services. As of May 31, 1995, Medisave operated 36 institutional pharmacies and
20 retail pharmacies in 18 states. In fiscal 1995, Medisave's net operating
revenues were $190.6 million, representing 12.1% of the Company's net operating
revenues. Medisave's net operating revenues of $198.6 million accounted for
13.5% of Hillhaven's net operating revenues in fiscal 1994, compared to 14.1% in
fiscal 1993.
The institutional pharmacy division focuses on providing a full array of
pharmacy services to approximately 735 nursing centers and specialized care
centers. Institutional pharmacy sales encompass a wide variety of products
including prescription medication, prosthetics, respiratory and infusion
services and enteral therapies. In addition, Medisave provides a variety of
pharmaceutical consulting services designed to assist nursing centers in program
administration. Institutional pharmacy operations accounted for approximately
92% of total pharmacy revenues and approximately 95% of Medisave's operating
profits in fiscal 1995. In fiscal 1994, the comparable figures were 79% and 91%,
respectively, and in fiscal 1993, the comparable figures were 66% and 81%,
respectively.
Medisave's retail pharmacy operations consist of discount retail pharmacy
and optical stores in leased facilities. In 1993 and 1994, the Company
terminated leases of 36 retail outlets in Wal-Mart stores. The leases of the
remaining 14 Wal-Mart outlets were terminated in the 1995 first quarter. The
termination of these leases has not had a material effect on pharmacy operating
income. Retail operations accounted for approximately 8% of Medisave's total
pharmacy revenues and approximately 5% of its operating profits in fiscal 1995.
In fiscal 1994, the comparable figures were 21% and 9%, respectively.
The following table lists by state the number of pharmacies operated by
Medisave as of May 31, 1995.
<TABLE>
<CAPTION>
STATE NUMBER
----- ------
<S> <C>
Arizona..................................................... 1
California.................................................. 14
Florida..................................................... 3
Idaho....................................................... 1
Illinois.................................................... 3
Kansas...................................................... 2
Louisiana................................................... 3
Massachusetts............................................... 1
Mississippi................................................. 6
Missouri.................................................... 1
Nevada...................................................... 2
North Carolina.............................................. 4
Ohio........................................................ 2
Tennessee................................................... 2
Texas....................................................... 5
Utah........................................................ 1
Virginia.................................................... 2
Wisconsin................................................... 3
--
Total............................................. 56
==
</TABLE>
RETIREMENT HOUSING COMMUNITIES
Hillhaven's retirement housing operations consist of 19 retirement housing
communities. These centers include 2,679 apartment units and are located in 14
states. Of the total number of retirement housing centers, 15 are owned by
Hillhaven, one is leased by Hillhaven, one is managed by Hillhaven for a third
party and two are owned by partnerships in which Hillhaven has an equity
interest. Retirement housing operations
10
<PAGE> 13
represented approximately 2.3%, 2.3% and 2.0% of Hillhaven's total net revenues
for fiscal 1995, 1994 and 1993, respectively.
Retirement housing communities serve more independent and self-sufficient
residents than do the nursing centers. A retirement housing community consists
of studio, one-bedroom and two-bedroom apartment units. Residents typically
receive weekly housekeeping and linen service, local transportation, 24-hour
emergency call system and daily food service.
Residents are responsible for monthly fees which typically are paid by the
resident or the resident's family members. Retirement housing operations do not
presently qualify for reimbursement under Medicare, Medicaid or Veterans
Administration health care programs because they do not offer the levels of care
required under such programs. Monthly fees paid by residents are based upon the
resident's apartment size, the number of meals the resident elects to purchase
and the level of personal care required by the resident.
The following table lists, by state, the number of retirement housing
communities operated by the Company as of May 31, 1995.
<TABLE>
<CAPTION>
LEASED FROM
STATE NUMBER OWNED(1) THIRD PARTIES
----- ------ -------- -------------
<S> <C> <C> <C>
Arizona..................................... 4 4 --
California.................................. 1 1 --
Colorado.................................... 1 1 --
Florida..................................... 2 2 --
Idaho....................................... 1 1 --
Kansas...................................... 1 1 --
Massachusetts............................... 2 2 --
Missouri.................................... 1 1 --
New Hampshire............................... 1 1 --
Ohio........................................ 1 -- 1
Oklahoma.................................... 1 1 --
Oregon...................................... 1 1 --
Utah........................................ 1 1 --
Washington.................................. 1 1 --
-- -- --
Totals............................ 19 18 1
== == ==
</TABLE>
---------------
(1) Includes retirement housing communities owned by partnerships in which
Hillhaven has a limited and/or general partnership interest that are managed
by Hillhaven for such partnerships.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates
regulate various aspects of the Company's business. In particular, the
development and operation of long term care facilities and retirement
communities and the provision of health care services are subject to federal,
state and local laws relating to the adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
rate-setting and compliance with building codes and environmental laws. Long
term care facilities are subject to periodic inspection by governmental and
other authorities to assure continued compliance with various standards, their
continued licensing under state law, certification under the Medicare and
Medicaid programs and continued participation in the Veterans Administration
program. Retirement communities and their owners are subject to periodic
inspection by governmental authorities to assure compliance with various
standards including standards relating to the financial condition of the owners
of such communities. The failure to obtain or renew any required regulatory
approvals or licenses could adversely affect the Company's operations.
11
<PAGE> 14
Effective October 1, 1990, OBRA increased the enforcement powers of state
and federal certification agencies. Additional sanctions were authorized to
correct noncompliance with regulatory requirements, including fines, temporary
suspension of admission of new patients to nursing centers and, in extreme
circumstances, decertification from participation in the Medicare or Medicaid
programs.
Nursing centers managed and operated by Hillhaven are licensed either on an
annual or bi-annual basis and certified annually for participation in Medicare
and/or Medicaid by the respective states through various regulatory agencies
which determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided, the
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws and
regulations governing the operation of nursing centers. Hillhaven endeavors to
comply with federal, state and local regulatory requirements for the maintenance
and operation of its nursing centers. From time to time Hillhaven's nursing
centers receive statements of deficiencies from regulatory agencies. In
response, Hillhaven implements plans of correction with respect to these nursing
centers to address the alleged deficiencies. Hillhaven believes that its nursing
centers are in material compliance with all applicable regulations or laws.
In certain circumstances, federal law mandates that conviction of certain
abusive or fraudulent behavior with respect to one health care facility may
subject other facilities under common control or ownership to disqualification
for participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all facilities under common control or ownership within
a state are subject to delicensure if any one or more of such facilities is
delicensed.
Changes in federal regulations from the Omnibus Budget Reconciliation Act
of 1987 became effective July 1, 1995. These federal regulations affect the
survey process for nursing facilities and the authority of state survey agencies
and the Health Care Financing Administration to impose sanctions on facilities
based upon noncompliance with requirements for participation in the Medicare and
Medicaid programs. Available sanctions include imposition of civil monetary
penalties, temporary suspension of payment for new admission, appointment of a
temporary manager, suspension of payment for eligible patients and suspension or
decertification from participation in the Medicare and/or Medicaid programs. The
process of implementing these regulatory changes has only recently been
addressed by the federal and state regulators. Each state will be allowed some
discretion in their implementation of the changes, but the scope of this
discretion is evolving through instructions issued by federal regulators and is
not yet finalized. The Company is unable to project how these regulatory changes
and their implementation will affect the Company.
In addition to license requirements, many states in which Hillhaven
operates have statutes that require a Certificate of Need to be obtained prior
to the construction of a new nursing center, the addition of new beds or
services or the incurring of certain capital expenditures. Certain states also
require regulatory approval prior to certain changes in ownership of a nursing
center. A total of eight states in which Hillhaven operates have eliminated
their Certificate of Need programs and a number of other states are considering
alternatives to their Certificate of Need programs. To the extent that
Certificates of Need or other similar approvals are required for expansion of
Company operations, either through facility acquisitions or expansion or
provision of new services or other changes, such expansion could be adversely
affected by the failure or inability to obtain the necessary approvals, changes
in the standards applicable to such approvals or possible delays and expenses
associated with obtaining such approvals.
Pharmaceutical operations are subject to regulation by the various states
in which the Company conducts its business as well as by the federal government.
The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act and
the Prescription Drug Marketing Act, which are administered by the United States
Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and
Control Act of 1970, which is administered by the United States Drug Enforcement
Administration ("DEA"), dispensers of controlled substances must register with
the DEA, file reports of inventories and transactions and provide adequate
security measures. Failure to comply with such requirements could result in
civil or criminal penalties.
The Company is also subject to federal and state laws which govern
financial and other arrangements between health care providers. These laws often
prohibit certain direct and indirect payments or fee-splitting
12
<PAGE> 15
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the anti-kickback
provisions of the federal Medicare and Medicaid Patients and Program Protection
Act of 1987. These provisions prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. In addition, some states restrict certain
business relationships between physicians and pharmacies, and many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs as well as civil and criminal penalties.
These laws vary from state to state and have seldom been interpreted by the
courts or regulatory agencies.
INSURANCE COVERAGE AND AVAILABILITY
The Company has liability insurance policies providing insurance coverage
which it believes to be adequate. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company's coverage will not be asserted against the Company. In addition,
the Company's insurance policies must be renewed annually. Although the Company
has obtained various insurance coverages at a reasonable cost in the past, there
can be no assurance that it will be able to do so in the future. All matters
arising after May 31, 1994 are insured through the Company's captive insurance
company, Cornerstone Insurance Company.
OTHER REAL PROPERTY
The Company owns unimproved real property with a book value of
approximately $11.3 million at May 31, 1995.
EMPLOYEES
As of May 31, 1995, Hillhaven employed approximately 42,000 individuals, of
whom approximately 27,500 full-time and 11,300 part-time employees work at
Hillhaven's nursing centers, approximately 900 employees work at the corporate
and regional offices, approximately 1,300 employees work in Hillhaven's pharmacy
operations and approximately 1,000 employees work in the retirement housing
communities. Among its professional staff, Hillhaven employs approximately 3,500
registered nurses, 5,000 licensed practical nurses and 3,600 licensed
therapists. Hillhaven has 21 collective bargaining agreements covering
approximately 3,500 employees.
ITEM 2. PROPERTIES
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS
In January 1995, Horizon Healthcare Corporation ("Horizon") proposed a
transaction in which holders of Hillhaven common stock would receive common
stock of Horizon valued by Horizon at $28. Horizon also had entered into an
agreement with Tenet pursuant to which Tenet indicated that it was supportive of
Horizon's proposal. A formal proposal was presented by Horizon to Hillhaven and
was rejected by a special committee (the "Special Committee") of the Hillhaven
Board for, among other reasons, the belief that the arrangements between Horizon
and Tenet had caused Horizon to become the "beneficial owner" of Tenet's
Hillhaven common stock. Because Nevada law prohibits a merger for three years
between Hillhaven and any person acquiring beneficial ownership or more than 10%
of Hillhaven common stock without prior Hillhaven approval, the Horizon proposal
could not be consummated. The Special Committee authorized Hillhaven to commence
litigation seeking a determination that Horizon could not effect a merger with
Hillhaven in compliance with Nevada law.
On February 6, 1995, Hillhaven filed a complaint against Horizon in the
United States District Court for the District of Nevada seeking injunctive and
declaratory relief that a business combination between Horizon
13
<PAGE> 16
and Hillhaven is prohibited by the Nevada statute regarding business
combinations with interested stockholders (NRS Sections 78.411 through 78.444)
by reason of Horizon's arrangements with Tenet. On February 27, 1995, Horizon
filed an answer and a counterclaim alleging that, among other things, Hillhaven
and all of its directors (other than Messrs. de Wetter and Andersons) have
breached their fiduciary duties to Hillhaven's stockholders in connection with
their consideration of Horizon's acquisition proposal and certain actions taken
by Hillhaven, including the formation of a grantor trust and the amendment of
Hillhaven's stockholder rights plan. The counterclaim seeks injunctive and
declaratory relief and compensatory and punitive damages in unspecified amounts.
Hillhaven has answered the counterclaim and believes Horizon's claims are
without merit. By stipulation of the parties, all proceedings in these actions
have been stayed until October 31, 1995.
Hillhaven and its directors are named as defendants in several putative
class action complaints filed on behalf of Hillhaven's stockholders in Nevada
state court (the "Nevada State Court Actions") and California state court (the
"California State Court Actions"). These complaints raise allegations that
Hillhaven's directors have breached their fiduciary duties to Hillhaven's
stockholders in connection with the consideration of Horizon's acquisition
proposal and certain corporate actions also cited in Horizon's counterclaim.
These actions seek declaratory and injunctive relief and, in California,
compensatory damages in unspecified amounts. The plaintiffs in the Nevada State
Court Actions have moved to dismiss their complaints, which dismissal has been
opposed by Hillhaven and its directors. Consideration of this motion has been
suspended without date. In addition, Tenet filed a complaint against Hillhaven
and two of its directors, Mr. Busby and Mr. Marker (the "Tenet Action"), in the
state court of California seeking declaratory and injunctive relief and
alleging, among other things, that they have breached their fiduciary duties to
Tenet and Hillhaven's other stockholders in connection with their consideration
of Horizon's acquisition proposal and certain other corporate actions cited in
the Horizon and putative class action complaints. The Service Employees
International Union (AFL-CIO), and Joann Sforza, a Hillhaven employee and union
member, are seeking to intervene as party plaintiffs in the Tenet Action and in
one of the putative class actions brought on behalf of Hillhaven's stockholders,
alleging that their interests as stockholders and employees of Hillhaven are not
adequately represented. Hillhaven has opposed this intervention. Hillhaven
believes all these actions are without merit.
By stipulation of the parties, the proceedings in the Tenet Action have
been stayed until the consummation of the Merger, at which time Hillhaven and
Tenet have agreed to dismiss with prejudice all pending claims with respect to
Horizon's acquisition proposal or the Merger. The stay of the California State
Court Actions expired July 5, 1995 and the stay in the Nevada State Court
Actions expired on June 22, 1995. No schedule has been established with respect
to further proceedings in these actions.
There are no other material legal proceedings pending to which the
Registrant is a party, or to which any of its property is subject, nor is such
litigation threatened, other than ordinary routine litigation which is
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1995.
14
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At May 31, 1995, there were approximately 9,665 holders of record of the
Company's common stock. Approximately 33,300 additional stockholders held shares
under beneficial ownership in nominee name or within clearing house positions of
brokerage firms and banks. The Company's common stock has been listed and traded
on the New York Stock Exchange since November 2, 1993 and was previously listed
and traded on the American Stock Exchange under the symbol "HIL." The stock
prices below are the high and low sales prices as reported on the composite tape
as adjusted to reflect a one-for-five reverse stock split.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter.............................. 21 1/8 17 3/8 18 3/4 14 3/8
Second quarter............................. 24 20 3/8 20 5/16 14 11/16
Third quarter.............................. 27 18 5/8 21 3/8 17 7/8
Fourth quarter............................. 29 1/4 23 1/4 22 7/8 18 1/2
</TABLE>
The Company has not paid a common dividend and does not anticipate
declaring a common dividend in the near future.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
Consolidated Financial Statements of The Hillhaven Corporation and its
subsidiaries ("Hillhaven" or the "Company"). The data set forth below should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which follow.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenues............... $1,576,282 $1,471,190 $1,378,466 $1,317,187 $1,254,253
Expenses:
General and administrative......... 1,349,837 1,255,332 1,180,974 1,144,390 1,094,456
Interest........................... 50,839 56,178 63,600 56,863 43,800
Depreciation and amortization...... 57,481 54,395 53,651 46,698 33,650
Rent............................... 53,571 56,280 56,687 71,665 101,604
Restructuring...................... -- (20,225) 5,769 92,529 --
Adjustment to carrying value of
properties previously reported
as discontinued operations...... -- -- -- 20,736 --
---------- ---------- ---------- ---------- ----------
Net expenses......................... 1,511,728 1,401,960 1,360,681 1,432,881 1,273,510
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 64,554 69,230 17,785 (115,694) (19,257)
Interest income...................... 12,860 13,635 16,006 12,820 17,013
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
reinstatement of discontinued
operations, extraordinary charge
and cumulative effect of accounting
change............................. 77,414 82,865 33,791 (102,874) (2,244)
Income tax (expense) benefit......... (25,555) (23,385) 7,116 (543) (136)
Reinstatement of discontinued
operations......................... -- -- -- 24,743 4,379
Extraordinary charge -- early
extinguishment of debt, net of
income taxes....................... (570) (1,062) (565) -- --
Cumulative effect of change in
accounting for income taxes........ -- -- (1,103) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 51,289 $ 58,418 $ 39,239 $ (78,674) $ 1,999
========== ========== ========== ========== ==========
Net income (loss) per common share
-- primary......................... $1.54 $1.96 $1.51 $(3.63) $.09
-- fully diluted................... $1.40 $1.68 -- -- --
BALANCE SHEET DATA:
Working capital...................... $ 64,273 $ 37,673 $ 78,886 $ 59,619 $ 78,771
Total assets......................... 1,252,319 1,192,493 1,224,012 1,178,909 817,823
Long-term debt....................... 578,601 579,035 819,202 834,452 443,095
Stockholders' equity................. 419,665 363,747 181,649 141,320 182,251
OTHER INFORMATION (unaudited)
(at end of period):
NURSING CENTERS
Number of nursing centers............ 272 272 284 334 342
Number of licensed beds.............. 34,194 34,162 35,139 41,089 42,239
Average occupancy rate for the
year............................... 92.8% 93.4% 93.4% 91.6% 90.6%
Nursing centers managed for others... 15 16 17 17 19
PHARMACY OUTLETS..................... 56 77 88 131 118
RETIREMENT HOUSING COMMUNITIES....... 19 19 21 27 27
</TABLE>
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands)
The following material should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements of the Company and the
related notes thereto. All references in this section to years are to fiscal
years of the Company ended May 31 of such year.
MERGERS AND ACQUISITIONS
In the 1995 fourth quarter, Hillhaven entered into the Merger Agreement
with Vencor, Inc. ("Vencor") pursuant to which Hillhaven will be merged with and
into Vencor (the "Merger"). Holders of Hillhaven common stock will be issued
Vencor common stock in a business combination intended to qualify as a pooling
of interests and as a tax-free reorganization for federal income tax purposes.
Vencor operates a network of health care services for patients who suffer from
cardiopulmonary disorders. The foundation of Vencor's network is a nationwide
chain of long term intensive care hospitals. The Merger will create what Vencor
and Hillhaven believe, based upon net operating revenues and the number of beds
in service, will be one of the nation's largest providers of health care
services primarily focusing on the needs of the elderly. With operations in 38
states, the merged company (including Nationwide Care, Inc. as discussed below)
will conduct business in states containing more than 80% of the nation's
population, with 35 long term intensive care hospitals and 311 nursing centers
with more than 42,000 beds, 55 retail and institutional pharmacy outlets and 23
retirement housing communities with approximately 3,000 apartments. Health care
services provided through this network of facilities will include long term
intensive hospital care, long term nursing care, contract respiratory therapy
services, acute cardiopulmonary care, subacute and post-operative care,
inpatient and outpatient rehabilitation therapy, specialized care for
Alzheimer's disease, hospice care, pharmacy services and retirement and assisted
living. Consummation of the Merger is contingent upon the affirmative vote of
Vencor's and Hillhaven's stockholders and certain governmental and regulatory
approvals and is expected to occur in the 1996 second quarter.
On February 27, 1995, Hillhaven signed a definitive agreement to acquire
Nationwide Care, Inc. ("Nationwide") and its affiliated corporations and
partnerships. The transaction closed on June 30, 1995. The consideration for the
Nationwide acquisition was 5,000,000 shares of the Company's Common Stock,
valued at approximately $141,000. The transaction was structured as a pooling of
interests and as a tax-free reorganization for federal income tax purposes.
The following summarized pro forma operating data give effect to the
Nationwide acquisition as if it had occurred on June 1, 1992:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Total revenues......................... $1,717,345 $1,606,568 $1,461,257
Net income............................. 54,526 63,437 42,732
Primary earnings per share............. $1.41 $1.80 $1.38
Fully diluted earnings per share....... 1.31 1.59 N/A
</TABLE>
On October 31, 1994, the Company acquired closely-held CPS Pharmaceutical
Services, Inc. and Advanced Infusion Systems, Inc. ("CPS/AIS") in a business
combination accounted for as a pooling of interests. CPS and AIS, which provide
diversified pharmaceutical and infusion services through locations in Northern
California, became part of the Company's Medisave Pharmacies, Inc. subsidiary
("Medisave") through the exchange of 1,262,062 shares of the Company's Common
Stock valued at approximately $29,000. The accompanying financial information
for 1995 is presented on the basis that the companies were combined for the
entire period, and financial statements of the prior years have been restated to
give effect to the combination.
RESULTS OF OPERATIONS
Net operating revenues were $1,576,282 in 1995, $1,471,190 in 1994 and
$1,378,466 in 1993. Net income was $51,289, $58,418 and $39,239 in 1995, 1994
and 1993, respectively. Net income for 1994 includes the
17
<PAGE> 20
$21,904 pretax restructuring credit arising from unused loss reserves remaining
at the conclusion of the Company's facility disposition program.
The following table identifies the Company's sources of net operating
revenues.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Percentage of net operating revenues:
Nursing Centers:
Long term care................................ 58.2% 60.8% 65.5%
Subacute medical and rehabilitation........... 25.3 20.8 16.3
Other revenues................................ 2.1 2.6 2.1
----- ----- -----
Total nursing centers................. 85.6 84.2 83.9
Pharmacies...................................... 12.1 13.5 14.1
Retirement Housing.............................. 2.3 2.3 2.0
----- ----- -----
Total................................. 100.0% 100.0% 100.0%
===== ===== =====
Net patient revenues per patient day:
Long term care.............................. $ 90.50 $ 84.59 $ 82.05
Subacute medical and rehabilitation......... $274.50 $240.87 $215.77
Combined.................................... $113.59 $101.38 $ 93.59
Average number of beds available.............. 34,208 34,760 35,356
Average occupancy............................. 92.8% 93.4% 93.4%
</TABLE>
Nursing center net operating revenues, comprised primarily of patient
revenues, increased 8.8% in 1995 to $1,348,940 and 7.1% in 1994 to $1,239,317
from $1,156,766 in 1993. These increases were due primarily to the increases in
revenues per patient day. The increases in revenue per patient day were the
result of (i) rate increases received from Medicare and Medicaid and increases
in private pay rates, (ii) increases in the volume of services provided to
patients, such as additional therapies and subacute care services, and (iii)
shifts in the patient mix toward subacute medical and rehabilitation care.
Patients using these services are of higher acuity levels than traditional long
term care patients, resulting in higher reimbursement rates. Nursing center net
revenues for 1994 include a gain on the sale of 13 nursing centers in the amount
of $5,102.
The decrease in average occupancy in 1995 is due primarily to higher
patient turnover associated with the increase in subacute medical and
rehabilitation services.
Patient revenues are affected by changes in Medicare and Medicaid
reimbursement rates, private pay and other rates charged by Hillhaven, occupancy
levels, the nature of services provided and the payor mix. Data for nursing
center operations with respect to sources of net patient revenues and patient
mix by payor type are set forth below. Included in private and other revenues
are amounts received under managed care contracts.
<TABLE>
<CAPTION>
NET PATIENT REVENUES PATIENT CENSUS
---------------------- ----------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Medicaid................................. 46.5% 50.2% 54.8% 65.3% 66.6% 68.4%
Private and other........................ 26.3 26.8 26.8 23.2 23.4 23.3
Medicare................................. 27.2 23.0 18.4 11.5 10.0 8.3
</TABLE>
The Company is continuing its strategy of improving its quality mix of
private pay and Medicare patients by expanding its subacute medical and
rehabilitation services. These higher revenue services include such care as
physical, occupational and speech therapies, stroke therapy, wound care,
oncology treatment, brain injury care and orthopedic therapy. The Company has
increased the number of managed care contracts it maintains with insurance
companies and other payors to provide subacute medical and rehabilitation care
to their insureds, offering a less expensive alternative to acute care
hospitals. The average daily number of managed care patients in Hillhaven's
nursing centers, including long term care patients, was approximately 534 in
1995 compared to 435 in 1994 and 211 in 1993.
18
<PAGE> 21
Net operating revenues from pharmacy operations amounted to $190,638 in
1995, $198,634 in 1994 and $194,935 in 1993. Included in 1995 net operating
revenues is a gain on the sale of the Company's interest in a closely-held
institutional pharmacy amounting to $8,077. Pharmacy revenues were impacted by
the disposition of 75 marginally performing retail outlets during the period
from late 1993 through the first quarter of 1995.
Institutional revenues, accounting for approximately 92% of pharmacy net
revenues in 1995, versus 79% in 1994 and 66% in 1993, increased by 11.9% and
21.0% to $175,119 and $156,444 in 1995 and 1994, respectively, from $129,312 in
1993. The growing contribution from institutional operations reflects the
Company's increasing focus on the nursing center market and the disposition of
retail outlets. Institutional revenues related to CPS/AIS amounted to $27,425,
$22,456 and $15,636 in 1995, 1994 and 1993, respectively. The increase in
institutional revenues is due to 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.
On February 1, 1995, Hillhaven formed the MediLife Pharmacy Network
Partnership ("MediLife"), a joint venture between Medisave and Life Care Centers
of America ("Life Care") and began providing pharmaceutical and consulting
services to certain of Life Care's long term and subacute care facilities.
Medisave contributed five of its existing institutional pharmacies to the joint
venture and accounts for its 50% ownership interest by the equity method.
Medisave receives a management fee for managing MediLife. As a result of its
contribution of five pharmacies to the joint venture, subsequent to February 1,
1995, the Company reported a decrease in pharmacy net operating revenues.
However, this transaction did not result in a material decrease in income for
the Company for the year ended May 31, 1995.
Net operating revenues from retirement housing operations increased to
$36,704 in 1995 from $33,239 in 1994 and $26,765 in 1993. These increases are
due to increases in rates charged as well as increases in medical and assisted
living services provided. Retirement housing occupancy averaged 94.6% in 1995
compared to 96.1% in 1994 and 92.0% in 1993.
General and administrative expenses of the Company's nursing centers
increased by 10.1% in 1995 to $1,169,811 and by 7.1% in 1994 to $1,062,442 from
$992,149 in 1993. These increases were attributable primarily to the expansion
of subacute medical and rehabilitation services. Labor and related benefits,
which represented approximately 76% of nursing center general and administrative
expenses in 1995, increased by 8.7% in 1995 to $891,772 and by 7.2% in 1994 to
$820,065 from $765,276 in 1993. These increases were the result of an increase
in the number of therapists in the Company's nursing centers to accommodate the
increase in the number of medically complex patients, as well as general wage
rate increases. Hillhaven employed approximately 4,600 therapists at May 31,
1995 compared to 3,400 and 2,400 at May 31, 1994 and 1993, respectively. Nursing
wages and benefits, accounting for approximately 52% of total nursing center
labor costs in 1995, increased by 3.6% in 1995 and by 2.0% in 1994. Hillhaven
employed approximately 8,500 nurses at May 31, 1995 compared to approximately
7,700 and 7,800 at May 31, 1994 and 1993, respectively.
The increases in the non-labor components of general and administrative
expenses, including ancillary and pharmaceutical supplies and contract therapy
services, reflect the higher costs associated with caring for higher acuity
patients. Nursing center supplies increased by 14.5% in 1995 to $60,765 and by
17.9% in 1994 to $53,069 from $45,005 in 1993.
Interest expense decreased by 9.5% to $50,839 in 1995 and by 11.7% to
$56,178 in 1994 due to the refinancing of certain of the Company's indebtedness
in connection with its September 1993 recapitalization program (the
"Recapitalization"). Rent expense decreased by 4.8% in 1995 to $53,571 due to
the purchase of previously leased nursing centers, as discussed below.
As a result of the refinancing of certain of the Company's indebtedness,
extraordinary charges of $570, $1,062 and $565 (net of income taxes) were
reported in 1995, 1994 and 1993, respectively, due primarily to the write-off of
previously capitalized financing costs.
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
19
<PAGE> 22
1993 statement of income. Including the impact of this charge, the effect of the
adoption of SFAS 109 in 1993 was a reduction of net income tax expense and an
increase in net income of $7,710 as compared to amounts that would have been
reported under APB Opinion No. 11. The Company has recorded net deferred tax
assets of $11,428 at May 31, 1995, the realization of which is dependent in part
upon future pretax earnings.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), establishes standards to
determine in what circumstances a creditor should measure impairment based on
either the present value of expected future cash flows related to the loan, the
market price of the loan or the fair value of the underlying collateral.
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures" (SFAS 118),
amends SFAS 114 to allow creditors to use existing methods for recognizing
interest income on an impaired loan. SFAS 114 and SFAS 118 relate to the
Company's portfolio of notes receivable. The Company anticipates that the
adoption of SFAS 114 and SFAS 118 on the required application date of June 1,
1995 will not have a material adverse impact on Hillhaven's financial position
or results of operations.
CASH FLOWS AND FINANCIAL CONDITION
Cash provided by operations in 1995 totalled $80,656 compared to $75,127 in
1994 and $66,852 in 1993. These increases are due primarily to higher operating
income before property-related expenses and restructuring items. Working capital
at May 31, 1995 amounted to $64,273 compared to $37,673 and $78,886 at May 31,
1994 and 1993, respectively. The decrease in working capital in 1994 is due
primarily to a decrease in cash and an increase in the current portion of
long-term debt resulting from the Recapitalization.
Net cash used in investing activities amounted to $62,664 in 1995 compared
to $9,949 in 1994 and $3,212 in 1993. The increase in 1995 is due primarily to
increases in cash used for capital expenditures and purchases of previously
leased nursing centers and decreases in proceeds from sales of property and
equipment and collection of notes receivable.
In 1995, capital expenditures for routine replacements and refurbishment of
facilities and capital additions amounted to $50,276 compared to $44,277 in 1994
and $30,779 in 1993. The increases in 1995 and 1994 are due primarily to the
expansion of certain nursing centers to accommodate the growth in subacute
medical and rehabilitation programs, and the construction of a new nursing
center and an assisted living center. Capital expenditures of approximately
$80,000 are budgeted for 1996, the majority of which are anticipated to be
funded from cash flow from operations.
In 1995, Hillhaven purchased six previously leased nursing centers for an
aggregate purchase price of $17,355. In 1994, the Company purchased the
remaining 23 nursing centers leased from Tenet Healthcare Corp. ("Tenet")
(formerly National Medical Enterprises, Inc.) for an aggregate purchase price of
$111,800. The purchase was financed with the proceeds from the Recapitalization.
Also in 1994, the Company sold 13 nursing centers and received cash for the
$15,594 aggregate sales price.
In 1993, Hillhaven purchased 62 nursing centers previously leased from
Tenet for an aggregate purchase price of $179,890. The purchase was financed
with the proceeds from the sale of $74,750 of 7 3/4% Convertible Subordinated
Debentures due 2002 (the "Debentures"), the assumption of underlying debt
amounting to $4,825 and Tenet financing in the amount of $92,256, with the
balance settled in cash. The Company also acquired seven previously leased
nursing centers from third parties in 1993 for an aggregate purchase price of
$26,791. These transactions were partially financed by the assumption of
underlying debt and borrowings aggregating $15,095, with the balance settled in
cash. During this same period, the Company disposed of 47 nursing centers and a
retirement housing facility for an aggregate sales price of $59,355. Hillhaven
provided financing for $36,338 of the total sales price and received cash for
the balance.
Net cash used in financing activities totalled $20,633 in 1995, $88,543 in
1994 and $36,438 in 1993. The Recapitalization included, in addition to the
purchase of nursing centers from Tenet, the repayment of all existing debt
payable to Tenet in the aggregate principal amount of $147,202. The
Recapitalization was financed through (i) the issuance to Tenet of $120,000 of
payable-in-kind Series D Preferred Stock, (ii) the incurrence of a $175,000
five-year term loan with a syndicate of banks (the "Bank Term Loan"), (iii) the
20
<PAGE> 23
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 $39,000 of cash. The bank financing (the "Credit
Agreement") also included a $100,000 letter of credit facility and an $85,000
revolving bank line of credit. The Credit Agreement was subsequently amended to
change the amounts available under the Bank Term Loan, the letter of credit
facility and the revolving bank line of credit to $165,000, $70,000 and $85,000,
respectively. At May 31, 1995, the Bank Term Loan had an outstanding principal
balance of $144,500 and borrowings under the revolving bank line of credit
amounted to $24,000.
Hillhaven participates in a $40,000 accounts receivable-backed credit
facility financed by a bank line of credit. At May 31, 1995, borrowings under
this facility amounted to $5,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are contained on pages F-1 through F-22 of this report
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and certain past
positions of the directors and executive officers of Hillhaven.
<TABLE>
<CAPTION>
NAME AND AGE POSITION AND EXPERIENCE
------------ -----------------------
<S> <C>
Bruce L. Busby (51)............. Chairman and Chief Executive Officer, Director and Chairman
of Executive Committee. Mr. Busby has been a director and
the Chief Executive Officer of the Company since April 1991
and Chairman of the Company since September 1993. Before
joining the Company, Mr. Busby served Tenet as Chief
Executive Officer and President of the Venture Development
Group from April 1988 to March 1991, Chairman and Chief
Executive Officer of the Long Term Care Group from August
1986 to March 1988 and President of the Retail Services
Group from June 1986 to November 1987.
Christopher J. Marker (52)...... President, Director and Member of Executive Committee.
Mr. Marker has been a director and the President of the
Company since December 1989. He served as President of the
Company's predecessor, a Tenet subsidiary, from April 1988
to January 1990. Prior to that, Mr. Marker was Executive
Vice President of Westin Hotels and Resorts from January
1984 to March 1988.
Maris Andersons (56)............ Director and Member of Audit Committee. Mr. Andersons has
been a director of Hillhaven since September 1993. Mr.
Andersons joined Tenet in 1976, as Senior Vice President,
from Bank of America, where he was a Vice President. Mr.
Andersons was elected Treasurer of Tenet in 1981 and
Executive Vice President of Tenet in 1992.
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
NAME AND AGE POSITION AND EXPERIENCE
------------ -----------------------
<S> <C>
Walter F. Beran (69)............ Director, Chairman of Audit Committee and Member of
Executive Committee. Mr. Beran has been a director of the
Company since December 1989. Mr. Beran serves as Chairman
of the Pacific Alliance Group, a financial services firm.
Previously, Mr. Beran served as Vice Chairman and Western
Regional Managing Partner of the accounting firm of Ernst &
Whinney (now Ernst & Young) from 1971 until his retirement
in September 1986. Mr. Beran also serves as a director of
Arco Chemical Company, Pacific Scientific Company and
Fleetwood Enterprises, Inc.
Peter de Wetter (75)............ Director and Chairman of Compensation Committee. Mr. de
Wetter has been a director of the Company since December
1989. Mr. de Wetter served as Executive Vice President of
Tenet from October 1979 until his retirement in May 1989.
Mr. de Wetter also serves as a director of Tenet.
Dinah Jacobs (49)............... Director and Member of Compensation Committee. Ms. Jacobs
has been a director of the Company since April 1991. Ms.
Jacobs has served Citicorp/Citibank as Corporate Director
of Customer Satisfaction and Quality since January 1988,
Director of Sales Effectiveness & Service Quality from
January 1980 to January 1988 and Director of Customer
Service-Vice President from January 1978 to January 1980.
Jack O. Vance (70).............. Director and Member of Compensation Committee. Mr. Vance
has been a director of the Company since December 1989. Mr.
Vance was employed by McKinsey & Company, Inc., a
management consulting firm, as a director from 1960 until
his retirement in 1990. Upon his retirement from McKinsey &
Company, Inc., Mr. Vance formed Management Research, Inc.
where he serves as Managing Director. He also serves as a
director of ESCORP, F.C.G. Enterprises, Inc., International
Rectifier Corp., International Technology Corporation, The
Olson Company, SEMTECH and University Restaurant Group.
Donald S. Burns (70)............ Director and Member of Audit Committee. Mr. Burns has been
a director of the Company since February 1995. Mr. Burns
has served as Chairman and Chief Executive Officer of
Prestige Holdings, Ltd. and as Chairman, Chief Executive
Officer and Licensed Investment Advisor for its wholly
owned subsidiary, Prestige Equities, Ltd., an SEC
registered investment advisory firm, since 1978. He also
serves as a director of ESCORP, International Technology
Corporation and International Rectifier Corp. and a
director and past President of the Orange County Sheriff's
Advisory Council.
Jeffrey M. McKain (44).......... Executive Vice President. Mr. McKain has served Hillhaven
as Executive Vice President since January 1992 and as
Senior Vice President from April 1991 to January 1992. He
served as Senior Vice President, Operations of First
Healthcare Corporation, a wholly-owned subsidiary of the
Company ("FHC"), from April 1990 to April 1991 and as Vice
President of Operations of FHC from January 1986 to March
1990.
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
NAME AND AGE POSITION AND EXPERIENCE
------------ -----------------------
<S> <C>
Robert F. Pacquer (50).......... Senior Vice President and Chief Financial Officer. Mr.
Pacquer has served the Company as Senior Vice President and
Chief Financial Officer since December 1989 and as
Treasurer from that date to March 1992. He served as Senior
Vice President and Chief Financial Officer of the Company's
predecessor from October 1986 to January 1990.
Richard P. Adcock (40).......... Senior Vice President, Secretary and General Counsel. Mr.
Adcock has served the Company as Senior Vice President
since December 1989 and as Vice President, Secretary and
General Counsel since May 1989. He served as Vice
President, Secretary and General Counsel of the Company's
predecessor from May 1987 to January 1990.
Kris Scoumperdis (51)........... Senior Vice President. Mr. Scoumperdis has served the
Company as Senior Vice President since February 1991 and as
Vice President from March 1990 to January 1991. Before
joining the Company he served as Vice President, Human
Resources of the Frank Russell Company, a pension asset
consulting firm, from November 1988 to March 1990, and as
Vice President, Human Resources and Support Services of
Good Samaritan, Inc., a health care company, from November
1984 to October 1988.
Carl J. Napoli (57)............. Chief Executive Officer, President and Chief Operating
Officer of Medisave. Mr. Napoli has served as Chief
Executive Officer of Medisave Pharmacies, Inc. since July
1994, as President and Chief Operating Officer since May
1992, and he previously served as Executive Vice President
of Operations from September 1984 to May 1992.
Robert K. Schneider (47)........ Vice President and Treasurer. Mr. Schneider has served as
Vice President and Treasurer since April 1992 and as Vice
President, Treasury from August 1990 to April 1992. Before
joining Hillhaven, he served as a Vice President and
Manager of Seafirst Bank from September 1985 to August
1990.
Michael B. Weitz (45)........... Vice President of Finance. Mr. Weitz has served as Vice
President of Finance and principal accounting officer since
April 1992 and as Vice President, Finance from June 1991 to
April 1992. From November 1990 to May 1991, he was a
self-employed independent certified public accountant. From
June 1989 to October 1990, he served as Vice President of
Finance and Treasurer of Chemical Processors, Inc., an
environmental company.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. The same
persons are also required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended May 31, 1995, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
23
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the remuneration paid or accrued by the Company
to the Company's Chief Executive Officer and to the four other most highly paid
executive officers of the Company for the three fiscal years ended May 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------
PAYOUTS
ANNUAL COMPENSATION AWARDS ---------
--------------------------- ----------------------- LONG
OTHER SECURITIES TERM ALL
ANNUAL RESTRICTED UNDERLYING INCENTIVE OTHER
COMPEN- STOCK OPTIONS/ PLAN COMPEN-
NAME AND SALARY BONUS SATION AWARDS SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#) ($)(4) ($)(5)
------------------ ----- ------- ------- ------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce L. Busby...................... 1995 445,193 337,550 49,585 0 6,620 0 98,716
Chief Executive Officer 1994 417,308 266,914 46,025 0 6,444 0 45,818
1993 385,000 288,750 33,321 0 9,882 210,765 40,787
Christopher J. Marker............... 1995 360,000 270,000 37,680 0 4,960 0 102,336
President 1994 360,000 210,000 36,430 0 5,230 0 48,859
1993 350,000 251,560 34,309 0 8,167 162,750 45,412
Jeffrey M. McKain................... 1995 229,691 156,600 24,921 0 2,750 0 45,249
Executive Vice President 1994 218,077 118,350 25,158 0 2,816 0 23,286
1993 210,000 137,025 33,524 0 1,824 67,871 17,231
Robert F. Pacquer................... 1995 189,038 110,000 24,682 0 1,920 0 37,920
Senior Vice President and 1994 184,038 80,000 24,302 0 1,954 0 18,107
Chief Financial Officer 1993 180,000 89,775 22,398 0 3,050 57,375 17,378
Carl J. Napoli...................... 1995 163,692 99,600 37,098 260,250 1,630 0 34,228
Chief Executive Officer of 1994 154,504 35,224 37,136 0 0 0 9,854
Medisave Pharmacies, Inc.(6) 1993 148,488 55,102 34,205 171,875 2,090 0 10,540
</TABLE>
---------------
(1) Includes amounts paid pursuant to the Company's Annual Incentive Plan (the
"AIP"). Under the AIP, annual cash incentive awards are made to selected key
employees in positions which significantly impact the Company's operations.
Individual awards are based on salary, corporate and operating unit
financial performance goals and other key operating factors determined by
the Compensation Committee.
(2) Mr. Napoli's "Other Annual Compensation" includes early withdrawal of his
Deferred Compensation as well as life and health insurance premiums for
1993, 1994 and 1995.
(3) Restricted Shares are granted without charge to the recipient and are
subject to forfeiture if continued employment for specified periods or other
conditions as the Compensation Committee may establish are not met.
Dividends, if any, are paid currently. Restrictions as to one-fourth of the
shares awarded to Mr. Napoli in fiscal year 1995 and as to one-fifth of the
shares awarded in fiscal year 1993 lapse yearly on each anniversary date of
the awards. The number and value of the aggregate restricted stock holdings
of Mr. Napoli at the end of the 1995 fiscal year (based on the Fair Market
Value of the Company's Common Stock on the last day of fiscal 1995) was
15,000 and $429,375 respectively.
(4) The Company has a Long Term Incentive Plan for key management employees
which provides for cash awards that are to be paid only if Hillhaven
achieves predetermined performance objectives over the length of a
performance cycle, which must be a period of two or more fiscal years.
Target awards are established for each participant, which will be the amount
ultimately paid if goals are met or exceeded.
Cash payments under the Long Term Incentive Plan were discontinued after
the three-year period ending May 31, 1993 and were replaced with Options
and Performance Shares under the Company's 1990 Stock Incentive Plan.
Consequently, the last performance award cycle scheduled under the Long
Term Incentive Plan encompassed the three-year period ending May 31, 1993.
A portion of Mr. Busby's Long Term Incentive Plan award ($54,359 for the
period ended May 31, 1993) was paid by his previous employer with respect
to service before Mr. Busby became a director and executive officer of
Hillhaven.
(5) Hillhaven maintains a non-qualified Deferred Compensation Plan (the "DCP")
for executive officers and certain key management employees, which permits
deferral of up to the maximum amount permissible
24
<PAGE> 27
under applicable law of base salary or salary plus bonus until retirement,
death or disability. The Company will make a matching contribution to a
participant's account of up to 4% of a participant's total compensation.
Vesting in the matching contributions occurs on a graduated basis, with full
vesting after seven years of service or upon the participant attaining the
age of 60. Amounts disclosed reflect Company matching contributions and
interest credited to deferred compensation plan accounts. The amounts
disclosed also include the economic value of Company-paid split dollar life
insurance premiums as follows: Mr. Busby, $50,048; Mr. Marker, $42,498; Mr.
McKain, $16,544; Mr. Pacquer, $17,323 and Mr. Napoli, $20,169.
(6) Effective July 19, 1994, Mr. Napoli was appointed Chief Executive Officer
and Director of Medisave.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF % OF TOTAL GRANT DATE
SECURITIES OPTIONS/SARS VALUE
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS/SARS EMPLOYEES PRICE PER EXPIRATION PRESENT
NAME GRANTED(1) IN FISCAL YEAR(2) SHARE ($) DATE VALUE ($)(3)
---- ------------ ------------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Bruce L. Busby.................... 6,620 3.05% $18.00 7/25/04 $86,091
Christopher J. Marker............. 4,960 2.29 18.00 7/25/04 64,503
Jeffrey M. McKain................. 2,750 1.27 18.00 7/25/04 35,763
Robert F. Pacquer................. 1,920 (4) 18.00 7/25/04 24,968
Carl J. Napoli.................... 1,630 (4) 18.00 7/25/04 21,198
</TABLE>
---------------
(1) Options were granted on July 26, 1994 at a purchase price per share of 100%
of the fair market value of the Company's common stock on that date. The
options vest 100% on the first anniversary of the grant date. All grants
have a ten-year term. Upon the occurence of certain events which may
constitute a change in control of the Company, the right of the holder to
exercise the options will accelerate.
(2) Based on total grants during the fiscal year of 216,790 shares.
(3) The dollar amounts under this column represent the result of calculations
using the Black-Scholes based option valuation model. The valuation assumes
an expected volatility of .5135, a 0% dividend yield, a 10-year exercise
term, a risk-free rate of 7.505% reflecting the yield on a zero coupon U.S.
Treasury security for the term of the option, and a grant price and exercise
price of $18.00. No adjustments have been made for non-transferability or
risk of forfeiture. The actual value of the options, if any, will depend on
the extent to which the market value of the common stock exceeds the price
of the option on the date of exercise.
(4) Less than 1%.
25
<PAGE> 28
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS AT
ACQUIRED AT MAY 31, 1995 MAY 31, 1995($)(2)
ON VALUE --------------- ---------------------
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) $ UNEXERCISABLE(1) UNEXERCISABLE
---- --------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
Bruce L. Busby........................ -- -- 321,854/318,514 $3,939,616/$3,840,356
Christopher J. Marker................. -- -- 255,273/253,202 3,126,280/ 3,053,325
Jeffrey M. McKain..................... -- -- 102,826/ 98,228 1,356,663/ 1,183,309
Robert F. Pacquer..................... -- -- 106,846/103,763 1,306,688/ 1,251,427
Carl J. Napoli........................ -- -- 59,376/116,204 728,131/ 1,402,232
</TABLE>
---------------
(1) These amounts include exercisable and unexercisable investment options under
the Company's Performance Investment Plan (the "PIP Plan"). Unlike
traditional stock options, these options were acquired by the named
individuals with their personal funds and represent those individuals'
personal investment decisions. The option price paid by a participating key
employee will be refunded without premium if an outstanding option remains
unexercised on May 29, 1999.
The options are evidenced by investment agreements which contain provisions
governing the rights of participants to purchase the PIP Debentures, that
are convertible in two steps into shares of the Company's common stock.
Such investment agreements provide that the PIP Debentures may not be
purchased prior to December 10, 1993, unless vesting is accelerated.
Beginning on that date, the right of the holder to purchase the PIP
Debentures vests at the rate of 25% per year so that the PIP Debentures are
purchasable in full on December 10, 1996. Upon the occurrence of certain
events which may constitute a change in control of the Company, the
performance conditions may be deemed to be satisfied and the right of a
holder to purchase the PIP Debentures will become fully vested. The
effective conversion price of the PIP Debentures issued under the PIP Plan
is $16.5375 (resulting in a $15.71 exercise price after the crediting of
the initial $5,264 option purchase price), subject to adjustment.
These options may be exercised through the Company's cashless option
exercise program in which the shares acquired on exercise are immediately
sold into the market and the exercise price and applicable taxes are
deducted from the proceeds of such sale.
(2) Based on Fair Market Value of $28.625 on the last trading day of fiscal
1995.
LONG TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
NUMBER OF UNDER NON-STOCK
SHARES, PERFORMANCE OR PRICE-BASED PLANS
UNITS OR OTHER PERIOD ----------------------------------
OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT (#) (#) (#)
---- ---------- ---------------------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Bruce L. Busby........... 350,000(2) 5/31/96-5/31/2000(4) 0 350,000 350,000(5)
Christopher J. Marker.... 200,000(2) 5/31/96-5/31/2000(4) 0 200,000 200,000(5)
Jeffrey M. McKain........ 150,000(2) 5/31/96-5/31/2000(4) 0 150,000 150,000(5)
Robert F. Pacquer........ 150,000(2) 5/31/96-5/31/2000(4) 0 150,000 150,000(5)
Carl J. Napoli........... 1,630(3) 3 years ending 5/31/97 0 1,630 2,445(6)
</TABLE>
---------------
(1) This table describes declaration of eligibility to receive performance
shares under the Company's 1990 Stock Incentive Plan to the five named
executive officers during the last fiscal year. These shares are distinct
from the stock options set forth in the table describing Option/SAR grants
above.
26
<PAGE> 29
(2) Awards of Performance Shares are provided under the 1990 Stock Incentive
Plan. For the period indicated, the target awards of Performance Shares for
Messrs. Busby, Marker, McKain and Pacquer were based upon (i) the number of
restricted stock awards previously granted to each officer and (ii) similar
awards given to executive officers of other healthcare companies and other
public companies of similar size. In order to be eligible to receive these
Performance Shares each year, participants must have retained at least 50%
of the Performance Shares awarded in the previous year and must still be an
employee of the Company. The financial target is the Company's budgeted
earnings per share for each performance period.
(3) For the indicated period, Mr. Napoli's target award of Performance Shares
was determined by first deriving an amount equal to a percentage determined
by the Compensation Committee of the sum of his base salary plus any AIP
award earned in the year prior to commencement of the performance period.
This amount was then divided by a number approved by the Compensation
Committee which approximated the fair market value of the Company's Common
Stock over a specified period to determine the number of Performance Shares.
The financial target is the sum of all-business pretax income for annual
target awards under the Company's AIP for each performance period. Amounts
payable at the close of each performance cycle are determined with respect
to the composite of the pretax income from ongoing operations and from
properties held for sale for the length of the performance cycle, subject to
the final approval of the Compensation Committee.
(4) Under the terms of the award, each named executive officer is eligible to
receive one-fifth of the total award indicated in July following the end of
each fiscal year.
(5) Subject to the Compensation Committee's sole discretion to award all or any
portion of the Performance shares, these officers may receive shares of
common stock ranging from zero to 100% of the number of Performance Shares
set forth under the heading "Number of Shares, Units or Other Rights" above,
based upon actual performance in relation to earnings per share targets. The
Threshold column represents a zero payout in the event the actual earnings
per share are less than the earnings per share target. The Target and
Maximum amounts assumes 100% of the number of Performance Shares is actually
awarded. To be eligible for the awards in the Target and Maximum columns,
earnings per share must equal or exceed the earnings per share target.
(6) Subject to the Compensation Committee's sole discretion to award all or any
portion of the Performance Shares, Mr. Napoli may receive shares of Common
Stock in amounts ranging from zero to 150% of the number of Performance
Shares set forth under the heading "Number of Shares, Units or Other Rights"
above, based upon actual performance in relation to financial performance
targets. The Threshold column represents a zero payout in the event
financial performance is equal to or less than the financial target. Target
amounts assume 100% of the number of Performance Shares is actually awarded
and Maximum amounts assume 150% of the number of Performance Shares is
actually awarded. To be eligible for the awards in the Target and the
Maximum columns, financial performance must exceed financial targets.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Supplemental Executive Retirement Plan (the "SERP") provides executive
officers and certain other management employees with supplemental deferred
benefits in the form of retirement payments for life.
At retirement, the monthly benefit paid to participants will be a product
of four factors: (i) the participant's highest average monthly earnings for any
consecutive 60-month period during the ten years preceding retirement; (ii) the
number of years of service to the Company to a maximum of 20 years (participants
will receive a percentage credit for years of service prior to enrollment in the
plan which increases gradually from 25% during the first year to 100% after five
years from the date of enrollment); (iii) a vesting factor; and (iv) a
percentage factor not to exceed 2.7% reduced to reflect the projected benefit
from other Company retirement plans available to a participant and from Social
Security. The monthly benefit is adjusted in the event of early retirement or
termination of employment with the Company. The first day on which unreduced
retirement benefits are available is age 62. In the event of the death of a
participant, before
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<PAGE> 30
or after retirement, one-half of the benefit earned as of the date of death will
be paid to the surviving spouse for life or to the participant's children until
the age of 21.
With respect to participants, the Company has purchased life insurance
policies to provide for certain obligations under the SERP relating to such
individuals.
In the event of a change of control of the Company (as defined under the
SERP), participants will be deemed fully vested in the SERP without regard to
actual years of service and will be entitled to the normal retirement benefits
without reduction on or after age 60.
The following table presents the estimated maximum annual retirement
benefits payable on a straight-life annuity basis to participating executives
under the Company's SERP in the earnings and years of service classifications
indicated.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS FOR
YEARS OF SERVICE INDICATED
AVERAGE ------------------------------------------------------------
ANNUAL EARNINGS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
--------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000.......... $ 50,625 $ 67,500 $ 67,500 $ 67,500 $ 67,500
150,000.......... 60,750 81,000 81,000 81,000 81,000
175,000.......... 70,875 94,500 94,500 94,500 94,500
200,000.......... 81,000 108,000 108,000 108,000 108,000
225,000.......... 91,125 121,500 121,500 121,500 121,500
250,000.......... 101,250 135,000 135,000 135,000 135,000
300,000.......... 121,500 162,000 162,000 162,000 162,000
350,000.......... 141,750 189,000 189,000 189,000 189,000
400,000.......... 162,000 216,000 216,000 216,000 216,000
450,000.......... 182,250 243,000 243,000 243,000 243,000
500,000.......... 202,500 270,000 270,000 270,000 270,000
</TABLE>
"Earnings" as defined by the SERP is the participant's base salary
excluding bonuses and other cash and non-cash compensation. Earnings, for
purposes of the plan, are limited to increase at a rate not to exceed 8% per
annum measured from the participant's earnings at his or her plan entry date. As
of May 31, 1993, the earnings covered by the plan for Mr. Busby and Mr. McKain
differed by more than 10% from the salaries set forth in the Summary
Compensation Table. In November 1993, the Compensation Committee determined to
rectify this inequity by amending the definition of Projected Earnings under the
SERP as to Messrs. Busby and McKain to mean actual earnings of such officers on
the effective date of their promotions plus an assumed increase of 8% per annum.
As of May 31, 1995, the estimated credited years of service for the
individuals named in the Summary Compensation Table were as follows: Mr. Busby,
25.9 years; Mr. Marker, 7.2 years; Mr. McKain, 15.6 years; Mr. Pacquer, 13.4
years and Mr. Napoli, 32.9 years.
EMPLOYMENT AGREEMENTS
Mr. Marker has a contract with the Company and Tenet which requires
Hillhaven to pay Mr. Marker a severance benefit (the payment of which is
guaranteed by Tenet) of one year's base salary should he be terminated from the
position of President.
SEVERANCE AGREEMENTS
Effective May 24, 1994, the Company entered into agreements with each of
the named executive officers, providing for the payment of severance
compensation upon termination of employment consisting of a lump-sum payment of
two years' base salary in the event of a change in control as defined in the
agreement. The agreement with Mr. Marker provides that he will receive payment
of a severance benefit of no more than two
28
<PAGE> 31
years' base salary from the operation of such agreement in combination with his
other agreement with the Company and Tenet.
REMUNERATION OF DIRECTORS
Directors who are not employees of the Company were paid at a rate of
$24,000 a year for serving on the Board of Directors as well as an attendance
fee of $1,000 for attending each Board meeting. In addition, directors receive
$1,000 for attending each meeting of any committee on which they serve.
Non-employee directors serving on the Executive Committee also receive a monthly
fee of $500. Each non-employee Committee Chairman receives a fee of $2,000 per
year for each committee for which he or she serves as Chairman. Directors also
are reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings. Directors who are officers or employees of the Company do
not receive any fees for Board or Board Committee service.
DIRECTORS' STOCK OPTION PLAN
Directors who are not officers or employees of Hillhaven participate in the
Directors' Stock Option Plan (the "Directors Plan"). Such directors are not
eligible to participate in the 1990 Stock Incentive Plan. Under the Directors
Plan, all members of the Board who are not officers or employees of the Company
are granted an option to acquire 2,000 shares of Common Stock of the Company on
the last Thursday of March of each year if serving as a director on that date.
The number of shares of Hillhaven Common Stock that may be issued under the
Directors Plan is 1% of the number of shares then outstanding. Options may be
granted under the Directors Plan through December 31, 2005, unless the plan is
terminated prior to such date.
The options granted under the Directors Plan are non-qualified options. The
basic term of an option expires not later than 15 years from the date of grant,
and options are fully exercisable one year after the date of grant. The option
price is the fair market value of a share of Hillhaven Common Stock on the date
of the grant. The option price may be paid: (i) in cash; (ii) at the discretion
of the Compensation Committee, by (a) exchanging Common Stock owned by the
optionee or (b) executing a promissory note bearing interest at a rate
determined by the Compensation Committee (currently 8.75%) and secured by shares
of Hillhaven Common Stock; or (iii) by a combination of the above.
Generally, if an optionee ceases to be an outside director of the Company
due to any reason other than death, disability or retirement, the option will
expire three months after the date service as a director ceases. If the optionee
ceases to be a director due to retirement, the option will expire three years
after the date service as a director ceases. If the optionee dies or becomes
permanently disabled while serving as an outside director of the Company, the
option will expire three years after the date of such death or disability.
In the event of any change in the capitalization of the Company, such as a
stock dividend or stock split, the Compensation Committee may make an
appropriate adjustment to the outstanding awards and the number of shares
reserved for issuance under the Directors Plan.
The Company believes that the Directors Plan promotes the interest of the
Company and its stockholders by strengthening the Company's ability to attract,
motivate and retain outside directors with training, experience and ability and
by encouraging the highest level of director performance by providing such
persons with a proprietary interest in the Company.
During the year ended May 31, 1995, Ms. Jacobs and Messrs. Beran, Burns, de
Wetter, Andersons and Vance were each granted options under the Directors Plan
for 2,000 shares of the Company's Common Stock. The Fair Market Value of a share
of Hillhaven Common Stock on the date of the grant was $27.25.
"Fair Market Value" means the average of the high and the low trading
prices of a share of Common Stock on the New York Stock Exchange on the date as
of which Fair Market Value is to be determined, or if no such sales were made on
such date, the closing price of such shares on the New York Stock Exchange on
the next preceding date on which there were such sales.
29
<PAGE> 32
DIRECTORS RETIREMENT PLAN
The Directors Retirement Plan (the "Retirement Plan") provides the members
of the Board of Directors who are not employees of the Company with supplemental
deferred benefits in the form of retirement payments for ten years following the
later of each such member's termination of service or reaching the age of 65.
At retirement, the annual benefit paid to each participant will equal the
lesser of (i) 100% of his or her Final Annual Board Retainer (as defined in the
Retirement Plan) or (ii) $24,000, increased by a compounded rate of 6% per year
from 1995 to the year of the participant's termination of service, subject in
both cases to a vesting factor. The retirement benefits will be paid in equal
monthly installments. In the event of the death of a participant, before or
after retirement, the benefits earned as of the date of death will be paid to
the surviving spouse or the participant's children under the age of 21 for the
remainder of the ten-year term.
In the event of a change of control of the Company (as defined in the
Retirement Plan), participants will be deemed fully vested in the Retirement
Plan without regard to actual years of service and will be entitled to full
retirement benefits without reduction on or after age 65.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION FOR FISCAL YEAR 1995
1. COMPENSATION COMMITTEE DUTIES AND EXECUTIVE COMPENSATION PHILOSOPHY
The Compensation Committee is responsible for ensuring that the Company
establishes and implements compensation and benefit programs which drive
improvement in Company business performance (measured in terms of quality of
care, total revenues, occupancy, census mix, operating margins and productivity,
net income and earnings per share) in order to create greater shareholder value.
Hillhaven's executive compensation programs are designed to attract,
motivate and retain the high calibre executives who are required to successfully
implement the Company's short and long term business strategies and promote
long-term growth in shareholder value. The Committee reviews the Company's
business and financial performance targets, established through the Company's
annual planning process, to ensure that they represent a significant challenge
for that fiscal year and the three-year strategic cycle, and are an appropriate
basis for performance-based compensation as described below.
Effective January 1, 1994, compensation payments in excess of $1 million to
the Chief Executive Officer or the other four most highly compensated officers
are subject to a limitation on deductibility for the Company under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Certain
performance-based compensation is not subject to the limitation on
deductibility. Compensation to the Chief Executive Officer or any other
executive officer which is subject to the limitation has never exceeded $1
million and the Compensation Committee does not expect compensation subject to
the limitation in 1995 to any such officers to be in excess of $1 million. If
compensation subject to the limitation were, however, to exceed $1 million, the
Company could not deduct the amount in excess of $1 million. In such event, the
Compensation Committee intends to consider the advisability of amending the
Company's plans in the future.
Each member of the Compensation Committee is an outside Director with
significant professional experience in linking business performance and
executive compensation. No member of the Compensation Committee is a former or
current officer of the Company or any of its subsidiaries.
2. SPECIFIC COMPONENTS OF EXECUTIVE OFFICER COMPENSATION
The Company's executive officer compensation program is based upon a "total
compensation" approach and requires that a significant and appropriate amount of
compensation be "at risk" and dependent on the Company achieving aggressive
financial and operating performance targets. Incentives are not paid unless
Company and individual results significantly exceed these performance targets,
result in the satisfactory delivery of quality services and are achieved in
compliance with Company ethics policies.
30
<PAGE> 33
The Company's executive officer compensation program consists of three
primary components: (1) base salary; (2) an annual incentive plan with cash
award; and (3) long-term, stock-based awards. In determining increases to base
salaries and maximum cash and stock awards, the Compensation Committee
establishes compensation levels designed to be competitive with compensation
paid to officers in comparable positions with competitor companies in health
care and other similar businesses. Whether maximum salary increases and
incentive award amounts are ultimately paid is contingent upon the achievement
of established Company performance targets discussed below and, in part, upon
individual performance.
Base salaries are determined from salary ranges established to position
maximums at the 75th percentile of general and comparable industry salaries.
Companies that are regularly reviewed to determine "comparable industry
salaries" include various long term, subacute, acute and for profit health care
providers, and are often regional or national competitors of Hillhaven. Some of
these companies are included in the S&P Health Care Composite Index. Salary
increases are based upon improved business results, as measured by growth in
total revenues, "all-business pretax income" and earnings per share, and upon
individual performance. These performance measures were exceeded in fiscal 1995.
Cash incentives are utilized to clearly focus executive officers on
significant year-to-year improvement in Company financial performance and
earnings per share. Awards may range from 0% to 75% of an executive's base
salary. The performance targets are established through the Company's annual
business and financial planning process, and are based on substantial
improvements beyond budget in "all-business pretax income", which drives
improvements in earnings per share. In addition, incentives can be, and will be,
eliminated if certain service quality or ethical standards are not met. These
performance targets were exceeded in fiscal 1995.
Longer-term improvements in business performance and shareholder value are
driven through stock-based incentive plans. The Committee believes that equity
incentives align the economic interests of executive officers with the interests
of all shareholders, which further drives shareholder value. Long-term
incentives are provided through grants of Stock Options, "Restricted Shares" and
"Performance Shares", and are awarded for achieving significant growth in
shareholder value.
Stock Options are awarded at fair market value on the date of grant and
must be held for at least one year before they can be exercised.
"Restricted Shares" are subject to forfeiture if employment does not
continue for a specified period (three to five years). Certain restricted shares
are subject to forfeiture if performance targets are not met. The Compensation
Committee believes that these awards drive significant improvement in business
performance and shareholder value and also are important in the retention of the
key senior executives required to lead continued improvement in Company
performance.
"Performance Shares" represent the eligibility to receive shares of Common
Stock in the future if Company performance exceeds a specified financial target
for the succeeding three-year period. The first three-year cycle for potential
performance share awards ended May 31, 1995.
The Company's five-year award cycle of restricted stock awards established
to retain and motivate senior executive officers ended with restrictions lapsing
in January through March 1995. The Committee determined that this type of
program provides significant retention value and further aligns executive
officers with shareholder interests. The Committee also determined that
significant stock grants continued to be appropriate for senior executive
officers to ensure competitive total compensation. The Committee determined that
the further use of restricted awards would have significant impact on earnings
this year, and that Company performance in future years should be a major factor
in making stock awards to senior executive officers.
In December 1994, the Committee recommended, and the Board of Directors
approved, a five-year award cycle of performance share awards for senior
executive officers. Unlike the expired restricted stock award program for senior
executive officers, awards of performance shares will only be made if company
performance exceeds specific financial and earnings per share targets. The first
awards under this program are scheduled for July 1996, based upon the Company's
performance for fiscal year 1996. The Committee retains
31
<PAGE> 34
the authority to determine each year if any awards will be made, and the size of
the awards, based upon Company performance.
The Compensation Committee continues to determine the potential equity
awards for each eligible executive officer, and the actual award will only be
paid if the financial target has been met or exceeded. In determining the size
of these awards, the Committee reviews the Company's performance for the
respective fiscal year (focusing on all-business pretax income and earnings per
share), the contribution of each of the Company's executive officers and the
amount of equity then held by each executive officer. The financial targets are
monitored throughout the period to ensure that there has been an appropriate
improvement in earnings per share to justify any awards.
In addition to the incentive plans noted above, in May 1992, the Company,
with the approval of its shareholders and the Board of Directors, implemented
the Company's Performance Investment Plan. While the primary purpose of this
plan was to raise capital at favorable rates, a significant component of the
plan involved investment by officers of personal funds to acquire options to
purchase the Company's convertible debentures, which are convertible into the
Company's Common Stock. The exercise price of these options was set at 135% of
the stock price at the time the options were purchased. While this plan is
administered by a separate committee of outside directors, the Compensation
Committee believes that it should be noted in this report (even though not
viewed as compensation), since it also serves to closely align executives with
the interests of all shareholders. Officers will only realize gains under the
plan if the price of the Company's Common Stock appreciates, thereby benefiting
all shareholders.
3. COMPANY PERFORMANCE
In evaluating the Company's performance for fiscal year 1995, for the
purpose of making executive officer compensation decisions, the Compensation
Committee has reviewed a number of aspects of the Company's performance. The
Compensation Committee has particularly noted the Company's continued success in
creating a more competitive and profitable enterprise focused on improved core
business performance and higher margin subacute health services, rehabilitative
care and pharmacy services.
The Company has been able to improve its operating margins in its
traditional long term care business by increasing total occupancy and the amount
of revenues from higher revenue business such as subacute care and
rehabilitative services. Occupancy continued to be strong, with an average rate
for nursing center beds of 92.8% for the fiscal year.
For fiscal year 1995, normalized pretax income from operations grew to
$70.4 million from normalized $56.3 million in fiscal year 1994, for a 25%
increase. Net income significantly increased from a normalized $36.6 million in
fiscal year 1994 to $47.1 million in fiscal year 1995. Earnings per share were
$1.40 (fully diluted) for fiscal year 1995, a normalized improvement of 26%.
Total net operating revenues for fiscal year 1995 increased by 7%, as
institutional pharmacy revenues increased 12%, retirement housing revenues grew
10%, and specialty service programs (physical, occupational and speech
rehabilitation therapies, and subacute care) grew 30% to $399 million. The
Company's revenues from subacute medical and rehabilitation services improved
from 26% of patient care revenues in fiscal year 1994 to 30% in fiscal year
1995.
Significant gains have been achieved again in fiscal year 1995 in service
quality and the effective management of the Company's workforce. Workers'
compensation lost time claims decreased 21.2% from the previous fiscal year.
Also during fiscal year 1995, the Company began to leverage its strategic
growth opportunities, as follows:
o acquired a significant infusion therapy/pharmacy business
o entered into a definitive agreement to acquire Nationwide Care, Inc. and
its related entities (27 nursing and assisted living centers)
o opened a new 120 bed nursing center in Ft. Myers, Florida
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<PAGE> 35
o spent $63.3 million on routine facility renovation, maintenance, and
internal development of nursing centers through licensed beds,
rehabilitation and assisted living additions, and on the acquisition of
previously leased facilities.
From May 1990 through May 31, 1995, the Company has outperformed the S&P
500 Index and the S&P Health Care Composite Index as illustrated in the
Comparison of Cumulative Total Returns. The Committee views the Comparison of
Cumulative Total Returns as a longer-term view of the Company's progress in
becoming a competitive investment, and it will not necessarily directly relate
to year-to-year compensation decisions.
4. CEO COMPENSATION
For fiscal year 1995, Mr. Busby was paid a base salary of $445,193. Mr.
Busby's base salary is in the median range of base salaries of CEO's of
companies of similar size in health care and other similar businesses.
In determining the amount of Mr. Busby's annual incentive plan award of
$337,500, and in determining the number of Performance Shares, which Mr. Busby
is eligible to receive commencing July 1996, the Compensation Committee
considered the significant improvement in financial and operating performance
which the Company has experienced in fiscal year 1995 and the previous three
fiscal years, as well as the significant growth in pretax income and earnings
per share under Mr. Busby's leadership, as previously noted in Section 3 of this
Report. During fiscal year 1995, the Company has met or exceeded challenging
business performance targets for net income, earnings per share, new business
development and cash flow. These achievements represent significant improvement
from fiscal year 1994. Additionally, the Company has continued to make
substantial improvements in the quality of services provided and in the
effective management of its workforce.
Additionally, the Committee considered Mr. Busby's excellent governance in
various merger and acquisition opportunities. These important matters were
appropriately handled while also ensuring that the Company continued to achieve
excellent operating results, as noted above.
The Compensation Committee believes that Mr. Busby's leadership is key to
these excellent business results and that he has earned his compensation in
leading the Company to such performance in fiscal year 1995.
The Compensation Committee has determined that executive officer
compensation will continue to track Company performance. If Company performance
and earnings per share do not continue to improve, total compensation for Mr.
Busby and other executive officers will be adjusted accordingly.
COMPENSATION COMMITTEE:
Peter de Wetter, Chairman
Dinah Jacobs
Jack O. Vance
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<PAGE> 36
COMPARISON OF CUMULATIVE TOTAL RETURNS
THE HILLHAVEN CORPORATION, S & P 500 INDEX AND S & P HEALTH CARE COMPOSITE
The following performance graph compares the total returns (assuming
reinvestment of dividends) of The Hillhaven Corporation Common Stock, the S & P
500 Index and the S & P Health Care Composite. The graph assumes $100 invested
on February 2, 1990 for Hillhaven (the first day of regular way trading of the
Company's Common Stock on the American Stock Exchange) and on February 1, 1990
for the S & P 500 Index and the S & P Health Care Composite and shows the
cumulative total return as of each May 31 thereafter.
<TABLE>
<CAPTION>
S & P
Health
Measurement Period Hillhaven Care
(Fiscal Year Covered) Corporation S & P 500 Composite
--------------------- ----------- --------- ---------
<S> <C> <C> <C>
1990 $100.00 $100.00 $100.00
1991 190.91 111.79 134.86
1992 172.73 122.81 146.51
1993 231.78 137.06 127.19
1994 278.18 142.90 125.94
1995 416.36 171.75 171.06
</TABLE>
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<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table shows the name, address, number of shares held, and
percentage of shares held as of August 17, 1995 by each person or entity known
by the Company to beneficially own more than 5% of the Company's outstanding
Common Stock, based upon publicly available information as of August 17, 1995.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
------------------- ------------------------ --------
<S> <C> <C>
Tenet Healthcare Corporation 8,878,147 sole dispositive 23.43%
2700 Colorado Avenue and voting power(2)
Santa Monica, California 90404
Thomas E. Phillippe, Sr. 2,560,948 sole dispositive 6.76%
11721 Sea Star Drive and voting power
Indianapolis, Indiana 46356
</TABLE>
---------------
(1) Based on information furnished to the Company by representatives of such
beneficial owners.
(2) Excludes 35,000 shares of Series C Preferred Stock and 65,430 shares of
Series D Preferred Stock held by Tenet which have no voting rights.
STOCK OWNERSHIP TABLE
The table below presents the Common Stock ownership of all directors, the
Chief Executive Officer and the four next most highly compensated executive
officers, and all executive officers and directors as a group as of August 17,
1995. Except as otherwise indicated, each individual named has sole investment
and voting power with respect to the securities beneficially owned.
<TABLE>
<CAPTION>
SHARES OF PERCENT
COMMON STOCK OF COMMON
BENEFICIALLY OWNED STOCK OWNED
------------------ -----------
<S> <C> <C>
Bruce L. Busby(1)(3)............................ 684,938 1.80%
Christopher J. Marker(2)(3)..................... 480,379 1.27%
Maris Andersons(4).............................. 10,700 *
Walter F. Beran(5).............................. 16,740 *
Donald S. Burns................................. 0 *
Peter de Wetter(5).............................. 15,080 *
Dinah Jacobs(6)................................. 6,200 *
Jack O. Vance(5)................................ 12,000 *
Jeffrey M. McKain(7)............................ 156,316 *
Robert F. Pacquer(8)............................ 203,009 *
Carl J. Napoli(9)............................... 88,176 *
Executive officers and directors as a group
(15 persons)(10).............................. 1,920,552 5.01%
</TABLE>
---------------
* Less than 1%
(1) Includes options to purchase an aggregate of 22,946 shares of Common Stock
granted pursuant to the 1990 Stock Incentive Plan and options to purchase
an aggregate of 305,528 shares of Common Stock granted pursuant to the
Performance Investment Plan.
(2) Includes options to purchase an aggregate of 18,357 shares of Common Stock
granted pursuant to the 1990 Stock Incentive Plan, options to purchase an
aggregate of 241,876 shares of Common Stock granted pursuant to the
Performance Investment Plan and 3,200 shares held by a charitable remainder
trust of which Mr. Marker and his wife control investment and voting power
as trustees.
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<PAGE> 38
(3) Does not include the right to vote certain shares held by The Hillhaven
Corporation Grantor Trust (the "Trust"). Under the terms of the Trust
Agreement, the voting of the shares held by the Trust is passed through to
participants in Hillhaven's stock-based benefit plans who either have
purchased shares pursuant to the Company's Employee Monthly Stock
Investment Plan (the "EMSIP") during the last 12 months or currently hold
vested, unexercised options (the "Eligible Participants"). Each Eligible
Participant has the right to direct the vote with respect to a number of
shares held by the Trust as determined by the following formula: multiply
the shares held by the Trust by a fraction for each Eligible Participant
who has given voting instructions. The numerator of such fraction equals
the sum of (1) shares purchased pursuant to the EMSIP by the participant
during the preceding 12 months, and (2) the total vested, unexercised
options held by the participant; the denominator equals the total number of
shares purchased pursuant to the EMSIP during the preceding 12 months by
all Eligible Participants who have exercised their voting rights plus the
total number of vested, unexercised options held by all Eligible
Participants who have exercised their voting rights. As of August 17, 1995,
the Trust held 4,025,169 shares; the denominator for the fraction would be
3,827,388 shares if all Eligible Participants voted and the numerator for
the fraction would be 328,474 for Mr. Busby and 260,233 for Mr. Marker.
(4) Includes 1,200 shares owned by spouse.
(5) Includes options to purchase 10,000 shares of Common Stock granted pursuant
to the 1990 Directors Stock Option Plan.
(6) Includes options to purchase 6,000 shares of Common Stock granted pursuant
to the 1990 Directors Stock Option Plan.
(7) Includes options to purchase an aggregate of 16,464 shares of Common Stock
granted pursuant to the 1990 Stock Incentive Plan and options to purchase
an aggregate of 89,112 shares of Common Stock granted pursuant to the
Performance Investment Plan.
(8) Includes options to purchase an aggregate of 6,924 shares of Common Stock
granted pursuant to the 1990 Stock Incentive Plan and options to purchase
an aggregate of 101,842 shares of Common Stock granted pursuant to the
Performance Investment Plan.
(9) Includes options to purchase an aggregate of 3,720 shares of Common Stock
granted pursuant to the 1990 Stock Incentive Plan, options to purchase an
aggregate of 57,286 shares of Common Stock granted pursuant to the
Performance Investment Plan, 2,000 shares which Mr. Napoli owns jointly
with his wife, and 500 shares held in Mr. Napoli's wife's name in an IRA
account.
(10) Includes (a) options to purchase the aggregate amount of 78,468 shares of
Common Stock granted to certain executive officers pursuant to the 1990
Stock Incentive Plan, (b) options to purchase an aggregate of 954,772
shares of Common Stock granted pursuant to the Performance Investment Plan,
and (c) options to purchase 38,000 shares of Common Stock granted pursuant
to the 1990 Directors' Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
36
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. FINANCIAL STATEMENTS.
Independent Auditors' Report...................................................... F-1
Consolidated Balance Sheets -- as of May 31, 1995 and 1994........................ F-2
Consolidated Statements of Income -- Years Ended May 31, 1995, 1994 and 1993...... F-3
Consolidated Statements of Cash Flows -- Years Ended May 31, 1995, 1994 and
1993............................................................................ F-4
Consolidated Statements of Stockholders' Equity -- Years Ended May 31, 1995, 1994
and 1993........................................................................ F-5
Notes to Consolidated Financial Statements........................................ F-7
Quarterly Financial Summary (unaudited)........................................... F-23
2. FINANCIAL STATEMENT SCHEDULES.
Schedule VIII Valuation and Qualifying Accounts.............................. S-1
</TABLE>
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.01 Amended and Restated Articles of Incorporation of Hillhaven
(Incorporated by reference to Exhibit J to Exhibit 2 to the
document referred to in Note 1 below)
3.02 Amended and Restated By-Laws of Hillhaven (Incorporated by
reference to Exhibit 3.02 to the document referred to in Note 10
below)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.01 Amended and Restated Articles of Incorporation of Hillhaven (See
Exhibit 3.01)
4.02 Amended and Restated By-Laws of Hillhaven (See Exhibit 3.02)
4.03 Form of Common Stock Certificate of Hillhaven (Incorporated by
reference to Exhibit 4.3 to the document referred to in Note 1
below)
4.04 Warrant and Registration Rights Agreement among Hillhaven, Tenet
and Manufacturers Hanover Trust Company of California, dated as of
January 31, 1990 (Incorporated by reference to Exhibit 4.4 to the
document referred to in Note 1 below)
4.05 Rights Agreement between Hillhaven and Manufacturers Hanover Trust
Company of California, dated as of January 31, 1990 (Incorporated
by reference to Exhibit 4.6 to the document referred to Note 1
below)
4.06 Form of Rights Certificate (Incorporated by reference to Exhibit A
to Exhibit 4.6 to the document referred to in Note 1 below)
4.07 Form of Amendment dated as of January 16, 1995 to Rights Agreement
(Incorporated by reference to Exhibit 8 to the document referred to
in Note 16 below)
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
4.08 Form of Amendment dated February 7, 1995 to Rights Agreement
(Incorporated by reference to Exhibit 10 to the document referred
to in Note 17 below)
4.09 Agreement concerning purchase by NME Properties Corp., of Series C
Preferred Stock of Hillhaven and prepayment by First Healthcare
Corporation of indebtedness to NME Properties Corp., dated at or
prior to 11:59 p.m. on November 30, 1991 between Tenet, NME
Properties Corp., Hillhaven and First Healthcare Corporation
(Incorporated by reference to Exhibit 4(a) to the document referred
to in Note 2 below)
4.10 Certificate of Designation, Preferences and Rights of Series C
Preferred Stock of Hillhaven (Incorporated by reference to Exhibit
4(b) to the document referred to in Note 2 below)
4.11 Certificate of First Amendment to Certificate of Designation,
Preferences and Rights of Series C Preferred Stock of The Hillhaven
Corporation (Incorporated by reference to Exhibit 4(b) to the
document referred to in Note 9 below)
4.12 Form of Indenture between Hillhaven and Bankers Trust Company, as
Trustee with respect to the 7 3/4% Convertible Subordinated
Debentures due 2002 (Incorporated by reference to Exhibit 4.14 to
the document referred to in Note 4 below)
4.13 Form of 7 3/4% Convertible Subordinated Debenture due 2002
(Incorporated by reference to Exhibit 4.15 to the document referred
to in Note 4 below)
4.14 Form of Indenture between Hillhaven and State Street Bank and Trust
Company, as Trustee with respect to the 10 1/8% Senior Subordinated
Notes due 2001 (Incorporated by reference to Exhibit 4.01 to the
document referred to in Note 5 below)
4.15 Form of 10 1/8% Senior Subordinated Note due 2001 (Incorporated by
reference to Exhibit 4.02 to the document referred to in Note 5
below)
4.16 Agreement Concerning Purchase by NME Properties Corp. and Certain
Subsidiaries of Series D Preferred Stock of The Hillhaven
Corporation, dated as of September 1, 1993 among Hillhaven, First
Healthcare Corporation, Tenet, NME Properties Corp. and certain
subsidiaries of NME Properties Corp. (Incorporated by reference to
Exhibit 4.14 to the document referred to in Note 10 below)
4.17 Certificate of Designation, Preferences and Rights of Series D
Preferred Stock of The Hillhaven Corporation (Incorporated by
reference to Exhibit 4(a) to the document referred to in Note 9
below)
4.18 Certificate Concerning Reverse Stock Split of The Hillhaven
Corporation (Incorporated by reference to Exhibit 4(c) to the
document referred to in Note 9 below)
4.19 Credit Agreement dated as of September 2, 1993, between First
Healthcare Corporation, as lender, and Hillhaven PIP Funding I,
Inc., as borrower (Incorporated by reference to Exhibit 4.07 to the
document referred to in Note 8 below)
4.20 The Hillhaven Corporation 1991 Performance Investment Plan
(Incorporated by reference to Exhibit 10.24 to the document
referred to in Note 1 below)
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
4.21 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock (Incorporated by reference to Exhibit
4.03 to the document referred to in Note 8 below)
4.22 Form of Indenture between Hillhaven and Chemical Bank, as Trustee
with respect to the Convertible Debentures due May 29, 1999
(Incorporated by reference to Exhibit 4.01 to the document referred
to in Note 8 below)
4.23 Form of Convertible Debenture due May 29, 1999 (Incorporated by
reference to Exhibit 4.02 to the document referred to in Note 8
below)
(10) MATERIAL CONTRACTS
10.01 Services Agreement between Hillhaven and Tenet, dated as of January
31, 1990 (Incorporated by reference to Exhibit 10.2 to the document
referred to in Note 1 below)
10.02 Tax Sharing Agreement between Hillhaven and Tenet, dated as of
January 31, 1990 (Incorporated by reference to Exhibit 10.3 to the
document referred to in Note 1 below)
10.03 Government Programs Agreement between Hillhaven and Tenet, dated
January 31, 1990 (Incorporated by reference to Exhibit 10.4 to the
document referred to in Note 1 below)
10.04 Insurance Agreement between Hillhaven and Tenet, dated as of
January 31, 1990 (Incorporated by reference to Exhibit 10.5 to the
document referred to in Note 1 below)
*10.05 Employee and Employee Benefits Agreement between Hillhaven and
Tenet, dated as of January 31, 1990 (Incorporated by reference to
Exhibit 10.6 to the document referred to in Note 1 below)
*10.06 Resignation Agreement and General Release between Hillhaven and
Richard K. Eamer, dated as of September 15, 1993 (Incorporated by
reference to Exhibit 10.06 to the document referred to in Note 10
below)
*10.07 Employment Agreement between Hillhaven and Leonard Cohen, dated as
of January 31, 1990 (Incorporated by reference to Exhibit 10.21 to
the document referred to in Note 1 below)
*10.08 Amendment No. One to Employment Agreement between Hillhaven and
Leonard Cohen, dated as of May 31, 1994 (Incorporated by reference
to Exhibit 10.08 to the document referred to in Note 10 below)
*10.09 Severance Agreement among Hillhaven, Tenet and Christopher J.
Marker, dated as of January 31, 1990 (Incorporated by reference to
Exhibit 10.23 to the document referred to in Note 1 below)
*10.10 Severance Agreement between Hillhaven and Christopher J. Marker,
dated as of May 24, 1994 (Incorporated by reference to Exhibit
10.10 to the document referred to in Note 10 below)
*10.11 Form of Severance Agreement between Hillhaven and certain of its
officers (Incorporated by reference to Exhibit 10.11 to the
document referred to in Note 10 below)
*10.12 Form of Amendment to Severance Agreement between Hillhaven and
certain of its officers (Incorporated by reference to Exhibit 10 to
the document referred to in Note 13 below)
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
10.13 Form of Indemnification Agreement between Hillhaven and certain of
its executive officers (Incorporated by reference to Exhibit 4.8 to
the document referred to in Note 1 below)
*10.14 Hillhaven Directors' Stock Option Plan (Incorporated by reference
to Exhibit 10.18 to the document referred to in Note 1 below)
*10.15 The Amended Hillhaven Corporation Board of Directors Retirement
Plan
*10.16 Hillhaven Deferred Savings Plan (Incorporated by reference to
Exhibit 10.11 to the document referred to in Note 1 below)
*10.17 Hillhaven 1990 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.12 to the document referred to in Note 1 below)
*10.18 Hillhaven Annual Incentive Plan, amended as of December 6, 1994
*10.19 Hillhaven Long Term Incentive Plan (Incorporated by reference to
Exhibit 10.14 to the document referred to in Note 1 below)
*10.20 Hillhaven Deferred Compensation Plan
*10.21 Amended and Restated Hillhaven Supplemental Executive Retirement
Plan
*10.22 Hillhaven Individual Retirement Annuity Plan (Incorporated by
reference to Exhibit 10.19 to the document referred to in Note 1
below)
10.23 Form of Assignment and Assumption of Lease Agreement between
Hillhaven and certain subsidiaries, on the one hand, and Tenet and
certain subsidiaries on the other hand, together with the related
Guaranty by Hillhaven, dated on or prior to January 31, 1990
(Incorporated by reference to Exhibit 10.7 to the document referred
to in Note 1 below)
10.24 Form of Management Agreement between First Healthcare Corporation
and certain Tenet subsidiaries, dated on or prior to January 31,
1990 (Incorporated by reference to Exhibit 10.10 to the document
referred to in Note 1 below)
10.25 Reorganization and Distribution Agreement between Hillhaven and
Tenet, dated as of January 8, 1990, as amended on January 30, 1990
(Incorporated by reference to Exhibit 2.01 to the document referred
to in Note 1 below)
10.26 Guarantee Reimbursement Agreement between Hillhaven and Tenet,
dated as of January 31, 1990 (Incorporated by reference to Exhibit
10.8 to the document referred to in Note 1 below)
10.27 First Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of October 30, 1990 (Incorporated by
reference to Exhibit 10.27 to the document referred to in Note 10
below)
10.28 First Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 30, 1991 (Incorporated by
reference to Exhibit 10.45 to the document referred to in Note 3
below)
10.29 Second Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of October 2, 1991 (Incorporated by
reference to Exhibit 10.46 to the document referred to in Note 3
below)
10.30 Third Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of April 1, 1992 (Incorporated by
reference to Exhibit 10.47 to the document referred to in Note 3
below)
10.31 Fourth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of November 12, 1992 (Incorporated by
reference to Exhibit 10.13 to the document referred to in Note 6
below)
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
10.32 Fifth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of February 19, 1993 (Incorporated by
reference to Exhibit 10.14 to the document referred to in Note 6
below)
10.33 Sixth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 28, 1993 (Incorporated by
reference to Exhibit 10.15 to the document referred to in Note 6
below)
10.34 Seventh Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 28, 1993 (Incorporated by
reference to Exhibit 10.34 to the document referred to in Note 10
below)
10.35 Eighth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of September 2, 1993 (Incorporated by
reference to Exhibit 10.35 to the document referred to in Note 10
below)
10.36 Amended and Restated Loan Agreement among Hillhaven, New Pond
Village Associates and Bay Bank of Boston, N.A., dated as of August
25, 1989 and effective November 1, 1991 (Incorporated by reference
to Exhibit 10.52 to the document referred to in Note 3 below)
10.37 Facility Agreement among First Healthcare Corporation and Certain
Limited Partnerships, dated as of April 23, 1992 relating to the
sale of 32 nursing centers (Incorporated by reference to Exhibit
10.42 to the document referred to in Note 3 below)
10.38 First Amendment to Facility Agreement among First Healthcare
Corporation and Certain Limited Partnerships, dated as of July 31,
1992 relating to the sale of 32 nursing centers (Incorporated by
reference to Exhibit 10.43 to the document referred to in Note 3
below)
10.39 Letter of Intent dated June 22, 1993 between Hillhaven and Tenet
(Incorporated by reference to Exhibit 10.63 to the document
referred to in Note 6 below)
10.40 Agreement and Waiver, dated as of September 2, 1993, by and among
Hillhaven, First Healthcare Corporation, Tenet and certain Tenet
subsidiaries (Incorporated by reference to Exhibit 10.52 to the
document referred to in Note 10 below)
10.41 Novation Agreement among Hillhaven Funding Corporation, Banque
Indosuez, New York Branch, Banque Nationale de Paris, San Francisco
Agency, Bank of America National Trust and Savings Association and
Seattle-First National Bank, dated as of April 29, 1994
(Incorporated by reference to Exhibit 10.53 to the document
referred to in Note 10 below)
10.42 Amended and Restated Master Sale and Servicing Agreement among
Hillhaven Funding Corporation, Hillhaven and certain Hillhaven
subsidiaries, dated as of April 29, 1994 (Incorporated by reference
to Exhibit 10.54 to the document referred to in Note 10 below)
10.43 Amended and Restated Liquidity Agreement between Hillhaven Funding
Corporation, Bank of America National Trust and Savings Association
and Seattle-First National Bank dated as of April 29, 1994
(Incorporated by reference to Exhibit 10.55 to the document
referred to in Note 10 below)
10.44 Amendment No. 4 to Credit Agreement, dated as of October 28, 1994,
Amending (and Restating) the $360,000,000 Credit Agreement dated as
of September 1, 1993 (Incorporated by reference to Exhibit 10 to
the document referred to in Note 11 below)
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- --------------
<S> <C> <C>
10.45 Amendment No. 5 to Credit Agreement, dated as of April 21, 1995,
Amending the $360,000,000 Credit Agreement dated as of September 1,
1993
10.46 Trust Agreement Between The Hillhaven Corporation and Wachovia Bank
of North Carolina, N.A., as Trustee, dated as of January 16, 1995
(Incorporated by reference to Exhibit 99.01 to the document
referred to in Note 12 below)
10.47 Stock Purchase Agreement, dated as of January 16, 1995
(Incorporated by reference to Exhibit 99.02 to the document
referred to in Note 12 below)
10.48 Amended and Restated Agreement and Plan of Share Exchange and
Agreements to Assign Partnership Interests dated as of February 27,
1995 by and among The Hillhaven Corporation, Nationwide Care, Inc.,
Phillippe Enterprises, Inc., Meadowvale Skilled Care Center, Inc.
and Specified Partners of Camelot Care Centers, Evergreen Woods,
Ltd. and Shangri-La Partnership (Incorporated by reference to
Exhibit 2.01 to the document referred to in Note 14 below)
10.49 Amended and Restated Agreement and Plan of Merger (Incorporated by
reference to Appendix A to the document referred to in Note 15)
10.50 Other Debt Instruments -- Copies of additional debt instruments for
which the related debt is less than 10% of total assets will be
furnished to the Commission upon request.
(11) COMPUTATION OF PER SHARE EARNINGS
11.01 Statement re: Computation of Per Share Earnings
(21) SUBSIDIARIES
21.01 Subsidiaries of the Registrant
(23) CONSENT OF EXPERTS AND COUNSEL
23.01 Consent of Independent Accountants, KPMG Peat Marwick LLP
(99) MISCELLANEOUS
99.01 Section entitled "Operations and Management After The Merger" from
Vencor, Inc. Form S-4 (File No. 33-59345) (See Note 15 below)
</TABLE>
<TABLE>
<CAPTION>
NOTE
REFERENCE DOCUMENT
--------- -------------------------------------------------------------------------
<S> <C>
1. Quarterly Report on Form 10-Q for the quarter ended November 30, 1989, as
amended.
2. Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, as
amended.
3. Annual Report on Form 10-K for the year ended May 31, 1992, as amended.
4. Registration Statement on Form S-1 (File No. 33-48755).
5. Registration Statement on Form S-3 (File No. 33-65718).
6. Annual Report on Form 10-K for the year ended May 31, 1993.
7. Current Report on Form 8-K dated September 2, 1993.
8. Registration Statement on Form S-3 (File No. 33-50833).
9. Quarterly Report on Form 10-Q for the quarter ended November 30, 1993.
10. Annual Report on Form 10-K for the year ended May 31, 1994.
11. Quarterly Report on Form 10-Q for the quarter ended November 30, 1994.
12. Current Report on Form 8-K dated January 27, 1995.
13. Quarterly Report on Form 10-Q for the quarter ended February 28, 1995.
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
NOTE
REFERENCE DOCUMENT
--------- --------
<S> <C>
14. Registration Statement on Form S-4 (File No. 33-58641).
15. Registration Statement on Form S-4 of Vencor, Inc. (File No. 33-59345).
16. Form 8-A/A dated as of January 20, 1995.
17. Form 8-A/A dated as of February 10, 1995.
</TABLE>
---------------
* Management contracts and compensatory plans or arrangements required to be
filed as an Exhibit to comply with Item 14(a)(3).
(b) Reports filed on Form 8-K:
1. A Form 8-K, dated April 23, 1995, was filed during the quarter to
disclose an agreement to merge with Vencor, Inc. as follows:
On April 23, 1995, The Hillhaven Corporation (the "Company") signed a
definitive merger agreement under which Vencor, Inc. ("Vencor") will
acquire the Company and its affiliated corporations and partnerships (the
"Merger"). In consideration for the Merger, the Company's stockholders will
receive $32.25 in value in Vencor common stock for each share owned of the
Company's common stock. Based upon the closing price of $37.00 per share of
Vencor's shares on Friday, April 21, 1995, the terms equate to an exchange
ratio of 0.872 shares of Vencor common stock for each share of the
Company's common stock. The agreement specifies that the exchange ratio can
be adjusted under certain circumstances, depending upon Vencor's market
price prior to closing, but under no circumstances can the ratio be
adjusted down to less than 0.768 nor higher than 0.977. The transaction
will be structured as a pooling of interests and as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code. The
closing is scheduled during the third calendar quarter of 1995.
No financial statements were filed with the Form 8-K.
43
<PAGE> 46
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ BRUCE L. BUSBY
-----------------------------------
Bruce L. Busby
Chief Executive Officer
Date: August 25, 1995
---------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ BRUCE L. BUSBY Chief Executive Officer, August 25, 1995
--------------------------------------------- Chairman of the Board
Bruce L. Busby and Director
/s/ ROBERT F. PACQUER Senior Vice President August 25, 1995
--------------------------------------------- and Chief Financial Officer
Robert F. Pacquer (principal financial officer)
/s/ MICHAEL B. WEITZ Vice President and August 25, 1995
--------------------------------------------- Principal Accounting Officer
Michael B. Weitz
/s/ CHRISTOPHER J. MARKER President and Director August 25, 1995
---------------------------------------------
Christopher J. Marker
/s/ MARIS ANDERSONS Director August 25, 1995
---------------------------------------------
Maris Andersons
/s/ WALTER F. BERAN Director August 25, 1995
---------------------------------------------
Walter F. Beran
/s/ DONALD S. BURNS Director August 25, 1995
---------------------------------------------
Donald S. Burns
/s/ PETER DE WETTER Director August 25, 1995
---------------------------------------------
Peter de Wetter
/s/ DINAH JACOBS Director August 25, 1995
---------------------------------------------
Dinah Jacobs
/s/ JACK O. VANCE Director August 25, 1995
---------------------------------------------
Jack O. Vance
</TABLE>
44
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of The Hillhaven Corporation:
We have audited the accompanying consolidated balance sheets of The
Hillhaven Corporation and subsidiaries (Hillhaven) as of May 31, 1995 and 1994
and the related consolidated statements of income, cash flows and stockholders'
equity for each of the years in the three-year period ended May 31, 1995. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the index on page 36
of this annual report. These consolidated financial statements are the
responsibility of the management of Hillhaven. Our responsibility is to express
an opinion on these consolidated 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 aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of The
Hillhaven Corporation and subsidiaries as of May 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 7 to the consolidated financial statements, effective
June 1, 1992 Hillhaven changed its method of providing income taxes by adopting
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
KPMG PEAT MARWICK LLP
Seattle, Washington
July 7, 1995
F-1
<PAGE> 48
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 47,247 $ 49,888
Accounts and notes receivable, less allowance for doubtful
accounts of $12,883 and $10,337 in 1995 and 1994............... 180,327 152,962
Inventories....................................................... 18,048 20,772
Prepaid expenses and other current assets......................... 31,256 35,011
---------- ----------
Total current assets...................................... 276,878 258,633
---------- ----------
Long-term notes receivable, less allowance for doubtful accounts of
$15,011 and $14,608 in 1995 and 1994.............................. 81,444 84,944
Property and equipment, net......................................... 814,954 784,337
Intangible assets, net of accumulated amortization of $19,117 and
$19,336 in 1995 and 1994.......................................... 27,955 31,331
Other noncurrent assets, net........................................ 51,088 33,248
---------- ----------
$1,252,319 $1,192,493
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 39,207 $ 46,389
Accounts payable.................................................. 64,553 65,150
Employee compensation and benefits................................ 73,235 64,844
Other accrued liabilities......................................... 35,610 44,577
---------- ----------
Total current liabilities................................. 212,605 220,960
---------- ----------
Convertible debentures.............................................. 131,172 134,223
---------- ----------
Other long-term debt................................................ 447,429 444,812
---------- ----------
Other long-term liabilities......................................... 41,448 28,751
---------- ----------
Commitments, contingencies and subsequent events
Stockholders' equity:
Series C Preferred Stock, $0.15 par value; 35,000 shares
authorized, issued and outstanding in 1995 and 1994
(liquidation preference of $35,000)............................ 5 5
Series D Preferred Stock, $0.15 par value; 300,000 shares
authorized; 64,416 and 60,546 issued and outstanding in 1995
and 1994 (liquidation preference of $64,416)................... 10 9
Common stock, $0.75 par value; authorized 60,000,000 shares;
32,850,463 and 28,434,756 issued and outstanding in 1995 and
1994........................................................... 24,638 21,326
Additional paid-in capital........................................ 423,789 329,537
Retained earnings................................................. 60,520 16,081
Unearned compensation............................................. (3,804) (3,211)
---------- ----------
505,158 363,747
Less 4,067,473 common shares held in trust........................ (85,493) --
---------- ----------
Total stockholders' equity................................ 419,665 363,747
---------- ----------
$1,252,319 $1,192,493
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE> 49
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues................................. $1,576,282 $1,471,190 $1,378,466
---------- ---------- ----------
Expenses:
General and administrative........................... 1,349,837 1,255,332 1,180,974
Interest............................................. 50,839 56,178 63,600
Depreciation and amortization........................ 57,481 54,395 53,651
Rent................................................. 53,571 56,280 56,687
Restructuring........................................ -- (20,225) 5,769
---------- ---------- ----------
Net expenses................................. 1,511,728 1,401,960 1,360,681
---------- ---------- ----------
Income from operations................................. 64,554 69,230 17,785
Interest income........................................ 12,860 13,635 16,006
---------- ---------- ----------
Income before income taxes, extraordinary charge and
cumulative effect of accounting change............... 77,414 82,865 33,791
Income tax (expense) benefit........................... (25,555) (23,385) 7,116
---------- ---------- ----------
Income before extraordinary charge and cumulative
effect of accounting change.......................... 51,859 59,480 40,907
Extraordinary charge -- early extinguishment of debt,
net of income taxes.................................. (570) (1,062) (565)
Cumulative effect of change in accounting for income
taxes................................................ -- -- (1,103)
---------- ---------- ----------
Net income............................................. $ 51,289 $ 58,418 $ 39,239
========== ========== ==========
Income available to common stockholders (net income
less preferred stock dividends)...................... $44,439 $50,763 $36,351
Primary income per common share:
Income before extraordinary charge and cumulative
effect of accounting change....................... $1.56 $2.00 $1.58
Extraordinary charge................................. (.02) (.04) (.02)
Cumulative effect of change in accounting for income
taxes............................................. -- -- (.05)
----- ----- -----
Net income per share................................... $1.54 $1.96 $1.51
===== ===== =====
Fully diluted income per common share:
Income before extraordinary charge................... $1.42 $1.71 --
Extraordinary charge................................. (.02) (03) --
===== ===== =====
Net income per share................................... $1.40 $1.68 N/A
===== ===== =====
Weighted average common shares and equivalents
outstanding:
Primary.............................................. 28,824,847 25,952,021 24,394,165
Fully diluted........................................ 36,840,944 34,326,350 N/A
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 50
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 51,289 $ 58,418 $ 39,239
Adjustments to reconcile net income to net cash provided
by operations:
Restructuring credits................................. -- (21,904) --
Cumulative effect of change in accounting for income
taxes............................................... -- -- 1,103
Depreciation and amortization......................... 57,481 54,395 53,651
Provision for losses on accounts and notes
receivable.......................................... 5,516 8,391 4,346
Gain on sales of property and equipment............... (13,803) (9,224) (841)
Deferred income taxes................................. 6,548 8,014 (13,734)
Amortization of unearned stock compensation........... 3,619 3,627 3,442
Other charges and credits, net........................ 6,973 (8,318) (8,617)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts and notes receivable....................... (34,059) (23,757) (7,483)
Inventories......................................... (576) 262 (852)
Prepaid expenses and other current assets........... 13,215 (585) (3,647)
Accounts payable.................................... (6,990) 2,831 (2,884)
Other accrued liabilities........................... (8,557) 2,977 3,129
-------- -------- --------
Net cash provided by operating activities.................. 80,656 75,127 66,852
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...................... (50,276) (44,277) (30,779)
Purchase of previously leased nursing centers............ (13,032) (1,667) (14,444)
Proceeds from sales of property and equipment............ 4,947 15,877 22,330
Proceeds from collection of notes receivable............. 4,974 21,983 22,480
Investment in joint ventures and partnerships............ (3,367) (1,698) (1,799)
Distributions from joint ventures and partnerships....... 1,183 2,283 3,833
Increase in other assets................................. (7,093) (2,450) (4,833)
-------- -------- --------
Net cash used in investing activities...................... (62,664) (9,949) (3,212)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in borrowings under revolving
lines of credit....................................... 21,000 8,000 (13,000)
Proceeds from sale of preferred stock.................... -- 63,399 --
Preferred stock dividends................................ (2,888) (2,888) (2,888)
Proceeds from long-term debt............................. 29,219 364,346 96,033
Payments of principal on long-term debt.................. (74,006) (506,495) (114,266)
Proceeds from exercise of stock options.................. 2,793 587 246
Increase in deferred financing costs..................... (2,576) (15,127) (4,084)
Other, net............................................... 5,825 (365) 1,521
-------- -------- --------
Net cash used in financing activities...................... (20,633) (88,543) (36,438)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... (2,641) (23,365) 27,202
Cash and cash equivalents at beginning of year............. 49,888 73,253 46,051
-------- -------- --------
Cash and cash equivalents at end of year................... $ 47,247 $ 49,888 $ 73,253
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 51
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED COMMON
ADDITIONAL EARNINGS UNEARNED SHARES
PREFERRED COMMON PAID-IN (ACCUMULATED STOCK HELD IN
STOCK STOCK CAPITAL DEFICIT) COMPENSATION TRUST
--------- ------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1992
As previously reported........ $ 5 $15,663 $208,535 $(76,617) $(7,529) --
Pooling of interests
adjustment................. -- 946 (935) 1,252 -- --
---- ------- -------- -------- ------- --------
Balance, as restated.......... 5 16,609 207,600 (75,365) (7,529) --
Net income...................... -- -- -- 39,239 -- --
Restricted share awards, net
of forfeitures............. -- 34 1,104 -- (1,138) --
Performance shares............ -- -- 907 -- (907) --
Stock options exercised....... -- 37 209 -- -- --
Preferred stock dividends
($82.50 per share)......... -- -- (2,888) -- -- --
Amortization of unearned stock
compensation............... -- -- -- -- 3,442 --
Tax benefit associated with
exercise of stock
options.................... -- -- 290 -- -- --
---- ------- -------- -------- ------- --------
Balance, May 31, 1993........... 5 16,680 207,222 (36,126) (6,132) --
Net income.................... -- -- -- 58,418 -- --
Issuance of preferred stock... 18 -- 119,982 -- -- --
Preferred stock tendered to
exercise stock purchase
warrants................... (10) -- (63,290) -- -- --
Stock purchase warrants
exercised.................. -- 4,500 58,800 -- -- --
Conversion of debentures...... -- 86 1,809 -- -- --
Restricted share awards, net
of forfeitures............. -- (12) (188) -- 200 --
Performance shares............ -- -- 906 -- (906) --
Stock options exercised....... -- 73 514 -- -- --
Preferred stock dividends
($82.50 per share)......... -- -- (1,444) (1,444) -- --
Fractional shares
repurchased................ -- (1) (17) -- -- --
Amortization of unearned stock
compensation............... -- -- -- -- 3,627 --
Tax benefit associated with
exercise of stock
options.................... -- -- 477 -- -- --
Preferred stock
dividends-in-kind.......... 1 -- 4,766 (4,767) -- --
---- ------- -------- -------- ------- --------
Balance, May 31, 1994........... 14 21,326 329,537 16,081 (3,216) --
</TABLE>
F-5
<PAGE> 52
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED MAY 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED COMMON
ADDITIONAL EARNINGS UNEARNED SHARES
PREFERRED COMMON PAID-IN (ACCUMULATED STOCK HELD IN
STOCK STOCK CAPITAL DEFICIT) COMPENSATION TRUST
--------- ------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income.................... -- -- -- 51,289 -- --
Common shares issued to
Grantor Trust.............. -- 3,150 85,129 -- -- (88,279)
Common shares released from
Grantor Trust.............. -- (99) (2,687) -- -- 2,786
Conversion of debentures...... -- 100 2,111 -- -- --
Restricted share awards....... -- 111 3,241 -- (3,352) --
Performance shares
forfeited.................. -- -- (175) -- 175 --
Discounted stock options
granted.................... -- -- 1,035 -- (1,035) --
Stock options exercised....... -- 50 643 -- -- --
Preferred stock dividends
($82.50 per share)......... -- -- -- (2,888) -- --
Fractional shares
repurchased................ -- -- (6) -- -- --
Amortization of unearned stock
compensation............... -- -- -- -- 3,619 --
Tax benefit associated with
exercise of stock
options.................... -- -- 1,000 -- -- --
Preferred stock dividends
in-kind.................... 1 -- 3,961 (3,962) -- --
---- ------- -------- -------- ------- --------
Balance, May 31, 1995........... $ 15 $24,638 $423,789 $ 60,520 $(3,804) $(85,493)
==== ======= ======== ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 53
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of The Hillhaven Corporation and its wholly owned subsidiaries
("Hillhaven" or the "Company"). Significant intercompany transactions and
balances have been eliminated.
In October 1994, the Company acquired CPS Pharmaceutical Services, Inc.
(CPS) and Advanced Infusion Systems, Inc. (AIS) in a business combination
accounted for as a pooling of interests (Note 2). Accordingly, the accompanying
financial statements for the year ended May 31, 1995 are presented on the basis
that the companies were combined for the entire year, and prior years have been
restated to give effect to the combination.
Certain reclassifications of prior years' amounts have been made to conform
to 1995 classifications.
Net Operating Revenues. Revenues are recognized when services are provided
and products are delivered.
Net operating revenues consist primarily of patient care revenues which are
reported at the net amounts realizable from residents, third-party payors and
others for services provided. A provision for estimated uncollectible patient
accounts and notes receivable is included in general and administrative expenses
and was $5,516, $8,391 and $4,346 for the years ended May 31, 1995, 1994 and
1993, respectively.
Approximately 74%, 73% and 73% of net patient care revenues for the years
ended May 31, 1995, 1994 and 1993, respectively, are from participation of the
nursing centers in Medicare and Medicaid programs. Revenues under these programs
are subject to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered and are adjusted as final settlements are determined. Accounts
receivable from Medicare and Medicaid amounted to $35,038 and $61,837,
respectively, at May 31, 1995, and $16,189 and $64,022, respectively, at May 31,
1994.
Net operating revenues also include revenues from pharmacy operations of
$190,638, $198,634 and $194,935 for the years ended May 31, 1995, 1994 and 1993,
respectively.
Income Per Share. Primary income per share is calculated by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of common shares and equivalents outstanding for the period. Common stock
equivalents are stock purchase warrants and employee stock options. Fully
diluted income per share further assumes conversion of the Company's convertible
debentures. Conversion of the debentures was not assumed for the 1993
calculation because the exercise prices of the debentures exceeded the market
price at May 31, 1993.
Cash Equivalents. Highly liquid investments with maturities of three months
or less at the date of acquisition are considered cash equivalents. Interest
earned on these investments amounted to $866, $1,027 and $911 for the years
ended May 31, 1995, 1994 and 1993, respectively.
Inventories. Inventories, which are stated at the lower of cost (first-in,
first-out) or market, are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Pharmaceutical products.................................. $ 9,804 $12,941
Nursing center supplies.................................. 8,244 7,831
------- -------
$18,048 $20,772
======= =======
</TABLE>
F-7
<PAGE> 54
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Notes Receivable. Notes receivable consist primarily of notes originated
upon the sale of nursing centers to third parties. Generally the notes are
secured by mortgages and deeds of trust on the properties sold. See Note 12.
Property and Equipment. Owned land, buildings, leasehold improvements and
equipment are stated at cost. Capitalized leases are stated at the lower of the
present value of minimum lease payments or fair value at the inception of the
lease. Depreciation and amortization are computed using the straight-line method
over the useful lives of the assets, estimated as follows: buildings, 20-45
years; leasehold improvements and certain capitalized leases, over the lesser of
the estimated useful life or the lease term; and equipment, 5-10 years.
Intangible Assets. Costs incurred in obtaining long-term financing are
amortized over the terms of the related indebtedness, primarily using the
straight-line method. Costs related to the acquisition of leases are amortized
over the lease term using the straight-line method.
Hillhaven recorded extraordinary charges of $851 ($570 net of tax), $1,543
($1,062 net of tax) and $743 ($565 net of tax) for the years ended May 31, 1995,
1994 and 1993, respectively, in connection with the early retirement or
refinancing of long-term debt.
2. ACQUISITIONS
On October 31, 1994, the Company acquired closely-held CPS and AIS in a
business combination accounted for as a pooling of interests. CPS and AIS, which
provide pharmaceutical and infusion services, became part of the Company's
Medisave Pharmacies subsidiary through the exchange of 1,262,062 shares of
Hillhaven's common stock valued at approximately $29,000.
Summarized results of operations of the separate companies for the period
from June 1, 1994 through October 31, 1994 are as follows:
<TABLE>
<CAPTION>
HILLHAVEN CPS/AIS
--------- -------
<S> <C> <C>
Net operating revenues.................................. $636,305 $10,164
Income (loss) before extraordinary item................. 23,790 (240)
Net income (loss)....................................... 23,616 (240)
</TABLE>
Following is a reconciliation of restated net operating revenue and net
income to amounts previously reported for the years ended May 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Net operating revenues:
As previously reported............................ $1,448,734 $1,362,830
Acquired companies (CPS and AIS).................. 22,456 15,636
---------- ----------
As restated....................................... $1,471,190 $1,378,466
========== ==========
Net income:
As previously reported............................ $ 57,463 $ 39,079
Acquired companies (CPS and AIS).................. 955 160
---------- ----------
As restated....................................... $ 58,418 $ 39,239
========== ==========
</TABLE>
F-8
<PAGE> 55
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash paid for:
Interest.................................... $51,459 $45,241 $56,358
Income taxes................................ 21,438 11,499 7,751
Noncash investing and financing activities:
Acquisition of previously leased nursing
centers and pharmacies
Long-term debt assumed and incurred......... 2,720 13,705 39,609
Adjustment to property and equipment and
capital lease obligations................ -- 23,600 6,780
Notes received in connection with sales of
nursing centers............................. 500 3,340 36,338
Preferred stock issued to retire debt......... -- 56,601 --
Preferred stock tendered for the purchase of
common stock................................ -- 63,300 --
Reclassification of property and equipment and
intangible assets to/from assets held for
disposition................................. -- 52,537 --
Common stock placed in grantor trust.......... 88,279 -- --
</TABLE>
4. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Hillhaven has 50% ownership interests in a number of unconsolidated general
and limited partnerships. These investments are accounted for by the equity
method and are included in other noncurrent assets. All of these partnerships
own or lease real and personal property and operate nursing centers. Combined
summarized unaudited financial information for these partnerships is as follows:
<TABLE>
<CAPTION>
MAY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Current assets........................................... $ 7,534 $ 8,902
Property and equipment................................... 28,625 46,696
------- -------
Total assets............................................. $36,159 $55,598
======= =======
Current liabilities...................................... $ 3,836 $ 6,999
Long-term debt to unrelated parties...................... 21,672 37,400
Long-term debt to Hillhaven.............................. 325 4,377
Partners' equity......................................... 10,326 6,822
------- -------
Total liabilities and equity............................. $36,159 $55,598
======= =======
</TABLE>
F-9
<PAGE> 56
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net operating revenues........................ $34,695 $47,857 $54,314
Net income.................................... 1,373 2,747 4,204
Recognized by Hillhaven:
Equity in income............................ 1,033 1,554 2,081
Interest income............................. 25 367 697
Management fees............................. 1,753 2,412 2,710
</TABLE>
Hillhaven manages six nursing centers for partnerships in which the Company
has an equity interest. Management fees earned are usually based upon a
percentage of revenues, ranging from 7% to 9%.
5. PROPERTY AND EQUIPMENT
Property and equipment at May 31 is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land................................................ $ 82,514 $ 77,043
Buildings........................................... 762,092 718,983
Leasehold improvements.............................. 22,123 17,208
Equipment........................................... 196,756 174,793
Construction in progress............................ 15,959 14,376
---------- ----------
1,079,444 1,002,403
Less accumulated depreciation and amortization...... (264,490) (218,066)
---------- ----------
Net property and equipment.......................... $ 814,954 $ 784,337
========== ==========
</TABLE>
Property and equipment includes buildings acquired under capital leases in
the amount of $1,997 at both May 31, 1995 and 1994. Related accumulated
depreciation and amortization amounted to $1,861 and $1,776 at May 31, 1995 and
1994, respectively.
6. LONG-TERM DEBT
The Recapitalization. In September 1993, Hillhaven completed a
recapitalization plan (the "Recapitalization") which included the modification
of the Company's relationship with Tenet Healthcare Corporation ("Tenet")
(formerly National Medical Enterprises, Inc.) (Note 8) to (i) purchase 23
nursing centers leased from Tenet for a purchase price of $111,800, (ii) repay
all existing debt to Tenet in the aggregate principal amount of $147,202, (iii)
release Tenet guarantees on approximately $400,000 of debt, (iv) limit the
annual fee payable to Tenet to 2% of the remaining amount guaranteed and (v)
amend existing agreements to eliminate obligations of Tenet to provide
additional financing to the Company. The Recapitalization was financed through
(i) the issuance to Tenet of $120,000 of payable-in-kind Series D Preferred
Stock, (ii) the incurrence of a $175,000 term loan under a secured credit
facility with a syndicate of banks, (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 $39,000 of
cash.
F-10
<PAGE> 57
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Long-term debt at May 31 is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
CONVERTIBLE DEBENTURES
Floating rate convertible debentures(1).............. $ 56,422 $ 59,473
7 3/4% convertible debentures(2)..................... 74,750 74,750
-------- --------
$131,172 $134,223
======== ========
OTHER LONG-TERM DEBT
Debt under bank credit agreement(3).................. $114,900 $116,500
Industrial revenue bonds, payable in installments to
2025(4)........................................... 124,297 124,895
Mortgage notes, payable monthly to 2040(4)........... 48,235 50,369
Other notes, payable in installments to 2001(4)...... 22,920 23,067
Capitalized lease obligations (Note 9)............... 1,797 1,965
10 1/8% unsecured notes due 2001..................... 174,487 174,405
-------- --------
486,636 491,201
Less current portion................................. (39,207) (46,389)
-------- --------
$447,429 $444,812
======== ========
</TABLE>
---------------
(1) Under Hillhaven's 1991 Performance Investment Plan, on May 29, 1992, the
Company privately placed $65,053 of convertible debentures (the "PIP
Debentures") to a wholly owned, special purpose subsidiary. The subsidiary
financed 95% of the purchase with three-year term loans from a syndicate of
commercial banks and 5% from the sale to key employees of options to acquire
the PIP Debentures. In September 1993, Hillhaven refinanced the term loans
using its term loan facility. These borrowings, together with the
outstanding balance of the options, are classified as floating rate
convertible debentures in the above table. The interest rate was 7.1875% at
May 31, 1995. Interest is not payable on the options. The PIP Debentures
mature and the options terminate on May 29, 1999, and both the PIP
Debentures and options are subject to mandatory redemption on that date or
upon the occurrence of certain events. The options permit the holder to
purchase PIP Debentures at 95% of their face value and to ultimately convert
them into shares of common stock at an effective conversion price of
$16.5375 per share. The options vest 25% per year beginning in December
1993, with accelerated vesting in certain events. The Company may repurchase
the options at any time after May 29, 1997 by paying a redemption premium.
As options are exercised, the Company's taxable income will be reduced by
any excess of the fair market value of the common stock at the date of
conversion over the principal amount of the PIP Debentures redeemed.
(2) On November 4, 1992, the Company sold $74,750 of its 7 3/4% Convertible
Subordinated Debentures (the "Debentures") due 2002. The Debentures are
convertible into common stock at the option of the holder at any time prior
to maturity at a conversion price of $16.795 per share. On or after November
1, 1995, the Company may redeem the Debentures, in whole or in part, at
specified redemption prices. The Debentures are unsecured and subordinated
to all other indebtedness of Hillhaven.
(3) In connection with the Recapitalization, Hillhaven entered into a credit
agreement with a syndicate of banks. The credit agreement, as amended in
October 1994, includes a $165,000 term loan facility, an $85,000 revolving
credit facility and a $70,000 IRB letter of credit facility (collectively,
the "Facilities"). Borrowings under the credit agreement are secured by 86
nursing centers, certain accounts receivable and the stock of certain
subsidiaries of the Company. The Facilities bear interest at either a base
rate plus zero to .625% or the London Interbank Offered Rate ("LIBOR") plus
.625% to 1.625%, the spreads being dependent on the type of facility and
leverage ratios. The Facilities will mature on October 28,
F-11
<PAGE> 58
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999. Commitment fees are required on the unused portions of the term loan,
revolving credit facility and IRB letter of credit facility and are paid
at a rate of .25% to .50%, depending on leverage ratios. At May 31, 1995,
$144,500 was outstanding under the term loan facility, including $53,600 as
substituted debt for the PIP Debentures, with interest payable at 7.1875%.
The term loan is subject to scheduled principal repayments. Borrowings
under the revolving credit facility amounted to $24,000 at May 31, 1995,
with interest payable at 7.1875%. Letters of credit outstanding at May 31,
1995 under the IRB letter of credit facility totalled $68,668 and under the
revolving credit facility totalled $4,250.
(4) Mortgage notes, industrial revenue bonds and the majority of other notes are
principally secured by Hillhaven's property and equipment. Mortgage notes
include non-interest bearing resident mortgage bonds related to a retirement
housing facility amounting to $31,254 and $30,543 at May 31, 1995 and 1994,
respectively. The industrial revenue bonds were issued by various
governmental authorities to finance the construction or acquisition of
nursing centers and retirement housing facilities. The use of escrowed funds
of $3,249 and $6,156 at May 31, 1995 and 1994, respectively, is limited to
specific facility capital improvements or payment of principal and interest
on the bonds. These amounts are included in other noncurrent assets. Average
interest rates for the mortgage notes (excluding resident mortgage bonds),
industrial revenue bonds and other notes at May 31, 1995 were 9.0%, 5.0% and
9.3%, respectively.
Hillhaven participates in a $40,000 accounts receivable-backed credit
facility whereby eligible Medicaid receivables of selected nursing centers are
sold to a wholly owned subsidiary of Hillhaven, formed specifically for the
purpose of such transactions. The purchase of receivables by the subsidiary may
be financed by a bank line of credit with interest payable at either LIBOR plus
3/4% or the lenders' cost of funds. At May 31, 1995, borrowings under this
facility totalled $5,000 with interest payable at 9.0%. At May 31, 1995, the
subsidiary had total assets of approximately $72,160, which cannot be used to
satisfy claims against Hillhaven or any of its subsidiaries.
Certain loan agreements have, among other requirements, restrictions on
cash dividends, investments and borrowings and require maintenance of specified
operating ratios, levels of working capital and net worth. Management believes
that Hillhaven is in compliance with all material covenants. There are no
compensating balance requirements for any of the credit lines or borrowings.
Future maturities of convertible debentures and long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31,
-------------------
<S> <C>
1996...................................................... $ 39,207
1997...................................................... 42,038
1998...................................................... 37,568
1999...................................................... 40,344
2000...................................................... 47,181
Later years............................................... 411,470
--------
$617,808
========
</TABLE>
7. INCOME TAXES
Effective June 1, 1992, Hillhaven adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The
implementation of SFAS 109 changed the Company's method of accounting for income
taxes from the deferred method of APB Opinion No. 11 ("APB 11") to an asset and
liability approach. Under the asset and liability method of SFAS 109, deferred
tax assets and
F-12
<PAGE> 59
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Adoption of SFAS 109 resulted in a charge of $1,103 to the 1993 statement
of income as the cumulative effect of a change in accounting principle.
Including the impact of this charge, the effect on the year ended May 31, 1993
of the adoption of SFAS 109 was a reduction of net income tax expense and an
increase in net income of $7,710 as compared to amounts that would have been
reported under APB 11.
Income tax (expense) benefit on income from operations before income taxes,
extraordinary charge and cumulative effect of accounting change consists of the
following amounts:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Current (expense) federal................... $(15,470) $(12,720) $(5,593)
Current (expense) state..................... (3,537) (2,651) (1,025)
-------- -------- -------
(19,007) (15,371) (6,618)
-------- -------- -------
Deferred (expense) benefit federal.......... (5,712) (7,385) 12,609
Deferred (expense) benefit state............ (836) (629) 1,125
-------- -------- -------
(6,548) (8,014) 13,734
-------- -------- -------
$(25,555) $(23,385) $ 7,116
======== ======== =======
</TABLE>
An analysis of Hillhaven's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.......... 35% 35% 34%
-------- -------- --------
Income tax expense at federal rate......... $(27,095) $(29,003) $(11,489)
State income tax (expense) benefit net of
federal income tax effect................ (2,842) (2,132) 66
Employee stock compensation................ 651 491 255
Nondeductible wages........................ (744) (968) (488)
Valuation allowance adjustment............. 3,104 1,090 18,992
Targeted jobs tax credits.................. 1,923 6,780 --
Other...................................... (552) 357 (220)
-------- -------- --------
Income tax (expense) benefit on income
before extraordinary charge and
cumulative effect of accounting change... $(25,555) $(23,385) $ 7,116
======== ======== ========
</TABLE>
F-13
<PAGE> 60
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of temporary differences that give rise to significant
portions of the federal and state deferred tax assets (liabilities) are
comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Depreciation............................... $(20,812) $(16,882) $(24,912)
Installment sales.......................... (1,573) (1,691) (3,685)
Other...................................... (3,627) (3,563) (1,148)
-------- -------- --------
Gross deferred tax liabilities............. (26,012) (22,136) (29,745)
-------- -------- --------
Capital leases............................. 8,164 8,110 7,090
Deferred partnership revenue............... 2,548 1,960 2,662
Insurance reserves......................... 5,485 9,573 8,033
Vacation accruals.......................... 6,198 5,691 4,955
Deferred gain.............................. 3,464 4,350 5,882
Bad debt reserves.......................... 9,945 8,788 7,093
Restructuring reserves..................... -- -- 20,293
Targeted jobs tax credits.................. -- 5,296 7,546
Alternative minimum tax credits............ 2,416 2,649 1,534
Other...................................... 7,393 4,972 3,014
-------- -------- --------
Gross deferred tax assets.................. 45,613 51,389 68,102
Less valuation allowance................... (8,173) (11,277) (12,367)
-------- -------- --------
Deferred tax assets, net................... 37,440 40,112 55,735
-------- -------- --------
Net deferred tax assets.................... 11,428 17,976 25,990
Less amount included in other current
assets................................... (16,544) (18,946) (15,762)
-------- -------- --------
Amount included in other noncurrent assets
(liabilities)............................ $ (5,116) $ (970) $ 10,228
======== ======== ========
</TABLE>
The decrease in the valuation allowance for deferred tax assets of $3,104
and $1,090 for 1995 and 1994, respectively, was attributable to taxable income
earned in the years ended May 31, 1995 and 1994 and, to a lesser extent, an
increase in the estimate of future income to be earned. Realization of net
deferred tax assets is dependent in part upon 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.
The Tax Reform Act of 1986 enacted an alternative minimum tax system for
corporations. The alternative minimum tax is assessed at a rate of 20% on
alternative minimum taxable income. Alternative minimum taxable income is
determined by making statutory adjustments to the Company's regular taxable
income. For the years ended May 31, 1995, 1994 and 1993, utilization of regular
tax credits was limited by alternative minimum tax expense of $13,913, $11,043
and $5,400, respectively.
8. TRANSACTIONS WITH TENET HEALTHCARE CORPORATION
Lending and Related Agreements. In connection with the spin-off from Tenet
in January 1990 (the "Spin-off"), Hillhaven entered into certain financial
arrangements with its former parent company. Hillhaven issued unsecured notes to
Tenet in the aggregate amount of $145,859. The Company used the proceeds from
the sale of both the 8 1/4% Series C Preferred Stock to Tenet and the PIP
Debentures to repay $96,800 of these notes (Note 6). Tenet also provided
mortgage financing to Hillhaven on certain nursing centers purchased by the
Company from Tenet. In fiscal 1994, Hillhaven repaid all of the Tenet notes in
the aggregate principal
F-14
<PAGE> 61
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amount of $147,202 with proceeds from the Recapitalization (Note 6). The Company
also repaid debt which was guaranteed by Tenet in the aggregate amount of
$266,737.
Interest expense on Tenet notes totalled $3,696 and $7,061 for the years
ended May 31, 1994 and 1993, respectively.
Guarantee Reimbursement Agreement. Tenet and Hillhaven entered into a
guarantee reimbursement agreement providing for the payment by Hillhaven of a
fee in consideration of Tenet's guarantee of certain Hillhaven obligations. At
May 31, 1995 and 1994, an aggregate total of approximately $182,000 and
$279,000, respectively, of long-term debt (Note 6), leases (Note 9) and
contingent liabilities (Note 11) were subject to this agreement. Guarantee fees
totalled $4,588, $6,684 and $9,644 for the years ended May 31, 1995, 1994 and
1993, respectively.
Insurance. Through May 31, 1994, substantially all of the professional and
general liability risks of Hillhaven were insured by an insurance company which
is owned by Tenet. Such insurance expense amounted to $7,627 and $7,344 for the
years ended May 31, 1994 and 1993, respectively. Beginning June 1, 1994,
Hillhaven obtained separate coverage for its professional and general liability
exposure (Note 11).
Leases. At the time of the Spin-off, Hillhaven leased 115 nursing centers
from Tenet. During the three years ended May 31, 1993, the Company purchased 92
of the leased nursing centers for an aggregate purchase price of $346,900. At
May 31, 1993, Hillhaven leased 23 nursing centers from Tenet which were recorded
as capital leases at the aggregate purchase option price of $135,400. As part of
the Recapitalization, the Company purchased the remaining 23 nursing centers
leased from Tenet for an aggregate purchase price of $111,800. Interest expense
on the Tenet leases for the years ended May 31, 1994 and 1993 amounted to $3,401
and $19,889 respectively.
Hillhaven is leasing certain nursing centers from Health Care Property
Partners, a joint venture in which Tenet has a minority interest. Lease payments
to this joint venture amounted to $9,574, $9,923 and $9,699 for the years ended
May 31, 1995, 1994 and 1993, respectively.
Equity Ownership. On November 30, 1991, Tenet purchased 35,000 shares of
Hillhaven's 8 1/4% cumulative nonvoting Series C Preferred Stock. The proceeds,
$35,000, were used to reduce notes payable to Tenet. Tenet is entitled to a
cumulative dividend, payable quarterly, at the annual rate of 8 1/4% of the
$35,000 liquidation value. The Series C Preferred Stock is redeemable at the
option of the Company at any time, in whole or in part.
In connection with the Recapitalization, Hillhaven issued to Tenet $120,000
of cumulative nonvoting payable-in-kind Series D Preferred Stock. On February
28, 1994, Tenet tendered shares of the Series D Preferred Stock in the amount of
$63,300 to exercise its warrants to purchase 6,000,000 shares of Hillhaven
common stock.
Tenet is entitled to receive cumulative quarterly dividends on the Series D
Preferred Stock at an annual rate of 6 1/2% of the liquidation value which, as
of May 31, 1995, was $64,416. The dividends are payable in additional shares of
Series D Preferred Stock, compounded annually, until September 1998, when the
dividends will be payable in cash. The Company may, at its option, redeem the
Series D Preferred Stock at any time, in whole or in part, subject to
restrictions included in certain loan agreements.
Management Agreement. Hillhaven provides management, consulting and
advisory services in connection with the operation of seven nursing centers
owned or leased by Tenet or its subsidiaries. In return for such services,
Hillhaven receives a management fee and is reimbursed for certain costs and
expenses. Hillhaven earned $2,535, $2,543 and $2,440 for such services during
fiscal 1995, 1994 and 1993, respectively. Management fees receivable from Tenet
amounted to $636 at May 31, 1995 and $610 at May 31, 1994.
F-15
<PAGE> 62
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. LEASES
As of May 31, 1995, Hillhaven leases 112 nursing centers, 70 of which are
operated by the Company. Most lease agreements cover periods from 10 to 20 years
and contain renewal options of 5 to 40 years. Hillhaven's pharmacy outlets are
leased under terms generally ranging from three to five years with three-year
renewal options.
Minimum lease payments under noncancelable leases and related sublease
income are as follows:
<TABLE>
<CAPTION>
SUBLEASE
YEAR ENDING MAY 31, CAPITAL OPERATING INCOME
------------------- ------- --------- --------
<S> <C> <C> <C>
1996................................................. $ 369 $ 34,605 $ (9,740)
1997................................................. 374 29,612 (7,291)
1998................................................. 378 27,254 (7,048)
1999................................................. 383 19,641 (5,378)
2000................................................. 383 16,421 (4,899)
Thereafter........................................... 651 38,062 (13,074)
------ -------- --------
Total minimum lease payments (income)................ 2,538 $165,595 $(47,430)
======== ========
Less amount representing interest.................... (741)
------
Present value of net minimum lease payments.......... 1,797
Less current portion................................. (189)
------
Long-term obligations................................ $1,608
======
</TABLE>
Rent expense under operating leases is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Rent expense............................... $ 53,571 $ 56,280 $ 56,687
Sublease rental income..................... (14,026) (13,563) (10,390)
-------- -------- --------
$ 39,545 $ 42,717 $ 46,297
======== ======== ========
</TABLE>
10. BENEFIT PLANS
Hillhaven's 1990 Stock Incentive Plan (the "1990 Plan") provides for
incentive stock option, nonqualified stock option, restricted stock, stock
appreciation right and cash bonus awards to certain executive officers and other
key employees of Hillhaven. Incentive stock options are granted at an exercise
price equal to the fair market value of the shares on the date of grant, and
nonqualified stock options are granted at an exercise price of not less than 50%
of fair market value on the date of grant. Restricted shares are issued at no
cost to the employee, and restrictions on such shares generally lapse over five
years from the date of the award as long as the employee continues to be
employed by Hillhaven.
In addition, Hillhaven has replaced its long-term cash bonus plan with
performance share awards ("Performance Shares") under the 1990 Plan. The
Compensation Committee of the Board of Directors identified key management
employees who are eligible to receive Performance Shares. Performance Shares
represent potential rights to receive common stock based upon the Company
achieving specified financial targets over a three- to five-year period. Subject
to the Compensation Committee's sole discretion to award all or any portion of
the Performance Shares, participants may receive shares of common stock based
upon actual performance in relation to the financial targets. Performance Shares
granted during the year ended May 31,
F-16
<PAGE> 63
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 amounted to 1,015,000, which may be awarded over the next five years
subject to the aforementioned conditions.
The fair market value on the date of award of restricted shares and the
excess of the fair market value of the Hillhaven shares on the date of grant of
nonqualified stock options over the exercise price represents compensation which
is deferred and charged to operations as the forfeiture restrictions lapse and
as the nonqualified options vest. An estimate of the fair market value of
Performance Shares expected to be awarded also represents compensation and is
deferred and charged to operations over a three- to five-year period. Unearned
compensation is recorded as a deduction from stockholders' equity. No stock
appreciation rights or cash bonuses have been awarded under the 1990 Plan. At
May 31, 1995, there were 1,030,161 shares of common stock available under the
1990 Plan for future awards.
Hillhaven also has a Directors' Stock Option Plan (the "Directors' Plan")
for directors who are not employees of Hillhaven and are not eligible to
participate in the 1990 Plan. Nonstatutory options to purchase 2,000 shares of
common stock are granted each year to each qualified director at the fair market
value of the shares on the date of grant.
Information regarding stock option plans follows:
<TABLE>
<CAPTION>
1990 DIRECTORS'
PLAN PLAN
------- ----------
<S> <C> <C>
Shares under option:
Outstanding at May 31, 1992............................... 248,902 30,000
Granted................................................... 101,647 10,000
Exercised................................................. (49,079) --
Canceled.................................................. (1,542) (2,000)
------- ------
Outstanding at May 31, 1993............................... 299,928 38,000
Granted................................................... 66,002 10,000
Exercised................................................. (95,785) (2,000)
Canceled.................................................. (6,532) (6,000)
------- ------
Outstanding at May 31, 1994............................... 263,613 40,000
Granted................................................... 216,790 12,000
Exercised................................................. (56,594) (2,000)
Cancelled................................................. (6,615) --
------- ------
Outstanding at May 31, 1995............................... 417,194 50,000
======= ======
Average option price per share............................ $12.77 $17.48
Options exercisable at May 31, 1995....................... 204,934 38,000
Average price of options exercised:
Year ended May 31, 1993................................. $5.02 --
Year ended May 31, 1994................................. $5.84 $13.75
Year ended May 31, 1995................................. $8.75 $14.69
</TABLE>
Shares of common stock issued in the last three fiscal years in connection
with employee and director compensation and benefit plans, including the 1991
Performance Investment Plan (Note 6), were 348,234 in 1995, 212,356 in 1994 and
135,079 in 1993. Restricted shares forfeited and retired in the last three
fiscal years amounted to zero in 1995, 16,000 in 1994 and 39,670 in 1993.
F-17
<PAGE> 64
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In January 1995, the Company established a grantor trust to pre-fund future
obligations under Hillhaven's employee stock plans. The grantor trust is a
vehicle for supporting its existing stock plans including the 1990 Plan, the
Performance Investment Plan and the Employee Stock Purchase Plan, and does not
change those plans or the amount of stock to be issued under those plans.
Hillhaven transferred 4,200,000 newly issued shares of its common stock to the
grantor trust, of which 4,067,473 shares remained in the trust at May 31, 1995.
In March 1995, the Company established a second grantor trust to pre-fund
future obligations under its nonqualified deferred compensation plans. This
trust does not change the status of the plans or benefits to be received by
participants in the plans. Hillhaven transferred to the trust, life insurance
policies with an aggregate cash value of $5,356,897 at May 31, 1995 (included in
other noncurrent assets), as well as 500,000 newly issued shares of the
Company's common stock. The Company may withdraw these shares of common stock at
any time prior to a change of control, as defined, and therefore they are not
considered outstanding shares.
Hillhaven maintains defined contribution retirement plans covering
substantially all full-time employees, whereby employee contributions to the
plans are matched by Hillhaven up to certain limits. Defined contribution
pension expense totalled $4,993, $3,938 and $4,556 for the years ended May 31,
1995, 1994 and 1993, respectively.
Hillhaven also maintains supplemental retirement plans covering outside
directors, executive officers and certain other management employees under which
benefits are determined based primarily upon the participants' compensation and
length of service to the Company. Expense under these plans amounted to $1,142,
$730 and $262 for the years ended May 31, 1995, 1994 and 1993, respectively.
Accrued benefits under the plans amounted to $3,668 and $2,518 at May 31, 1995
and 1994, respectively, and are included in other long-term liabilities.
11. COMMITMENTS AND CONTINGENCIES
Hillhaven is contingently liable at May 31, 1995 for $23,698 primarily as a
guarantor of indebtedness of partnerships in which Hillhaven has an ownership
interest (Note 4) or with which it has a management agreement. Tenet has
guaranteed $3,880 of these obligations for which Hillhaven has agreed to
indemnify Tenet under the terms of the Guarantee Reimbursement Agreement (Note
8).
The Company maintains insurance coverage for its workers' compensation
exposure. The estimated retrospective premiums (included in other receivables or
other accrued liabilities and other long term assets or liabilities) is based on
actuarially projected estimates discounted at an 8.0% average rate to their
present value, which amounted to a $5,861 receivable at May 31, 1995 and a
$8,619 liability at May 31, 1994.
The Company currently insures all of its professional and general liability
risks through a wholly owned insurance subsidiary. Risks in excess of $500 per
occurrence are reinsured with major independent insurance companies. The
estimated liability for the self-insured portion of professional and general
liability claims (included in other accrued liabilities and other long-term
liabilities) is based on actuarially projected estimates which amounted to
$6,436 at May 31, 1995. Included in cash at May 31, 1995 is $7,129 which is
restricted for the payment of claims. Through May 31, 1994, the Company's
professional and general liability risks were insured by an insurance company
which is owned by Tenet (Note 8).
On January 25, 1995, Horizon Healthcare Corporation ("Horizon") made a
proposal to acquire Hillhaven in a stock merger valued by Horizon at $28.00 per
share. On February 5, 1995, a Special Committee of Hillhaven's Board of
Directors (the "Special Committee") considered the proposal with its
F-18
<PAGE> 65
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
advisors and concluded that the proposal was inadequate. On March 7, 1995,
Horizon made another offer to acquire Hillhaven in a stock merger valued by
Horizon at $31.00 per share.
In light of the March 7, 1995 Horizon proposal and expressions of interest
received by Hillhaven from other parties desiring to explore an acquisition
transaction, on March 20, 1995, the Special Committee instructed Merrill Lynch,
Pierce, Fenner and Smith Incorporated to explore strategic alternatives,
including the possible sale of Hillhaven to a third party. The Special Committee
established a process to evaluate all alternatives available to Hillhaven.
As part of this process, Hillhaven engaged in discussions with certain
parties interested in acquiring Hillhaven, and invited Horizon to participate in
this process. Horizon announced that its proposal expired on March 21, 1995. On
April 24, 1995, Hillhaven announced that it had entered into a definitive merger
agreement with Vencor, Inc. ("Vencor"). See Note 13.
A number of legal actions have resulted from Horizon's January and March
proposals to acquire Hillhaven.
On February 6, 1995, Hillhaven filed a complaint against Horizon in the
United States District Court for the District of Nevada seeking injunctive and
declaratory relief that a business combination between Horizon and Hillhaven is
prohibited by the Nevada statute regarding business combinations with interested
stockholders by reason of certain arrangements between Horizon and Tenet. On
February 27, 1995, Horizon filed an answer and a counterclaim alleging that,
among other things, Hillhaven and all of its directors (other than Messrs. de
Wetter and Andersons) had breached their fiduciary duties to Hillhaven's
stockholders in connection with their consideration of Horizon's acquisition
proposal and certain actions taken by Hillhaven, including the formation of a
grantor trust, the amendment of Hillhaven's stockholder rights plan and the
filing of a shelf registration statement with the Commission. The counterclaim
seeks injunctive and declaratory relief and compensatory and punitive damages in
unspecified amounts. Hillhaven has answered the counterclaim and believes
Horizon's claims are without merit. By stipulation of the parties, all
proceedings in these actions have been stayed until October 31, 1995.
Hillhaven and its directors are named as defendants in a number of putative
class action complaints filed on behalf of Hillhaven's stockholders in Nevada
state court (the "Nevada State Court Actions") and California state court (the
"California State Court Actions"). These complaints raise allegations that
Hillhaven and its directors have breached their fiduciary duties to Hillhaven's
stockholders in connection with the consideration of Horizon's acquisition
proposal and certain corporate actions also cited in Horizon's counterclaim.
These actions seek declaratory and injunctive relief and, in California,
compensatory damages in unspecified amounts. The Service Employees International
Union (AFL-CIO) and a Hillhaven employee and union member are seeking to
intervene as party plaintiffs in both the Nevada and California putative class
actions brought on behalf of Hillhaven's stockholders, alleging that their
interests as stockholders and employees of Hillhaven are not adequately
represented. Hillhaven has opposed this intervention. In addition, Tenet filed a
complaint against Hillhaven and two of its directors, Mr. Busby and Mr. Marker,
in state court in California seeking declaratory and injunctive relief and
alleging, among other things, that they have breached their fiduciary duties to
Tenet and Hillhaven's other stockholders in connection with their consideration
of Horizon's acquisition proposal and certain of the other corporate actions
cited in the Horizon and putative class action complaints (the "Tenet Action").
The plaintiffs in the Nevada State Court Actions have moved to dismiss their
complaints, which dismissal has been opposed by Hillhaven and its directors.
Consideration of this motion has been suspended without date. Hillhaven believes
these actions are without merit.
By stipulation of the parties, the proceedings in the Tenet Action have
been stayed until the consummation of the merger with Vencor, at which time
Hillhaven and Tenet have agreed to dismiss with
F-19
<PAGE> 66
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
prejudice all pending claims with respect to Horizon's acquisition proposal or
the Merger. The stay of the California State Court Actions expired July 5, 1995,
and the stay in the Nevada State Court Actions expired on July 22, 1995. No
schedule has been established with respect to further proceedings in these
actions.
Hillhaven is subject to various other claims and lawsuits in the ordinary
course of business which are covered by insurance or adequately provided for in
Hillhaven's financial statements. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on
Hillhaven's results of operations or liquidity.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of Hillhaven's financial instruments
at May 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Notes receivable, net of allowance for
doubtful accounts......................... 88,104 97,256 87,921 94,913
Convertible debentures (Note 6)............. 131,172 184,618 134,223 154,407
Other long-term debt, excluding capitalized
lease obligations (Note 6)................ 484,839 480,283 489,236 486,425
</TABLE>
The estimated fair values of Hillhaven's financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies. Because no market exists for a significant portion of
Hillhaven's financial instruments, considerable judgment is necessarily required
in interpreting the data to develop the estimates of fair value. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The fair value of performing notes receivable is calculated by discounting
the projected cash flows using estimated market discount rates that reflect the
credit and interest rate risk inherent in the notes and using specific borrower
information. Fair values for notes with no set maturity are determined based on
individual circumstances and are valued net of specific reserves.
The fair values of the Company's long-term borrowings is estimated based on
quoted market prices or by discounting future cash flows at current rates
offered to the Company for debt of comparable types and maturities. It is not
practicable to estimate the fair value of the Company's off-balance sheet
obligations (Note 11).
13. RESTRUCTURING
On December 5, 1991, Hillhaven announced a restructuring plan designed to
improve its long-term financial strength and operating performance. The plan
included the disposition of 82 nursing centers over an estimated 24-month
period. In the second quarter of fiscal 1992, the Company recorded a $90,000
pretax charge, comprised of $25,700 for the projected losses from operations of
the 82 nursing centers during the disposition period and $64,300 for estimated
losses from the dispositions. Also as part of the restructuring, Hillhaven
exercised options to purchase nine nursing centers leased from Tenet, modified
terms of the remaining leases with Tenet and sold preferred stock to Tenet in
the amount of $35,000, the proceeds of which were used to prepay debt owed to
Tenet (Note 8).
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. During the
three months ended November 30, 1993, the Company reviewed its asset disposition
F-20
<PAGE> 67
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
program. Because of improvements in reimbursement rates and results of
operations, 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,
1993
-----------
(UNAUDITED)
<S> <C>
Assets................................................... $ 85,183
Restructuring reserve.................................... (54,550)
--------
Net assets............................................... $ 30,633
========
</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 YEAR SIX MONTHS
ENDED ENDED ENDED
AUGUST 31, MAY 31, MAY 31,
1993 1993 1992
----------- ------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Loss from operations...................... $ 235 $ 5,418 $4,263
Loss on dispositions...................... 1,861 41,010 3,790
------ ------- ------
$2,096 $46,428 $8,053
====== ======= ======
</TABLE>
Revenues and expense related to the 32 nursing centers and other properties
previously held for disposition were reclassified to ongoing operations in the
consolidated statements of income for all periods presented. Total revenues and
expenses of these facilities were as follows:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED
AUGUST 31, MAY 31, MAY 31,
1993 1993 1992
----------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues................................. $30,326 $114,758 $53,760
Expenses................................. 28,647 108,989 51,231
------- -------- -------
Income from operations before income
taxes.................................. $ 1,679 $ 5,769 $ 2,529
======= ======== =======
</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, were reclassified from net assets held for disposition to appropriate
balance sheet accounts.
On December 31, 1993, Hillhaven completed the sale of 13 nursing centers
for an aggregate sales price of $15,594. Nine of these nursing centers had
previously been held for disposition. The sale resulted in a gain of $5,102,
which is included in net operating revenues.
14. SUBSEQUENT EVENTS
In April 1995, Hillhaven entered into a definitive merger agreement with
Vencor, pursuant to which Hillhaven will be merged with and into Vencor (the
"Merger"). Holders of Hillhaven common stock will be issued Vencor common stock
in a business combination intended to qualify as a pooling of interests and as a
tax-free reorganization for federal income tax purposes. Vencor operates a
network of health care services for
F-21
<PAGE> 68
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
patients who suffer from cardiopulmonary disorders. The foundation of Vencor's
network is a nationwide chain of long term intensive care hospitals. With
operations in 38 states, the merged company (including Nationwide Care, Inc.,
discussed below) will consist of 36 long term intensive care hospitals and 311
nursing centers with more than 42,000 beds, 55 retail and institutional pharmacy
outlets and 23 retirement housing communities with approximately 3,000
apartments. Health care services provided through this network of facilities
will include long term intensive hospital care, long term nursing care, contract
respiratory therapy services, acute cardiopulmonary care, subacute and
post-operative care, inpatient and outpatient rehabilitation therapy,
specialized care for Alzheimer's disease, hospice care, pharmacy services and
retirement and assisted living. Consummation of the Merger is contingent upon
the affirmative vote of Vencor's and Hillhaven's stockholders and certain
governmental and regulatory approvals and is expected to occur in the 1996
second quarter.
On February 27, 1995, Hillhaven signed a definitive agreement to acquire
Nationwide Care, Inc. ("Nationwide") and its affiliated corporations and
partnerships. The transaction closed on June 30, 1995. The consideration for the
Nationwide acquisition was 5,000,000 shares of the Company's Common Stock valued
at approximately $141,000. The transaction was structured as a pooling of
interests and as a tax-free reorganization for federal income tax purposes.
The following summarized pro forma data give effect to the acquisition had
it occurred on June 1, 1992:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
(UNAUDITED)
-----------------------------------------
<S> <C> <C> <C>
Total revenues......................... $1,717,345 $ 1,606,568 $1,461,257
Net income............................. 54,526 63,437 42,732
Primary earnings per share............. $1.41 $1.80 $1.38
Fully diluted earnings per share....... 1.31 1.59 N/A
</TABLE>
F-22
<PAGE> 69
THE HILLHAVEN CORPORATION
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1995(1)
-----------------------------------------------
QUARTERS
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenues.......................... $382,065 $392,982 $392,973 $408,262
======== ======== ======== ========
Income before extraordinary charge.............. $ 11,394 $ 16,192 $ 11,388 $ 12,885
Extraordinary charge............................ (122) (52) (48) (348)
-------- -------- -------- --------
Net income...................................... $ 11,272 $ 16,140 $ 11,340 $ 12,537
======== ======== ======== ========
Income per share -- primary:
Income before extraordinary charge.............. $.34 $.50 $.33 $ .38
Extraordinary charge............................ -- -- -- (.01)
---- ---- ---- -----
Net income...................................... $.34 $.50 $.33 $ .37
==== ==== ==== =====
Income per share -- fully diluted:
Income before extraordinary charge.............. $.31 $.44 $.31 $ .35
Extraordinary charge............................ -- -- -- (.01)
---- ---- ---- -----
Net income...................................... $.31 $.44 $.31 $ .34
==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1994(1)
-----------------------------------------------
QUARTERS
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenues.......................... $359,710 $367,189 $369,865 $374,426
======== ======== ======== ========
Income before extraordinary charge(2)........... $ 8,180 $ 26,115 $ 11,944 $ 13,241
Extraordinary charge............................ -- (940) (73) (49)
-------- -------- -------- --------
Net income...................................... $ 8,180 $ 25,175 $ 11,871 $ 13,192
======== ======== ======== ========
Income per share -- primary:(3)
Income before extraordinary charge.............. $.30 $ .95 $.37 $.40
Extraordinary charge............................ -- (.04) -- --
---- ----- ---- ----
Net income...................................... $.30 $ .91 $.37 $.40
==== ===== ==== ====
Income per share -- fully diluted:(3)
Income before extraordinary charge.............. -- $ .75 $.32 $.36
Extraordinary charge............................ -- (.03) -- --
---- ----- ---- ----
Net income...................................... N/A $ .72 $.32 $.36
==== ===== ==== ====
</TABLE>
---------------
(1) Amounts for periods prior to November 1, 1994 have been restated to reflect
the acquisition of CPS and AIS (Note 2).
(2) Includes a $21,904 restructuring credit recorded in the 1994 second quarter.
(3) Adjusted to reflect a one-for-five reverse stock split effected in November
1993.
F-23
<PAGE> 70
SCHEDULE VIII
THE HILLHAVEN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS & END OF
DESCRIPTION OF PERIOD(1) EXPENSES(1) DEDUCTIONS(1) PERIOD(1)
----------------------------------------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
Year ended May 31, 1993:
Valuation accounts deducted from assets:
Allowance for doubtful $ (5,964)(2)
accounts and notes receivable.......... $ 21,744 $4,346 138 (3) $20,264
======== ====== ======== =======
Reserve for loss on assets held for
disposition............................ $103,074 $ -- $(46,428)(4) $56,646
======== ====== ======== =======
Year ended May 31, 1994:
Valuation accounts deducted from assets:
Allowance for doubtful accounts and notes
receivable............................. $ 20,264 $8,391 $ (3,710)(2) $24,945
======== ====== ======== =======
Reserve for loss on assets $ (2,096)(4)
held for disposition................... $ 56,646 $ -- (54,550)(5) $ --
======== ====== ======== =======
Year ended May 31, 1995:
Valuation accounts deducted from assets:
Allowance for doubtful accounts and notes
receivable............................. $ 24,945 $5,516 $ (2,567)(2) $27,894
======== ====== ======== =======
</TABLE>
---------------
(1) Prior year information had been restated to reflect the acquisitions of CPS
and AIS.
(2) Write-off of accounts and notes receivable.
(3) Provision related to nursing centers and retirement housing facilities held
for disposition was charged to the reserve for loss on assets held for
disposition.
(4) Operating losses related to nursing centers and retirement housing
facilities held for disposition were charged to the reserve.
(5) Elimination of loss reserve upon reinstatement of assets held for
disposition.
S-1
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.01 Amended and Restated Articles of Incorporation
of Hillhaven (Incorporated by reference to Exhibit
J to Exhibit 2 to the document referred to in Note
1 below)
3.02 Amended and Restated By-Laws of Hillhaven
(Incorporated by reference to Exhibit 3.02 to the
document referred to in Note 10 below)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
4.01 Amended and Restated Articles of Incorporation
of Hillhaven (See Exhibit 3.01)
4.02 Amended and Restated By-Laws of Hillhaven (See
Exhibit 3.02)
4.03 Form of Common Stock Certificate of Hillhaven
(Incorporated by reference to Exhibit 4.3 to the
document referred to in Note 1 below)
4.04 Warrant and Registration Rights Agreement among
Hillhaven, Tenet and Manufacturers Hanover Trust
Company of California, dated as of January 31, 1990
(Incorporated by reference to Exhibit 4.4 to the
document referred to in Note 1 below)
4.05 Rights Agreement between Hillhaven and
Manufacturers Hanover Trust Company of California,
dated as of January 31, 1990 (Incorporated by
reference to Exhibit 4.6 to the document referred
to Note 1 below)
4.06 Form of Rights Certificate (Incorporated by
reference to Exhibit A to Exhibit 4.6 to the
document referred to in Note 1 below)
4.07 Form of Amendment dated as of January 16, 1995
to Rights Agreement (Incorporated by reference to
Exhibit 8 to the document referred to in Note 16
below)
4.08 Form of Amendment dated February 7, 1995 to
Rights Agreement (Incorporated by reference to
Exhibit 10 to the document referred to in Note 17
below)
4.09 Agreement concerning purchase by NME Properties
Corp., of Series C Preferred Stock of Hillhaven
and prepayment by First Healthcare Corporation of
indebtedness to NME Properties Corp., dated at or
prior to 11:59 p.m. on November 30, 1991 between
Tenet, NME Properties Corp., Hillhaven and First
Healthcare Corporation (Incorporated by reference
to Exhibit 4(a) to the document referred to in Note
2 below)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
4.10 Certificate of Designation, Preferences and Rights
of Series C Preferred Stock of Hillhaven
(Incorporated by reference to Exhibit 4(b) to the
document referred to in Note 2 below)
4.11 Certificate of First Amendment to Certificate of
Designation, Preferences and Rights of Series C
Preferred Stock of The Hillhaven Corporation
(Incorporated by reference to Exhibit 4(b) to the
document referred to in Note 9 below)
4.12 Form of Indenture between Hillhaven and Bankers
Trust Company, as Trustee with respect to the 7
3/4% Convertible Subordinated Debentures due 2002
(Incorporated by reference to Exhibit 4.14 to
the document referred to in Note 4 below)
4.13 Form of 7 3/4% Convertible Subordinated Debenture
due 2002 (Incorporated by reference to Exhibit
4.15 to the document referred to in Note 4 below)
4.14 Form of Indenture between Hillhaven and State
Street Bank and Trust Company, as Trustee with
respect to the 10 1/8% Senior Subordinated Notes
due 2001 (Incorporated by reference to Exhibit
4.01 to the document referred to in Note 5 below)
4.15 Form of 10 1/8% Senior Subordinated Note due 2001
(Incorporated by reference to Exhibit 4.02 to the
document referred to in Note 5 below)
4.16 Agreement Concerning Purchase by NME Properties
Corp. and Certain Subsidiaries of Series D
Preferred Stock of The Hillhaven Corporation, dated
as of September 1, 1993 among Hillhaven, First
Healthcare Corporation, Tenet, NME Properties Corp.
and certain subsidiaries of NME Properties Corp.
(Incorporated by reference to Exhibit 4.14 to the
document referred to in Note 10 below)
4.17 Certificate of Designation, Preferences and Rights
of Series D Preferred Stock of The Hillhaven
Corporation (Incorporated by reference to Exhibit
4(a) to the document referred to in Note 9 below)
4.18 Certificate Concerning Reverse Stock Split of The
Hillhaven Corporation (Incorporated by reference
to Exhibit 4(c) to the document referred to
in Note 9 below)
4.19 Credit Agreement dated as of September 2, 1993,
between First Healthcare Corporation, as lender,
and Hillhaven PIP Funding I, Inc., as borrower
(Incorporated by reference to Exhibit 4.07 to the
document referred to in Note 8 below)
4.20 The Hillhaven Corporation 1991 Performance
Investment Plan (Incorporated by reference to
Exhibit 10.24 to the document referred to in
Note 1 below)
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
4.21 Certificate of Designation, Preferences and Rights
of Series B Convertible Preferred Stock
(Incorporated by reference to Exhibit 4.03 to the
document referred to in Note 8 below)
4.22 Form of Indenture between Hillhaven and Chemical
Bank, as Trustee with respect to the Convertible
Debentures due May 29, 1999 (Incorporated by
reference to Exhibit 4.01 to the document referred
to in Note 8 below)
4.23 Form of Convertible Debenture due May 29, 1999
(Incorporated by reference to Exhibit 4.02 to
the document referred to in Note 8 below)
(10) MATERIAL CONTRACTS
10.01 Services Agreement between Hillhaven and Tenet,
dated as of January 31, 1990 (Incorporated by
reference to Exhibit 10.2 to the document referred
to in Note 1 below)
10.02 Tax Sharing Agreement between Hillhaven and Tenet,
dated as of January 31, 1990 (Incorporated by
reference to Exhibit 10.3 to the document referred
to in Note 1 below)
10.03 Government Programs Agreement between Hillhaven and
Tenet, dated January 31, 1990 (Incorporated by
reference to Exhibit 10.4 to the document referred
to in Note 1 below)
10.04 Insurance Agreement between Hillhaven and Tenet,
dated as of January 31, 1990 (Incorporated by
reference to Exhibit 10.5 to the document referred
to in Note 1 below)
*10.05 Employee and Employee Benefits Agreement between
Hillhaven and Tenet, dated as of January 31, 1990
(Incorporated by reference to Exhibit 10.6 to the
document referred to in Note 1 below)
*10.06 Resignation Agreement and General Release between
Hillhaven and Richard K. Eamer, dated as of
September 15, 1993 (Incorporated by reference to
Exhibit 10.06 to the document referred to in Note
10 below)
*10.07 Employment Agreement between Hillhaven and Leonard
Cohen, dated as of January 31, 1990 (Incorporated
by reference to Exhibit 10.21 to the document
referred to in Note 1 below)
*10.08 Amendment No. One to Employment Agreement between
Hillhaven and Leonard Cohen, dated as of May 31,
1994 (Incorporated by reference to Exhibit 10.08 to
the document referred to in Note 10 below)
*10.09 Severance Agreement among Hillhaven, Tenet and
Christopher J. Marker, dated as of January 31, 1990
(Incorporated by reference to Exhibit 10.23 to
the document referred to in Note 1 below)
</TABLE>
3
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
------- -------------
<S> <C>
*10.10 Severance Agreement between Hillhaven and
Christopher J. Marker, dated as of May 24, 1994
(Incorporated by reference to Exhibit 10.10 to the
document referred to in Note 10 below)
*10.11 Form of Severance Agreement between Hillhaven and
certain of its officers (Incorporated by reference
to Exhibit 10.11 to the document referred to in
Note 10 below)
*10.12 Form of Amendment to Severance Agreement between
Hillhaven and certain of its officers (Incorporated
by reference to Exhibit 10 to the document
referred to in Note 13 below)
10.13 Form of Indemnification Agreement between Hillhaven
and certain of its executive officers (Incorporated
by reference to Exhibit 4.8 to the document
referred to in Note 1 below)
*10.14 Hillhaven Directors' Stock Option Plan
(Incorporated by reference to Exhibit 10.18 to
the document referred to in Note 1 below)
*10.15 The Amended Hillhaven Corporation Board of
Directors Retirement Plan
*10.16 Hillhaven Deferred Savings Plan (Incorporated by
reference to Exhibit 10.11 to the document
referred to in Note 1 below)
*10.17 Hillhaven 1990 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.12 to the document
referred to in Note 1 below)
*10.18 Hillhaven Annual Incentive Plan, amended as of
December 6, 1994
*10.19 Hillhaven Long Term Incentive Plan (Incorporated by
reference to Exhibit 10.14 to the document
referred to in Note 1 below)
*10.20 Hillhaven Deferred Compensation Plan
*10.21 Amended and Restated Hillhaven Supplemental
Executive Retirement Plan
*10.22 Hillhaven Individual Retirement Annuity Plan
(Incorporated by reference to Exhibit 10.19 to
the document referred to in Note 1 below)
10.23 Form of Assignment and Assumption of Lease
Agreement between Hillhaven and certain
subsidiaries, on the one hand, and Tenet and
certain subsidiaries on the other hand, together
with the related Guaranty by Hillhaven, dated on or
prior to January 31, 1990 (Incorporated by
reference to Exhibit 10.7 to the document referred
to in Note 1 below)
</TABLE>
4
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
10.24 Form of Management Agreement between First
Healthcare Corporation and certain Tenet
subsidiaries, dated on or prior to January 31,
1990 (Incorporated by reference to Exhibit 10.10 to
the document referred to in Note 1 below)
10.25 Reorganization and Distribution Agreement between
Hillhaven and Tenet, dated as of January 8, 1990,
as amended on January 30, 1990 (Incorporated by
reference to Exhibit 2.01 to the document referred
to in Note 1 below)
10.26 Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of January 31, 1990
(Incorporated by reference to Exhibit 10.8 to the
document referred to in Note 1 below)
10.27 First Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
October 30, 1990 (Incorporated by reference to
Exhibit 10.27 to the document referred to in
Note 10 below)
10.28 First Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
May 30, 1991 (Incorporated by reference to Exhibit
10.45 to the document referred to in Note 3 below)
10.29 Second Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
October 2, 1991 (Incorporated by reference to
Exhibit 10.46 to the document referred to in
Note 3 below)
10.30 Third Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
April 1, 1992 (Incorporated by reference to Exhibit
10.47 to the document referred to in Note 3 below)
10.31 Fourth Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
November 12, 1992 (Incorporated by reference to
Exhibit 10.13 to the document referred to in Note
6 below)
10.32 Fifth Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
February 19, 1993 (Incorporated by reference to
Exhibit 10.14 to the document referred to in Note
6 below)
10.33 Sixth Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
May 28, 1993 (Incorporated by reference to Exhibit
10.15 to the document referred to in Note 6 below)
10.34 Seventh Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
May 28, 1993 (Incorporated by reference to Exhibit
10.34 to the document referred to in Note 10 below)
10.35 Eighth Amendment to Guarantee Reimbursement
Agreement between Hillhaven and Tenet, dated as of
September 2, 1993 (Incorporated by reference to
Exhibit 10.35 to the document referred to in Note
10 below)
</TABLE>
5
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
10.36 Amended and Restated Loan Agreement among
Hillhaven, New Pond Village Associates and Bay Bank
of Boston, N.A., dated as of August 25, 1989 and
effective November 1, 1991 (Incorporated by
reference to Exhibit 10.52 to the document referred
to in Note 3 below)
10.37 Facility Agreement among First Healthcare
Corporation and Certain Limited Partnerships, dated
as of April 23, 1992 relating to the sale of 32
nursing centers (Incorporated by reference to
Exhibit 10.42 to the document referred to in Note
3 below)
10.38 First Amendment to Facility Agreement among First
Healthcare Corporation and Certain Limited
Partnerships, dated as of July 31, 1992 relating to
the sale of 32 nursing centers (Incorporated by
reference to Exhibit 10.43 to the document referred
to in Note 3 below)
10.39 Letter of Intent dated June 22, 1993 between
Hillhaven and Tenet (Incorporated by reference to
Exhibit 10.63 to the document referred to in
Note 6 below)
10.40 Agreement and Waiver, dated as of September 2,
1993, by and among Hillhaven, First Healthcare
Corporation, Tenet and certain Tenet subsidiaries
(Incorporated by reference to Exhibit 10.52 to the
document referred to in Note 10 below)
10.41 Novation Agreement among Hillhaven Funding
Corporation, Banque Indosuez, New York Branch,
Banque Nationale de Paris, San Francisco Agency,
Bank of America National Trust and Savings
Association and Seattle-First National Bank, dated
as of April 29, 1994 (Incorporated by reference to
Exhibit 10.53 to the document referred to in Note
10 below)
10.42 Amended and Restated Master Sale and Servicing
Agreement among Hillhaven Funding Corporation,
Hillhaven and certain Hillhaven subsidiaries, dated
as of April 29, 1994 (Incorporated by reference to
Exhibit 10.54 to the document referred to in Note
10 below)
10.43 Amended and Restated Liquidity Agreement between
Hillhaven Funding Corporation, Bank of America
National Trust and Savings Association and
Seattle-First National Bank dated as of April 29,
1994 (Incorporated by reference to Exhibit 10.55 to
the document referred to in Note 10 below)
10.44 Amendment No. 4 to Credit Agreement, dated as
of October 28, 1994, Amending (and Restating)
the $360,000,000 Credit Agreement dated as of
September 1, 1993 (Incorporated by reference to
Exhibit 10 to the document referred to in Note 11
below)
10.45 Amendment No. 5 to Credit Agreement, dated as of
April 21, 1995, Amending the $360,000,000 Credit
Agreement dated as of September 1, 1993
</TABLE>
6
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NO. ITEM/DOCUMENT
--------- -------------
<S> <C>
10.46 Trust Agreement Between The Hillhaven Corporation
and Wachovia Bank of North Carolina, N.A., as
Trustee, dated as of January 16, 1995 (Incorporated
by reference to Exhibit 99.01 to the document
referred to in Note 12 below)
10.47 Stock Purchase Agreement, dated as of January 16,
1995 (Incorporated by reference to Exhibit 99.02
to the document referred to in Note 12 below)
10.48 Amended and Restated Agreement and Plan of Share
Exchange and Agreements to Assign Partnership
Interests dated as of February 27, 1995 by and
among The Hillhaven Corporation, Nationwide Care,
Inc., Phillippe Enterprises, Inc., Meadowvale
Skilled Care Center, Inc. and Specified Partners of
Camelot Care Centers, Evergreen Woods, Ltd. and
Shangri-La Partnership (Incorporated by reference
to Exhibit 2.01 to the document referred to in
Note 14 below)
10.49 Amended and Restated Agreement and Plan of Merger
(Incorporated by reference to Appendix A to the
document referred to in Note 15 below)
10.50 Other Debt Instruments -- Copies of additional
debt instruments for which the related debt is
less than 10% of total assets will be furnished
to the Commission upon request.
(11) COMPUTATION OF PER SHARE EARNINGS
11.01 Statement re: Computation of Per Share Earnings
(21) SUBSIDIARIES
21.01 Subsidiaries of the Registrant
(23) CONSENT OF EXPERTS AND COUNSEL
23.01 Consent of Independent Accountants, KPMG Peat
Marwick LLP
(27) FINANCIAL DATA SCHEDULE
(99) MISCELLANEOUS
99.01 Section entitled "Operations and Management After
The Merger" from Vencor, Inc. Form S-4 (File No.
33-59345) (See Note 15 below)
</TABLE>
<TABLE>
Note
Reference Document
--------- --------
<S> <C>
1. Quarterly Report on Form 10-Q for the quarter ended November
30, 1989, as amended.
2. Quarterly Report on Form 10-Q for the quarter ended November
30, 1991, as amended.
3. Annual Report on Form 10-K for the year ended May 31, 1992, as amended.
4. Registration Statement on Form S-1 (File No. 33-48755).
5. Registration Statement on Form S-3 (File No. 33-65718).
6. Annual Report on Form 10-K for the year ended May 31, 1993.
7. Current Report on Form 8-K dated September 2, 1993.
8. Registration Statement on Form S-3 (File No. 33-50833).
9. Quarterly Report on Form 10-Q for the quarter ended November 30, 1993.
10. Annual Report on Form 10-K for the year ended May 31, 1994.
11. Quarterly Report on Form 10-Q for the quarter ended November 30, 1994.
12. Current Report on Form 8-K dated January 27, 1995.
13. Quarterly Report on Form 10-Q for the quarter ended February 28, 1995.
14. Registration Statement on Form S-4 (File No. 33-58641).
15. Registration Statement on Form S-4 of Vencor, Inc. (File No. 33-59345).
16. Form 8-A/A dated as of January 20, 1995.
17. Form 8-A/A dated as of February 10, 1995.
</TABLE>
7
<PAGE> 1
EXHIBIT 10.15
THE AMENDED
HILLHAVEN CORPORATION
BOARD OF DIRECTORS RETIREMENT PLAN
Effective January 1, 1995
SECTION 1
STATEMENT OF PURPOSE
This Amended Board of Directors Retirement Plan (the "Plan") of The
Hillhaven Corporation has been adopted to attract, retain, motivate and provide
financial security to members of the Board of Directors who are not employees
of the Company (the "Participants"). This Amended Plan applies to Directors
whose Termination of Service occurs after December 31, 1994.
SECTION 2
DEFINITIONS
2.1 AGREEMENT. "Agreement" means a written agreement
substantially in the form of Exhibit A between The Hillhaven Corporation and a
Participant.
2.2 ANNUAL BOARD RETAINER. "Annual Board Retainer" means the
total annual retainer paid to a Director by The Hillhaven Corporation for
Service on The Hillhaven Corporation's Board of Directors, excluding any
separate fees paid for meeting attendance or service of any committees of the
Board of Directors.
2.3 COMMITTEE. "Committee" means the members of the Executive
Committee of the Board of Directors of The Hillhaven Corporation who are
employees of the Company.
2.4 COMPANY. "Company" means The Hillhaven Corporation and its
Subsidiaries.
2.5 CHANGE OF CONTROL EVENT. A "Change of Control Event" shall be
deemed to occur if any of the following events has occurred:
(i) A Person, alone or together with its
Affiliates and Associates, or "group", within the meaning of
Section 13(d)(3) of the Securities
<PAGE> 2
EXHIBIT 10.15
Exchange Act of 1934, becomes, after the date hereof, the
beneficial owner of 20% or more of the general voting power of
the Company. Notwithstanding the preceding sentence, a Change
of Control Event shall not be deemed to occur if the "Person"
described in the preceding sentence has acquired 20% or more
of the general voting power of the Company as consideration in
a transaction or series of related transactions involving the
Company's acquisition (by stock acquisition, merger, asset
purchase or otherwise) of one or more businesses approved
prior to such transactions or series of transactions by the
Incumbent Board (as defined in (ii) below), and provided that,
if such transaction or series of transactions results in the
merger, consolidation or reorganization of the Company and
such Person, the Company is the surviving entity following
such merger, consolidation or reorganization.
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board"), cease for any
reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
(other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual
or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934) shall be considered as though such
person were a member of the Incumbent Board.
(iii) Consummation or effectiveness of:
a. a merger, consolidation or
reorganization involving the Company (a "Business
Combination"), unless
1. the stockholders of the
Company, immediately before the Business
Combination, own, directly or indirectly
immediately following the Business
Combination, at least fifty-one percent (51%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from the Business
Combination (the "Surviving Corporation") in
substantially the same proportion as their
ownership of the voting securities
immediately and before the Business
Combination, and
2. the individuals who were
members of the Incumbent Board immediately
prior to the execution of the agreement
providing for the Business Combination
constitute at
2
<PAGE> 3
least a majority of the members of the Board
of Directors of the Surviving Corporation, and
3. no Person (other than any
Person who, immediately prior to the Business
Combination, had beneficial ownership of
twenty percent (20%) or more of the then
outstanding Voting Securities) has Beneficial
Ownership of twenty percent (20%) or more of
the combined voting power of the Surviving
Corporation's then outstanding voting
securities;
b. a complete liquidation or
dissolution of the Company; or
c. the sale or other disposition of all
or substantially all of the assets of the Company to
any Person.
For purposes of determining whether a Change of Control Event
has occurred, the following additional definitions apply:
"Affiliate or Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
"Person," shall mean an individual, firm, corporation or other
entity or any successor to such entity, but "Person" shall not
include the Company, any subsidiary of the Company, any
employee benefit plan or employee stock plan (including a
trust relating thereto) of the Company or any subsidiary of
the Company, or any Person organized, appointed, established
or holding Voting Stock by, for or pursuant to the terms of
such a plan. "Person" shall also not include National Medical
Enterprises, Inc. ("NME"), any subsidiary of NME, any
Affiliate or Associate of NME, any employee benefit plan or
employee stock plan of NME or any subsidiary of NME to the
extent that such entities, individually or collectively, own
any or all of (x) 8,878,147 shares of the Company's common
stock (approximately 31% of the general voting power of the
Company as of December 6, 1994) registered in the name of NME
or any subsidiary of NME as of the date of this Agreement, or
(y) such additional number of shares of the Company's common
stock issued to NME or any subsidiary of NME in exchange for
shares of the Company's Series C Preferred Stock or Series D
Preferred Stock so long as such exchange has been approved in
advance by the Incumbent Board.
"Voting Stock" shall mean shares of the Company's capital
stock having general voting power, with "voting power" meaning
the power under ordinary circumstances (and not merely upon
the happening of a contingency) to vote in the election of
directors.
3
<PAGE> 4
2.6 DIRECTOR. A "Director" is any member of the Board of
Directors of The Hillhaven Corporation who is not an employee of the Company.
2.7 ELIGIBLE CHILDREN. "Eligible Children" means all natural or
adopted children of a Participant under the age of 21, including any child
conceived prior to the death of a Participant.
2.8 FINAL ANNUAL BOARD RETAINER. "Final Annual Board Retainer"
means the Annual Board Retainer being paid to a Director at the time of his or
her Termination of Service on the Board of Directors of The Hillhaven
Corporation.
2.9 NORMAL RETIREMENT AGE. "Normal Retirement Age" under this
Plan is age 65.
2.10 PARTICIPANT. "Participant" shall include any Director who is
not an employee of The Hillhaven Corporation who enters into an agreement to
participate in the Plan.
2.11 SERVICE. "Service" refers to service as a Director of The
Hillhaven Corporation.
2.12 SUBSIDIARY. A "Subsidiary" of the Company is any corporation,
partnership, venture or other entity in which the Company owns 50% of the
capital stock or otherwise has a controlling interest as determined by the
Committee, in its sole and absolute discretion.
2.13 SURVIVING SPOUSE. "Surviving Spouse" means the person legally
married to the Participant for at least a one year period prior to the
Commencement Date of Benefits hereunder.
2.14 TERMINATION OF SERVICE. "Termination of Service" means the
cessation of a Participant's service as a Director of The Hillhaven Corporation
for any reason whatsoever, whether voluntarily or involuntarily.
2.15 YEAR. A "Year" is a period of twelve consecutive calendar
months.
2.16 YEARS OF SERVICE. "Year of Service" means each complete Year
of Service as a Director of The Hillhaven Corporation. Years of Service shall
be deemed to have begun as of the first day of the calendar month of service
and to have ceased on the last day of the calendar month of service.
4
<PAGE> 5
SECTION 3
RETIREMENT BENEFITS
3.1 RETIREMENT BENEFIT.
(a) Upon the later of a Participant's Termination of
Service or attainment of Normal Retirement Age, The
Hillhaven Corporation agrees to pay to the
Participant an annual Retirement Benefit for ten
years in an amount equal to 100% of his or her Final
Annual Board Retainer, subject to the limitation of
Section 3.1(b) and the vesting of Section 3.2.
(b) The Retirement Benefit shall not exceed $24,000 (100%
of the Annual Board Retainer in 1993) increased by a
compounded rate of six percent per year from 1994 to
the year of the Participant's Termination of Service.
3.2 VESTING OF RETIREMENT BENEFIT. A Participant's interest in
his Retirement Benefit shall vest in accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED BENEFIT
<S> <C>
Less than 5 0%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
All Years of Service as a Director shall count towards vesting credit. Vested
Retirement Benefits are subject to offset pursuant to Section 5.6 and
forfeiture pursuant to Section 5.7.
3.3 SURVIVOR BENEFIT.
(a) If a Participant who is receiving a Retirement
Benefit dies, his or her Surviving Spouse or Eligible
Children shall be entitled to receive (in accordance
with Sections 3.4 and 3.5) the installments of the
5
<PAGE> 6
Participant's Retirement Benefit for the remainder of
the ten year period.
(b) If a Participant, who has a vested interest under
Section 3.2, dies while serving as a Director of The
Hillhaven Corporation, his or her Surviving Spouse or
Eligible Children shall be entitled at the
Participant's death to receive (in accordance with
Sections 3.4 and 3.5) the installments of the
Retirement Benefit which would have been payable to
the Participant in accordance with Section 3.1 for a
period of ten years. The limitation set forth in
Section 3.1(b) will be based upon the date of the
Participant's death.
(c) If a Participant, who has a vested interest under
Section 3.2, dies after Termination of Service but at
death is not receiving any Retirement Benefits under
this Plan, his or her Surviving Spouse or Eligible
Children shall be entitled at the Participant's death
to receive (in accordance with Sections 3.4 and 3.5)
the installments of the Retirement Benefit which
would have been payable to the Participant in
accordance with Section 3.1 for a period of ten
years.
3.4 FORM AND DURATION OF BENEFIT PAYMENT. Retirement Benefits
shall be paid in equal monthly installments over a period of ten years.
Surviving Spouse payments shall be paid in equal monthly installments
over the remainder of the ten year period.
Eligible Children benefit payments shall be paid monthly over the
remainder of the ten year period, but not beyond the date when the youngest of
the Eligible Children reaches age 21.
3.5 RECIPIENTS OF BENEFIT PAYMENTS. If a Participant dies without
a Surviving Spouse but is survived by any Eligible Children, then benefits will
be paid to the Eligible Children or their legal guardian, if applicable. The
total monthly benefit payment will be equal to the monthly benefit that a
Surviving Spouse would have received, which will be paid in equal shares to
each of the Eligible Children for the remainder of the ten year period or until
the youngest of the Eligible Children attains age 21, whichever comes first.
When any of the Eligible Children reaches age 21, his or her share will be
reallocated equally to the remaining Eligible Children.
If the Surviving Spouse dies after the death of the Participant but is
survived by Eligible Children, the total monthly benefit previously paid to the
Surviving Spouse will be paid in equal shares to each of the Eligible Children
for the remainder of the ten year period or until the youngest of the Eligible
Children attains age 21, whichever comes first.
6
<PAGE> 7
When any of the Eligible Children reaches age 21, his or her share will be
reallocated equally to the remaining Eligible Children.
3.6 CHANGE OF CONTROL. In the event of a Change of Control Event
of The Hillhaven Corporation while this Plan remains in effect which results in
a Participant's Termination of Service as a Director of The Hillhaven
Corporation or a Participant's failure to be reelected as a Director of The
Hillhaven Corporation when his or her term of office expires, (i) the
Participant's Retirement Benefit hereunder will be fully vested in the
Participant without regard to his or her Years of Service with The Hillhaven
Corporation, and (ii) notwithstanding any other provisions of this Plan, the
Participant will be entitled to receive the full Normal Retirement Benefit
commencing at age 65. Notwithstanding the foregoing, Vested Retirement
Benefits are subject to offset pursuant to Section 5.6 and forfeiture pursuant
to the provisions of Section 5.7.
SECTION 4
PAYMENT
4.1 COMMENCEMENT OF PAYMENTS. Payments under this Plan shall
begin not later than the first day of the calendar month following the
occurrence of an event which entitles a Participant (or his or her Surviving
Spouse or Eligible Children) to payments under this Plan.
4.2 WITHHOLDING; EMPLOYMENT TAXES. To the extent required by the
law in effect at the time payments are made, The Hillhaven Corporation shall
report all payments hereunder and shall withhold therefrom any taxes required
to be withheld by the Federal or any state or local government.
4.3 RECIPIENTS OF PAYMENTS. All payments to be made by The
Hillhaven Corporation under this Plan shall be made to the Participant during
his or her lifetime. All subsequent payments under the Plan shall be made by
The Hillhaven Corporation to the Participant's Surviving Spouse, Eligible
Children or their guardian, if applicable.
SECTION 5
CONDITIONS RELATED TO BENEFITS
5.1 ADMINISTRATION OF PLAN. The Committee has been authorized to
administer the Plan and to interpret, construe and apply its provisions in
accordance with its terms. The Committee shall administer the Plan and shall
establish, adopt or revise such rules and regulations as it may deem necessary
or advisable for the administration of the Plan. All decisions of the
Committee shall be by vote or written consent of the majority of its members
and shall be final and binding.
7
<PAGE> 8
5.2 NO RIGHTS TO ASSETS. Neither a Participant nor any other
person shall acquire by reason of the plan any right in or title to any assets,
fund or property of The Hillhaven Corporation and its subsidiaries whatsoever
including, without limiting the generality of the foregoing, any specific funds
or assets which The Hillhaven Corporation, in its sole discretion, may set
aside in anticipation of a liability hereunder. No trust shall be created in
accordance with or by the execution or adoption of this Plan or any Agreement
with a Participant, and any benefits which become payable hereunder shall be
paid from the general assets of The Hillhaven Corporation. A Participant shall
have only an unsecured contractual right to the amounts, if any, payable
hereunder.
5.3 NO TENURE RIGHTS. Nothing herein shall constitute a contract
of continuing service or in any manner obligate The Hillhaven Corporation to
continue the Service of a Director, or obligate a Director to continue in the
Service of The Hillhaven Corporation, and nothing herein shall be construed as
fixing or regulating the compensation paid to a Director.
5.4 RIGHT TO TERMINATE OR AMEND. Except during any two year
period after any Change of Control Event of The Hillhaven Corporation, The
Hillhaven Corporation reserves the sole right to terminate the Plan at any time
and to terminate an Agreement with any Participant at any time. In the event
of termination of the Plan or of a Participant's Agreement, a Participant shall
be entitled only to the vested portion of his or her accrued benefits under
Section 3 of the Plan as of the time of the termination of the Plan or his or
her Agreement.
Benefits will be paid in the amounts specified and will commence at
the time specified in Section 3 as appropriate. The Hillhaven Corporation
further reserves the right in its sole discretion to amend the Plan in any
respect except that Plan benefits cannot be reduced during any two year period
after any Change of Control Event of The Hillhaven Corporation. No amendment
of the Plan (whether there has or has not been a Change of Control Event of The
Hillhaven Corporation) that reduced the value of the benefit theretofore
accrued and vested by the Participant shall be effective.
5.5 ELIGIBILITY. Eligibility to participate in the Plan is
expressly conditional upon a Director's furnishing The Hillhaven Corporation
certain information and taking physical examinations and such other relevant
action as may be reasonably requested by The Hillhaven Corporation. Any
Participant who refuses to provide such information or to take such action
shall not be enrolled as or shall thereupon cease to be a Participant under the
Plan. Any Participant who commits suicide during the two year period beginning
on the date of his or her Agreement, or who makes any material misstatement of
information or non-disclosure of medical history, will not receive any benefits
hereunder unless, in the sole discretion of the Committee, benefits in a
reduced amount are awarded.
8
<PAGE> 9
5.6 OFFSET. If at the time payments or installments are to be
made hereunder, any Participant or his or her Surviving Spouse or both are
indebted to The Hillhaven Corporation or its Subsidiaries, then the payments
remaining to be made to the Participant or his or her Surviving Spouse or both
may, at the discretion of the Committee, be reduced by the amount of such
indebtedness; provided, however, that an election by the Committee not to
reduce any such payment or payments shall not constitute a waiver of any claim
for such indebtedness.
5.7 CONDITIONS PRECEDENT. No Retirement Benefits will be payable
hereunder to any Participant (i) whose Service with The Hillhaven Corporation
is terminated because of willful misconduct or gross negligence in the
performance of his or her duties or (ii) who within three years after
Termination of Service becomes an employee, director or consultant to any third
party engaged in any line of business in competition with the Company that
accounts for more than ten percent of the gross revenues of the Company taken
as a whole.
SECTION 6
MISCELLANEOUS
6.1 NONASSIGNABILITY. Neither a Participant nor any other person
shall have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate or convey in advance of
actual receipt the amounts, if any, payable hereunder, or any part thereof,
which are, and all rights to which are, expressly declared to be unassignable
and non-transferrable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure, or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant or any other
person, nor be transferrable by operation of law in the event of a
Participant's or any person's bankruptcy or insolvency.
6.2 GENDER AND NUMBER. Wherever appropriate herein, the
masculine may mean the feminine and the singular may mean the plural or vise
versa.
6.3 NOTICE. Any notice required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, to the principal office of The
Hillhaven Corporation, directed to the attention of the Secretary of the
Committee. Such notice shall be deemed given as of the date of delivery or, if
it is made by mail, as of the date shown on the postmark or on the receipt for
registration or certification.
6.4 VALIDITY. In the event any provision of this Plan is held
invalid, void or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Plan.
9
<PAGE> 10
6.5 APPLICABLE LAW. This Plan shall be governed and construed in
accordance with the laws of the State of Washington.
6.6 SUCCESSORS IN INTEREST. This Plan shall inure to the benefit
of, and be binding upon, and be enforceable by, any corporate successor to The
Hillhaven Corporation or successor to substantially all of the assets of The
Hillhaven Corporation.
6.7 NO REPRESENTATION ON TAX MATTERS. The Hillhaven Corporation
makes no representation to Participants regarding current or future income tax
ramifications of the Plan.
DATED this _____ day of February, 1995.
THE HILLHAVEN CORPORATION
By ________________________________
Its ____________________________
10
<PAGE> 11
EXHIBIT A
THE HILLHAVEN CORPORATION
BOARD OF DIRECTORS RETIREMENT PLAN AGREEMENT
THIS AGREEMENT is made and entered into at Tacoma, Washington, as of
______________, 199___, by and between The Hillhaven Corporation (the
"Company") and _____________________________________________("Director").
WHEREAS, THE HILLHAVEN CORPORATION has adopted a Board of Directors
Retirement Plan (as amended or restated from time to time, the "Plan");
and
WHEREAS, since the Director presently serves as a member of the Board
of Directors of the Company and is not an employee of the Company, the
Director is eligible to participate in the Plan; and
WHEREAS, the Plan requires that an agreement be entered into between
the Company and Director setting out certain terms and benefits of the
Plan as they apply to the Director;
NOW, THEREFORE, the Company and the Director hereby agree as follows:
1. The Plan, a copy of which is attached, is hereby incorporated
into and made a part of this Agreement as though set forth in
full herein. The parties shall be bound by, and have the
benefit of, each and every provision of the Plan, including but
not limited to the non-assignability provisions of Section 6.1
of the Plan.
2. The Director was born on ______________, 19___, and his or her
present service as a member of the Board of Directors of the
Company began on _______________, 19___.
3. This Agreement shall inure to the benefit of, and be binding
upon, the Company, its successors and assigns, and the Director
and his or her surviving Spouse and Eligible Children.
IT WITNESS WHEREOF, the parties hereto have signed and entered into
this Agreement as of he date first above written.
THE HILLHAVEN CORPORATION
By: _________________________________
Its: ________________________________
_____________________________________
Director
<PAGE> 1
EXHIBIT 10.18
THE HILLHAVEN CORPORATION
ANNUAL INCENTIVE PLAN
Adopted December 28, 1989
Amended as of December 6, 1994
1. Purposes. The purpose of the Annual Incentive Plan (the
"Plan") of The Hillhaven Corporation (the "Company") is to promote the
interests of the Company and its stockholders by basing a portion of selected
employees' compensation on the performance of such employee, his or her
Operating Unit and the Company.
2. Definitions.
a. "Fair Return to Stockholders" shall be determined
with reference to inflation, financial leverage of the Company and such other
factors as may have a bearing on the return on a stockholder's investment
taking into account the overall performance of the Company as measured against
the business plans approved by the Board of Directors of the Company.
b. "Operating Unit" means any division, subsidiary or
other functional unit within the Company which is designated by the Committee
to constitute an Operating Unit.
c. "Performance Goals" are the annual performance
objectives established by the Committee for the Company, Operating Unit, or an
employee for the purpose of determining whether, and the extent to which,
awards under the Plan will be made for that Year.
d. "Year" means the Company's fiscal year.
3. Administration. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Company's Board of Directors
(the "Board"). The Committee shall have the discretion to (a) determine the
Plan participants; (b) determine Performance Goals at the beginning of each
Year; (c) determine whether the Performance Goals have been met; (d) determine
what constitutes a Fair Return to Stockholders; (e) determine the total amount
of funds available for distribution as bonuses at the end of a Year; and (f)
determine the award, if any, to each participant each year. Subject to the
provisions of the Plan, the Committee shall be authorized to interpret the
Plan, to make,
<PAGE> 2
amend and rescind such rules as it deems necessary for the proper
administration of the Plan, to make all other determinations necessary or
advisable for the administration of the Plan and to correct any defect or
supply any omission or reconcile any inconsistency in the Plan in the manner
and to the extent the Committee deems desirable to carry the Plan into effect.
Any change in the Fair Return to Stockholders shall be approved by the Board.
Any action taken or determination made by the Committee shall be conclusive on
all parties.
4. Eligible Persons. Any key employee of the Company that the
Committee determines, in its discretion, will be responsible for producing
profits of the Company or otherwise have a significant effect on the operations
of the Company shall be eligible to participate in the Plan. Committee members
are not eligible to participate in the Plan. No employee shall have a right to
be selected under the Plan.
5. Amount Available for Awards. The amount of Company profits
available for awards under the Plan in any Year shall be determined by the
Committee.
6. Determination of Awards. The Committee shall select the Plan
participants prior to each Year. The Committee shall determine the award to
each participant for each Year, taking into consideration, as it deems
appropriate, the performance for the Year of the Company or an Operating Unit,
as the case may be, in relation to the Performance Goals theretofore
established by the Committee, and the performance of the respective
participants during such Year. The fact that an employee is selected as a
participant for any Year shall not mean such employee will necessarily receive
an award for that Year under the Plan.
7. Distribution of Awards. Awards under the Plan for a
particular Year shall be paid in cash after the end of that Year.
8. Change in Control. In the event of a Change in Control Event,
the Committee may, in its sole discretion, determine that all or any portion of
conditions associated with any award under the Plan have been met. A Change of
Control Event shall be deemed to occur if any of the following events has
occurred:
a. A Person, alone or together with its Affiliates and
Associates, or "group", within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, becomes, after the date hereof, the beneficial
owner of 20% or more of the general voting power of the Company.
Notwithstanding the preceding sentence, a Change of Control Event shall not be
deemed to occur if the "Person" described in the preceding sentence has
2
<PAGE> 3
acquired 20% or more of the general voting power of the Company as
consideration in a transaction or series of related transactions involving the
Company's acquisition (by stock acquisition, merger, asset purchase or
otherwise) of one or more businesses approved prior to such transactions or
series of transactions by the Incumbent Board (as defined in (ii) below), and
provided that, if such transaction or series of transactions results in the
merger, consolidation or reorganization of the Company and such Person, the
Company is the surviving entity following such merger, consolidation or
reorganization.
b. Individuals who, as of the date hereof, constitute
the Board (the "Incumbent Board"), cease for any reason to constitute at least
a majority of the Board, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Securities Exchange Act of 1934) shall be considered
as though such person were a member of the Incumbent Board.
c. Consummation or effectiveness of:
(1) a merger, consolidation or reorganization involving
the Company (a "Business Combination"), unless
(a) the stockholders of the Company, immediately
before the Business Combination, own, directly or indirectly
immediately following the Business Combination, at least
fifty-one percent (51%) of the combined voting power of the
outstanding voting securities of the corporation resulting
from the Business Combination (the "Surviving Corporation") in
substantially the same proportion as their ownership of the
voting securities immediately and before the Business
Combination, and
(b) the individuals who were members of the
Incumbent Board immediately prior to the execution of the
agreement providing for the Business Combination constitute at
least a majority of the members of the Board of Directors of
the Surviving Corporation, and
3
<PAGE> 4
(c) no Person (other than any Person who,
immediately prior to the Business Combination, had beneficial
ownership of twenty percent (20%) or more of the then
outstanding Voting Securities) has Beneficial Ownership of
twenty percent (20%) or more of the combined voting power of
the Surviving Corporation's then outstanding voting
securities;
(2) a complete liquidation or dissolution of the Company;
or
(3) the sale or other disposition of all or substantially
all of the assets of the Company to any Person.
For purposes of determining whether a Change of Control Event has
occurred, the following additional definitions apply:
"Affiliate or Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
"Person," means an individual, firm, corporation or other
entity or any successor to such entity, but "Person" shall not
include the Company, any subsidiary of the Company, any
employee benefit plan or employee stock plan (including a
trust relating thereto) of the Company or any subsidiary of
the Company, or any Person organized, appointed, established
or holding Voting Stock by, for or pursuant to the terms of
such a plan. "Person" shall also not include National Medical
Enterprises, Inc. ("NME"), any subsidiary of NME, any
Affiliate or Associate of NME, any employee benefit plan or
employee stock plan of NME or any subsidiary of NME to the
extent that such entities, individually or collectively, own
any or all of (x) 8,878,147 shares of the Company's common
stock (approximately 31% of the general voting power of the
Company as of December 6, 1994) registered in the name of NME
or any subsidiary of NME as of the date of this Agreement, or
(y) such additional number of shares of the Company's common
stock issued to NME or any subsidiary of NME in exchange for
shares of the Company's Series C Preferred Stock or Series D
Preferred Stock so long as such exchange has been approved in
advance by the Incumbent Board.
4
<PAGE> 5
"Voting Stock" means shares of the Company's capital stock
having general voting power, with "voting power" meaning the
power under ordinary circumstances (and not merely upon the
happening of a contingency) to vote in the election of
directors.
9. Termination of Employment. A participant must be actively
employed at the end of a Year in order to be entitled to payment of the full
amount of any award for that Year. In the event active employment of a
participant shall be terminated before the end of a Year for any reason other
than discharge for cause or voluntary resignation, such participant shall
receive such portion of his or her award for the Year as may be determined by
the Committee. A participant discharged for cause or who voluntarily resigns
shall not be entitled to receive any award for the Year, unless otherwise
determined by the Committee. For purposes of this Plan the term "discharge for
cause" shall mean any discharge for violation of the policies and procedures of
the Company or for other job performance or conduct which, as determined by the
Committee, is detrimental to the best interests of the Company.
10. No Guarantee of Employment. Participation in the Plan shall
not constitute an assurance of continued employment for any period.
11. Governing Law. The Plan and all actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Washington.
12. Effective Date. The Plan effective date is January 31, 1990.
THE HILLHAVEN CORPORATION
By ________________________________
Its ____________________________
5
<PAGE> 1
EXHIBIT 10.20
THE HILLHAVEN CORPORATION
DEFERRED COMPENSATION PLAN
(AMENDED AND RESTATED, EFFECTIVE OCTOBER 1, 1994)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 SELECTION, ENROLLMENT, ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Selection by Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Enrollment Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Eligibility; Commencement of Participation . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 3 DEFERRAL COMMITMENTS/INTEREST CREDITING . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1 Minimum and Maximum Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Company Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3 Election to Defer; Effect of Election Form . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Withholding of Deferral Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.5 Interest Crediting Prior to Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.6 Installment Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.7 FICA and Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 4 SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL
EMERGENCIES; WITHDRAWAL ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Short-Term Payout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies . . . . . . . . . . 12
4.3 Withdrawal Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 5 RETIREMENT BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.1 Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 Payment of Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Death Prior to Completion of Retirement Benefits . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Pre-Retirement Survivor Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Payment of Pre-Retirement Survivor Benefits . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 7 TERMINATION BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Termination Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Payment of Termination Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 8 DISABILITY WAIVER AND BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.1 Disability Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.2 Disability Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 9 BENEFICIARY DESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.1 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.2 Beneficiary Designation; Change; Spousal Consent . . . . . . . . . . . . . . . . . . . . . 16
9.3 Acknowledgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.4 No Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.5 Doubt as to Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.6 Discharge of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 10 LEAVE OF ABSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1 Paid Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 Unpaid Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.3 Effect of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 12 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.1 Committee Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.2 Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.3 Binding Effect of Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.4 Indemnity of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.5 Employer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 13 OTHER BENEFITS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 14 CLAIMS PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
14.1 Presentation of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
14.2 Notification of Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
14.3 Review of a Denied Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
14.4 Decision on Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
14.5 Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 15 TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.1 Establishment of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.2 Interrelationship of the Plan and the Trust . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 16 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.1 Unsecured General Creditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.2 Employer's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.3 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.4 Not a Contract of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
16.5 Furnishing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.6 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.7 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.9 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.10 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16.11 Spouse's Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16.12 Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16.13 Court Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16.14 Distribution in the Event of Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16.15 Legal Fees to Enforce Rights After a Change of Control Event . . . . . . . . . . . . . . . 24
16.16 Taxes and Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16.17 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
iii
<PAGE> 5
THE HILLHAVEN CORPORATION
DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED, EFFECTIVE OCTOBER 1, 1994
PURPOSE
The purpose of this Plan is to provide specified benefits to a select
group of management or highly compensated Employees who contribute materially
to the continued growth, development and future business success of The
Hillhaven Corporation, a Nevada corporation, and its subsidiaries, if any, that
sponsor this Plan. This Plan shall be unfunded for tax purposes and for
purposes of Title I of ERISA.
This Plan represents a combination and continuation of The Hillhaven
Corporation Deferred Compensation Master Plan, Third Restatement and The
Hillhaven Corporation Senior Management Deferred Compensation Plan (either a
"Predecessor Plan"). All amounts previously deferred under and account
balances maintained under either of such plans shall, as of October 1, 1994,
become subject to the terms and conditions of The Hillhaven Corporation
Deferred Compensation Plan as set forth herein, and as this instrument may be
amended from time to time.
Notwithstanding the foregoing sentence, any Participant in pay status
shall receive payment of his or her deferred compensation pursuant to the terms
of the Predecessor Plan and any short-term payout election made pursuant to the
Predecessor Plan shall be paid out pursuant to the election made thereunder.
ARTICLE 1.
DEFINITIONS
For purposes hereof, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "Account Balance" shall mean with respect to a Participant the sum of
(i) his or her Deferral Amount, plus (ii) his or her company
contributions, contributed under Section 3.2 hereof plus (iii)
interest credited in accordance with all the applicable interest
crediting provisions of this Plan, less (iv) all distributions. This
account shall be a bookkeeping entry only and shall be utilized solely
as a device for the measurement and determination of the amounts to be
paid to a Participant pursuant to this Plan.
1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual
Salary, paid annually to a Participant as an Employee under any
Employer's annual bonus plan or plans.
<PAGE> 6
1.3 "Annual Deferral Amount" shall mean that portion of a Participant's
Base Annual Salary and/or Annual Bonus to be paid during a Plan Year
that a Participant elects to have and is deferred in accordance with
Article 3, for any one Plan Year. In the event of a Participant's
Retirement, Disability (if deferrals cease in accordance with Section
8.1), death or a Termination of Employment prior to the end of a Plan
Year, such year's Annual Deferral Amount shall be the actual amount
deferred and withheld prior to such event.
1.4 "Base Annual Salary" shall mean the annual compensation, including
commissions, overtime, and incentive payments (other than amounts
considered part of the Annual Bonus), but excluding severance pay,
compensation received as a result of deferral, any equity-based
compensation and fringe benefits (including but not limited to
relocation expenses, non-monetary awards, directors fees and other
fees, automobile, educational, uniform, professional dues, and
employee expense allowances), paid to a Participant for employment
services rendered to any Employer before reduction for compensation
deferred pursuant to all qualified, non-qualified and Code Section 125
plans of any Employer. Notwithstanding the foregoing, the Company may
elect to permit directors fees to be included in the definition of
Base Annual Salary by written notice to affected Participants.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled
to receive benefits under this Plan upon the death of a Participant.
1.6 "Beneficiary Designation Form" shall mean the form established from
time to time by the Committee that a Participant completes, signs and
returns to the Committee to designate one or more Beneficiaries.
1.7 "Board" shall mean the board of directors of the Company.
1.8 A "Change of Control Event" shall be deemed to occur if any of the
following events has occurred:
(i) A Person, alone or together with its
Affiliates and Associates, or "group", within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes, after the date hereof, the beneficial owner of 20% or
more of the general voting power of the Company.
Notwithstanding the preceding sentence, a Change of Control
Event shall not be deemed to occur if the "Person" described
in the preceding sentence has acquired 20% or more of the
general voting power of the Company as consideration in a
transaction or series of related transactions involving the
Company's acquisition (by stock acquisition, merger, asset
purchase or otherwise) of one or more businesses approved
prior to such transactions or series of transactions by the
Incumbent
2
<PAGE> 7
Board (as defined in (ii) below), and provided that, if such
transaction or series of transactions results in the merger,
consolidation or reorganization of the Company and such
Person, the Company is the surviving entity following such
merger, consolidation or reorganization.
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board"), cease for any
reason to constitute at least a majority of the Board,
provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
(other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual
or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Securities
Exchange Act of 1934) shall be considered as though such
person were a member of the Incumbent Board.
(iii) Consummation or effectiveness of:
a. a merger, consolidation or reorganization
involving the Company (a "Business Combination"),
unless
1. the stockholders of the
Company, immediately before the Business
Combination, own, directly or indirectly
immediately following the Business
Combination, at least fifty-one percent (51%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from the Business
Combination (the "Surviving Corporation") in
substantially the same proportion as their
ownership of the voting securities
immediately and before the Business
Combination, and
2. the individuals who were
members of the Incumbent Board immediately
prior to the execution of the agreement
providing for the Business Combination
constitute at least a majority of the members
of the Board of Directors of the Surviving
Corporation, and
3. no Person (other than any
Person who, immediately prior to the Business
Combination, had beneficial ownership of
twenty percent (20%) or more of the then
outstanding Voting Securities) has Beneficial
Ownership of twenty percent (20%) or more of
the combined voting power of the Surviving
Corporation's then outstanding voting
securities;
3
<PAGE> 8
b. a complete liquidation or dissolution of
the Company; or
c. the sale or other disposition of all or
substantially all of the assets of the Company to any Person.
For purposes of determining whether a Change of Control Event
has occurred, the following additional definitions apply:
"Affiliate or Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
"Person," means an individual, firm, corporation or other
entity or any successor to such entity, but "Person" shall not
include the Company, any subsidiary of the Company, any
employee benefit plan or employee stock plan (including a
trust relating thereto) of the Company or any subsidiary of
the Company, or any Person organized, appointed, established
or holding Voting Stock by, for or pursuant to the terms of
such a plan. "Person" shall also not include National Medical
Enterprises, Inc. ("NME"), any subsidiary of NME, any
Affiliate or Associate of NME, any employee benefit plan or
employee stock plan of NME or any subsidiary of NME to the
extent that such entities, individually or collectively, own
any or all of (x) 8,878,147 shares of the Company's common
stock (approximately 31% of the general voting power of the
Company as of December 6, 1994) registered in the name of NME
or any subsidiary of NME as of the date of this Agreement, or
(y) such additional number of shares of the Company's common
stock issued to NME or any subsidiary of NME in exchange for
shares of the Company's Series C Preferred Stock or Series D
Preferred Stock so long as such exchange has been approved in
advance by the Incumbent Board.
"Voting Stock" means shares of the Company's capital stock
having general voting power, with "voting power" meaning the
power under ordinary circumstances (and not merely upon the
happening of a contingency) to vote in the election of
directors.
1.9 "Claimant" shall have the meaning set forth in Section 14.1.
1.10 "Code" shall mean the Internal Revenue Code of 1986, as may be amended
from time to time.
1.11 "Committee" shall mean the committee described in Article 12.
1.12 "Company" shall mean The Hillhaven Corporation, a Nevada corporation.
4
<PAGE> 9
1.13 "Crediting Rate" shall mean, starting October 1, 1994 and for each
Plan Year starting thereafter, an interest rate determined and
announced by the Committee before the Plan Year for which it is to be
used that is equal to 110% of the Moody's Rate. The Moody's Rate for
a Plan Year shall be an interest rate that (i) is published in Moody's
Bond Record under the heading of "Moody's Corporate Bond Yield
Averages -- Av. Corp," and (ii) is equal to the average corporate bond
yield published for the month which precedes the enrollment date for
the Plan Year for which the rate is to be used. The Crediting Rate
for the last quarter of 1994 shall equal 9.46%.
1.14 "Deferral Amount" shall mean the sum of all of a Participant's Annual
Deferral Amounts.
1.15 "Deduction Limitation" shall mean the following described limitation
on the annual benefit that may be distributed pursuant to the
provisions of this Plan. The limitation shall be applied to
distributions under this Plan as set forth in this Plan. If the
Company determines in good faith prior to a Change of Control Event
that there is a reasonable likelihood that any compensation paid to a
Participant for a taxable year of the Company would not be deductible
by the Company solely by reason of the limitation under Code Section
162(m), then to the extent deemed necessary by the Company to ensure
that the entire amount of any distribution to the Participant pursuant
to this Plan prior to the Change of Control Event is deductible, the
Company may defer all or any portion of the distribution. Any amounts
deferred pursuant to this limitation shall continue to be credited
with interest in accordance with Section 3.5 below. The amounts so
deferred and interest thereon shall be distributed to the Participant
or his or her Beneficiary (in the event of the Participant's death)
at the earliest possible date, as determined by the Company in good
faith, on which the deductibility of compensation paid or payable to
the Participant for the taxable year of the Company during which the
distribution is made will not be limited by Section 162(m), or if
earlier, the effective date of a Change of Control Event.
1.16 "Disability" shall mean a period of disability during which a
Participant qualifies for benefits under the Participant's Employer's
long-term disability plan.
1.17 "Disability Benefit" shall mean the benefit set forth in Article 8.
1.18 "Election Form" shall mean the form established from time to time by
the Committee that a Participant completes, signs and returns to the
Committee to make an election under the Plan.
1.19 "Employee" shall mean a person who is an employee of any Employer.
1.20 "Employer(s)" shall mean the (i) the Company, (ii) its wholly-owned
subsidiaries, (iii) partnerships in which the Company or a wholly-
owned subsidiary owns in excess of
5
<PAGE> 10
50% and (iv) any Employer that has entered into a contract with the
Company or a subsidiary for the receipt of management services at one
or more facilities owned by such Employer if the Employer has been
selected by the Committee to participate in the Plan. Obligations of
each Employer hereunder shall be separate except where The Hillhaven
Corporation has by specific action of its Board of Directors or other
written agreement executed by a duly authorized officer agreed that it
and/or its wholly-owned subsidiaries will undertake joint and several
liability.
1.21 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as may be amended from time to time.
1.22 "Participant" shall mean any Employee who was a Participant in either
of the Predecessor Plans before October 1, 1994 and still has an
Account Balance maintained hereunder or an Employee (i) who is
selected to participate in the Plan, (ii) who elects to participate in
the Plan, (iii) who signs a Plan Agreement, an Election Form and a
Beneficiary Designation Form, (iv) whose signed Plan Agreement,
Election Form and Beneficiary Designation Form are accepted by the
Committee, (v) who commences participation in the Plan, and (vi) a)
whose Plan Agreement has not terminated. By addendum to this Plan,
the Board or the Committee may permit directors of any of the
Employers to become Participants hereunder regardless of whether they
are Employees.
1.23 "Plan" shall mean the Company's Deferred Compensation Plan, which
shall be evidenced by this instrument and, with respect to each
Participant, by his or her one or more Plan Agreements, as may be
amended from time to time.
1.24 "Plan Agreement" shall mean a written agreement, as may be amended
from time to time, which is entered into by and between the Company
and a Participant. A Participant may be required to enter into more
than one Agreement depending on the entity employing him or her any
time and the manner in which the Company and another Employer have
agreed to allocate and assume responsibility for liabilities accrued
hereunder.
1.25 "Years of Plan Participation" shall mean the total number of full Plan
Years a Participant has been a Participant in the Plan. For purposes
of a Participant's first Plan Year of participation only, any partial
Plan Year of participation shall be treated as a full Plan Year.
1.26 "Plan Year" shall be the calendar year.
1.27 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in
Article 6.
6
<PAGE> 11
1.28 "Retirement", "Retires" or "Retired" shall mean, with respect to an
Employee, severance from employment from all Employers for any reason
other than a leave of absence, death or Disability on or after the
attainment of age 60.
1.29 "Retirement Benefit" shall mean the benefit set forth in Article 5.
1.30 "Short-Term Payout" shall mean the payout set forth in Section 4.1.
1.31 "Termination Benefit" shall mean the benefit set forth in Article 7.
1.32 "Termination of Employment" shall mean the ceasing of employment with
all Employers voluntarily or involuntarily, for any reason other than
death.
1.33 "Trust" shall mean the grantor, or "rabbi" trust, within the meaning
of Code Section 671, known as The Hillhaven Corporation Master
Executive Deferred Compensation Trust established pursuant to The
Hillhaven Corporation Master Trust Agreement for Executive Deferral
Plans, dated as of October 1, 1994, between the Company and the
trustee named therein, as amended from time to time.
1.34 "Unforeseeable Financial Emergency" shall mean an unanticipated
emergency that is caused by an event beyond the control of the
Participant that would result in severe financial hardship to the
Participant resulting from (i) a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant, (ii) a
loss of the Participant's property due to casualty, or (iii) such
other extraordinary and unforeseeable circumstances arising as a
result of events beyond the control of the Participant, all as
determined in the sole discretion of the Committee.
1.35 "Years of Service" shall mean the total number of full 12 month
periods of service in which a Participant has been employed by one or
more Employers. Any partial year of employment or service shall not
be counted. Except as may be determined by the Committee, service
with an entity prior to its becoming an Employer or a unit thereof
shall not be taken into account.
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
2.1 Selection by Committee. Participation in the Plan shall be limited to
a select group of management or highly compensated Employees. From
that group, the Committee shall select, in its sole discretion,
Employees to participate in the Plan.
2.2 Enrollment Requirements. Individuals participating in either
Predecessor Plan as of October 1, 1994 need not complete any initial
enrollment materials except as may be necessary to defer compensation
in Plan Years starting on or after January 1, 1995.
7
<PAGE> 12
Individuals initially selected to participate in this Plan after
October 1, 1994 may commence participation as soon as they complete,
execute and return to the Committee a Plan Agreement, Election Form
and Beneficiary Designation Form, provided such documents are returned
within 30 days of selection. In addition, the Committee shall
establish from time to time such other enrollment requirements as it
determines, in its sole discretion, are necessary.
2.3 Eligibility; Commencement of Participation. In the case of Employees
selected for participation in this Plan after October 1, 1994,
participation in this Plan shall commence on the first day of the
month following the month in which the Employee completes all
enrollment requirements. If an Employee fails to meet in a timely
fashion all such requirements that he or she shall not be eligible
toparticipate in the Plan until the first day of the Plan Year
following the delivery to and acceptance by the Committee of the
required documents.
ARTICLE III.
DEFERRAL COMMITMENTS/INTEREST CREDITING
3.1 Minimum and Maximum Deferral.
(a) Minimum. For each Plan Year, a Participant may elect to defer
Base Annual Salary and/or Annual Bonus that would otherwise be
received during a Plan Year in the following minimum and
maximum amounts for each type of deferral elected.
<TABLE>
<CAPTION>
Minimum Maximum
Deferral Amount Amount
-------- ------- -------
<S> <C> <C>
Base Annual Salary 1% 100%
Annual Bonus 1% 100%
</TABLE>
If no election is made, the amount deferred for each type of
compensation shall be zero. All amounts deferred under this
Section 3.1(a) shall at all times be fully vested and
nonforfeitable.
(b) Short Plan Year. If a Participant first becomes a Participant
after the first day of a Plan Year, or in the case of the
first Plan Year of the Plan itself, the minimum Base Annual
Salary deferral shall be an amount equal to the minimum set
forth above, multiplied by a fraction, the numerator of which
is the number of complete months remaining in the Plan Year
and the denominator of which is 12.
8
<PAGE> 13
3.2 Company Contribution.
(a) Subject to amendment or termination of the Plan and applicable
limitations herein, as of the last day of each pay period,
each Employer shall credit to the account of each Participant
in its employ as of the last day of such period an amount
equal to a percentage of the Participant's Annual Deferral
Amount for the period, not in excess of the first 4% of the
Participant's Base Annual Salary and Annual Bonus received
during such period based on the Participant's Years of Service
as of the last day of the pay period, as follows:
<TABLE>
<CAPTION>
Years of Service Percentage of Compensation
---------------- --------------------------
(up to first 4%)
<S> <C>
Less than 1 25%
At least 1 but less than 2 50%
At least 2 but less than 3 75%
3 or more 100%
</TABLE>
(b) A Participant shall be vested in amounts attributable to
Employer contributions (and earnings) credited to his or her
Account Balance, as follows:
<TABLE>
<CAPTION>
Years of Service Percentage Vested
---------------- -----------------
<S> <C>
Less than 3 0%
3 30%
4 40%
5 60%
6 80%
7 or more 100%
</TABLE>
Notwithstanding the foregoing, a Participant shall become
fully vested in Employer contributions and earnings credited
to his or her Account Balance if and when the Participant,
while employed by an Employer, attains age 60, dies or incurs
a Disability, or upon the occurrence of a Change of Control
Event.
(c) Notwithstanding any other provision of this Plan including
Section 3.2(b), the Committee shall have the right in its sole
discretion to cause any or all of the Employer contributions
credited to an Account Balance, including earnings, to be
forfeited if the Committee at any time determines that:
(i) The Participant has consciously and
intentionally divulged Employer confidential information to
the competitors of the Employer which is clearly and
9
<PAGE> 14
unequivocally detrimental to the Employer, and such action has
been fully and completely documented under oath;
(ii) The Participant has engaged in criminal conduct
which is clearly and unequivocally detrimental to the
Employer, and such conduct has been fully and completely
documented under oath; or
(iii) Within the two years immediately following his
or her Termination of Employment date, the Participant engages
in any capacity in a business, other than National Medical
Enterprises or one of its subsidiaries, that is in
substantial, direct competition with the business of, and in
the geographical areas served by, any of the operating units,
including the corporate office of the Company for which the
Employee worked during the 3 years immediately preceding his
or her Termination of Employment date.
3.3 Election to Defer; Effect of Election Form. In connection with a
Participant's commencement of participation in the Plan, the
Participant shall make a deferral election by delivering to the
Committee a completed and signed Election Form, which election and
form must be accepted by the Committee for valid election to exist.
For each succeeding Plan Year, a new Election Form must be delivered
to the Committee, in accordance with its rules and procedures, before
the end of the Plan Year preceding the Plan Year for which the
election is made. If no Election Form is timely delivered for a Plan
Year, no Annual Deferral Amount shall be withheld for that Plan Year.
3.4 Withholding of Deferral Amounts. For each Plan Year, the Base Annual
Salary portion of the Annual Deferral Amount shall be withheld each
payroll period in accordance with the Participant's election as a
percentage of Base Annual Salary. The Annual Bonus portion of the
Annual Deferral Amount shall be withheld at the time the Annual Bonus
is or otherwise would be paid to the Participant.
3.5 Interest Crediting Prior to Distribution. Prior to any distribution
of benefits under Articles 4, 5, 6, 7 or 8, interest shall be credited
and compounded quarterly on a Participant's Account Balance as though
the quarterly portion of the Participant's Annual Deferral Amount and
Employer contributions were made in two installments, half at the
beginning of the quarter and half at quarter-end. Provided, that
portion of the Annual Deferral Amount deferred from an annual bonus
(and Employer contribution attributable thereto) shall be treated as
credited at the beginning of the quarter in which the bonus is paid.
The rate of interest for crediting shall be the Crediting Rate.
3.6 Installment Distributions. In the event a benefit is paid in
installments under Articles 5, 6, 7, 8 or 11, installment payment
amounts shall be determined in the following manner:
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<PAGE> 15
(a) Interest Rate. The interest rate to be used to calculate
installment payment amounts shall be a fixed interest rate
that is determined by averaging the Crediting Rates for the
Plan Year in which installment payments commence and the four
(4) preceding Plan Years. If a Participant has completed fewer
than five (5) Plan Years, or if the Plan has been in existence
fewer than five (5) Plan Years, this average shall be
determined using the Crediting Rates for the Plan Years during
which the Participant participated in the Plan.
(b) "Deemed" Installment Payments. For purposes of calculating
installment payment amounts only (and notwithstanding the fact
that installment payments shall be paid monthly), installment
payments for each 3 month period, starting with the date that
the Participant became eligible to receive a benefit under
this Plan (the "Eligibility Date") and continuing thereafter
for each additional 3 month period until the Participant's
Account Balance is paid in full, shall be deemed to have been
paid in one sum as of the first day of each such 3 month
period.
(c) Amortization. Based on the interest rate determined in
accordance with Section 3.6(a) above and the "deemed" form of
installment payments determined in accordance with Section
3.6(b) above, the Participant's Account Balance shall be
amortized in equal quarterly installment payments over the
term of the specified payment period (starting as of the
Eligibility Date and stated in quarters rather than months).
(d) Monthly Payments. The quarterly installment payment
determined in Section 3.6(c) above shall be divided by 3, and
the resulting number shall be the monthly installment payment
that is to be paid each month during the specified monthly
installment payment period in accordance with the other terms
and conditions of this Plan.
3.7 FICA and Other Taxes. For each Plan Year in which an Annual Deferral
Amount is being withheld, the Participant's Employer(s) shall ratably
withhold from that portion of the Participant's Base Annual Salary
that is not being deferred, the Participant's share of FICA and other
employment taxes. If necessary, the Committee shall reduce the Annual
Deferral Amount in order to comply with this Section 3.7.
ARTICLE 4
SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL
EMERGENCIES; WITHDRAWAL ELECTION
4.1 Short-Term Payout. Subject to the Deduction Limitation, in connection
with each annual election to defer compensation, a Participant may,
but need not, elect to receive a future "Short-Term Payout" from the
Plan with respect to the Annual Deferral
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<PAGE> 16
Amount for such Plan Year. The Short-Term Payout shall be a lump sum
payment in an amount that is equal to the Annual Deferral Amount plus
interest credited in the manner provided in Section 3.5 above on that
amount. Subject to the other terms and conditions of this Plan, each
Short-Term payout elected shall be paid within 60 days of the first
day of the Plan Year that is a number of years, not less than three,
elected by the Participant, beginning on the first day of the Plan
Year following the Plan Year in which the Annual Deferral Amount is
actually deferred.
4.2 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.
If the Participant experiences an Unforeseeable Financial Emergency,
the Participant may petition the Committee to (i) suspend any
deferrals required to be made by a Participant and/or (ii) receive a
partial or full payout from the Plan. The payout shall not exceed the
lesser of the Participant's Account Balance, calculated as if such
Participant were receiving a Termination Benefit, or the amount
reasonably needed to satisfy the Unforeseeable Financial Emergency.
If, subject to the sole discretion of the Committee, the petition for
a suspension and/or payout is approved, suspension shall take effect
upon the date of approval and any payout shall be made within 60 days
of the date of approval.
4.3 Withdrawal Election. A Participant may elect, at any time, to
withdraw all of his or her vested Account Balance prior to the time
such Account Balance is otherwise due and payable in whole or in part,
subject to a 10% withdrawal penalty (the net amount shall be referred
to as the "Withdrawal Amount"). No partial withdrawals of that
balance shall be allowed. The Participant shall make this election by
giving the Committee advance written notice of the election in a form
determined from time to time by the Committee. The penalty shall be
equal to 10% of the Participant's vested Account Balance determined
immediately prior to the withdrawal. Provided, the penalty shall not
apply to any portion of the vested Account Balance that is otherwise
payable to the Participant during the year of the withdrawal. The
Participant shall be paid the Withdrawal Amount within 60 days of his
or her election. Once the Withdrawal Amount is paid, the
Participant's participation in the Plan shall terminate and the
Participant shall not be eligible to participate in the Plan in the
future. The payment of this Withdrawal Amount shall not be subject to
the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
5.1 Retirement Benefit. Subject to the Deduction Limitation, a
Participant who Retires shall receive, as a Retirement Benefit, his or
her Account Balance.
5.2 Payment of Retirement Benefits. A Participant, in connection with his
or her commencement of participation in the Plan, or, if later, during
the enrollment period for the Plan Year beginning in January 1995,
shall elect on an Election Form to receive
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<PAGE> 17
the Retirement Benefit in a lump sum or in equal monthly payments (the
latter determined in accordance with Section 3.6 above) over a period,
stated in an even number of years, of not less than two but not more
than fifteen years. The Participant may change his or her election to
an allowable alternative payout period by submitting a new Election
Form to the Committee, provided that any such Election Form is
submitted at least 3 years prior to the Participant's Retirement and
is accepted by the Committee in its sole discretion. The Election
Form most recently accepted by the Committee shall govern the payout
of the Retirement Benefit. The lump sum payment shall be made, or
installment payments shall commence, no later than 60 days after the
date the Participant Retires.
5.3 Death Prior to Completion of Retirement Benefits. If a Participant
dies after Retirement but before the Retirement Benefit is paid in
full, the Participant's unpaid Retirement Benefit payments shall
continue and shall be paid to the Participant's Beneficiary (a) over
the remaining number of months and in the same amounts as that benefit
would have been paid to the Participant had the Participant survived,
or (b) in a lump sum, if requested by the Beneficiary and allowed in
the sole discretion of the Committee, that is equal to the
Participant's unpaid remaining Account Balance.
ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation,
if a Participant dies before he or she Retires, experiences a
Termination of Employment or suffers a Disability, the Participant's
Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to
the Participant's Account Balance.
6.2 Payment of Pre-Retirement Survivor Benefits. A Participant, in
connection with his or her commencement of participation in the Plan
or, if later, during the enrollment period for the Plan Year starting
in January 1995, shall elect on an Election Form whether the Pre-
Retirement Survivor Benefit shall be received by his or her
Beneficiary in a lump sum or in equal monthly payments (the latter
determined in accordance with Section 3.6 above) over a period of 60,
120 or 180 months. The Participant may change this election to an
allowable alternative payout period by submitting a new Election Form
to the Committee, which form must be accepted by the Committee in its
sole discretion. The Election Form most recently accepted by the
Committee prior to the Participant's death shall govern the payout of
the Participant's Pre-Retirement Survivor Benefit. Despite the
foregoing, if the Participant's Account Balance at the time of his or
her death is less than $50,000, payment of the Pre-Retirement Survivor
Benefit may be made, in the sole discretion of the Committee, in a
lump sum or in installment payments that do no exceed five years in
duration. The lump sum payment shall be made, or installment payments
shall commence, no later than 60 days after the date the Committee is
provided with proof that is satisfactory to the Committee of the
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<PAGE> 18
Participant's death. In no event may the Beneficiary select the
manner of payment either before or after the Participant's death.
ARTICLE 7
TERMINATION BENEFIT
7.1 Termination Benefits. Subject to the Deduction Limitation, if a
Participant experiences a Termination of Employment prior to his or
her Retirement, death or Disability, the Participant shall receive a
Termination Benefit, which shall be equal to the Participant's vested
Account Balance, with interest credited in the manner provided in
Section 3.5 above.
7.2 Payment of Termination Benefit. The Termination Benefit shall be paid
commencing within 60 days of the Termination of Employment as follows:
(a) A Termination Benefit of $50,000 or less shall be paid in a
lump sum.
(b) A Termination Benefit in excess of $50,000 shall be paid in 60
approximately equal monthly installments.
(c) Notwithstanding (b), the Committee in its sole discretion may
authorize a lump sum payment or installments over a period of
less than five years.
If payment is made in installments, the interest rate to be credited
to the Account Balance during the installment payout shall be the
otherwise applicable rate determined in accordance with Section 3.6.
ARTICLE 8
DISABILITY WAIVER AND BENEFIT
8.1 Disability Waiver.
(a) Eligibility. By participating in the Plan, all Participants
are eligible for this waiver.
(b) Waiver of Deferral. A Participant who is determined by the
Committee to be suffering from a Disability shall, if the
Disability originated while the Participant was employed by an
Employer, become fully vested in his or her Account Balance
and shall be excused from fulfilling that portion of the
Annual Deferral Amount commitment that would otherwise have
been withheld from a Participant's Base Annual Salary or
Annual Bonus for the Plan Year during which the Participant
first suffers a Disability. During the period of Disability,
the Participant shall not be allowed to make any additional
deferral elections.
14
<PAGE> 19
(c) Return to Work. If a Participant returns to employment with
an Employer after a Disability ceases, the Participant may
elect to defer an Annual Deferral Amount for the Plan Year of
his or her return to employment or service and for every Plan
Year thereafter while a Participant in the Plan; provided such
deferral elections are otherwise allowed and an Election Form
is delivered to and accepted by the Committee for each such
election in accordance with Section 3.3 above.
8.2 Disability Benefit. A Participant suffering a Disability shall, for
all purposes under this Plan, continue to be considered to be employed
by an Employer and shall be eligible for the benefits provided for in
Articles 4, 5, 6 or 7 in accordance with the provisions of those
Articles. Notwithstanding the above, the Committee shall have the
right, in its sole and absolute discretion and for purposes of this
Plan only, to terminate a Participant's employment at any time after
such Participant is determined to be permanently disabled under the
Participant Employer's long-term disability plan.
ARTICLE 9
BENEFICIARY DESIGNATION
9.1 Beneficiary. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary
designated under this Plan may be the same as or different from the
Beneficiary designation under any other plan of an Employer in which
the Participant participates.
9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall
designate his or her Beneficiary by completing and signing the
Beneficiary Designation Form, and returning it to the Committee or its
designated agent. A Participant shall have the right to change a
Beneficiary by completing, signing, and otherwise complying with the
terms of the Beneficiary Designation Form and the Committee's rules
and procedures, as in effect from time to time. If the Participant
names someone other than his or her spouse as a Beneficiary, a spousal
consent, in the form designated by the Committee, must be signed by
that Participant's spouse and returned to the Committee. Upon the
acceptance by the Committee of a new Beneficiary Designation Form, all
Beneficiary designations previously filed shall be cancelled. The
Committee shall be entitled to rely on the last Beneficiary
Designation Form filed by the Participant and accepted by the
Committee prior to his or her death.
9.3 Acknowledgment. No designation or change in designation of a
Beneficiary shall be effective until received, accepted and
acknowledged in writing by the Committee or its designated agent.
15
<PAGE> 20
9.4 No Beneficiary Designation. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be his or her
surviving spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary shall be
payable to the executor or personal representative of the
Participant's estate.
9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the
proper Beneficiary to receive payments pursuant to this Plan, the
Committee shall have the right, exercisable in its discretion, to
cause the Participant's Employer to withhold such payments until this
matter is resolved to the Committee's satisfaction.
9.6 Discharge of Obligations. The payment of benefits under the Plan to a
Beneficiary shall fully and completely discharge all Employers and the
Committee from all further obligations under this Plan with respect to
the Participant, and that Participant's Plan Agreement shall terminate
upon such full payment of benefits.
ARTICLE 10
LEAVE OF ABSENCE
10.1 Paid Leave of Absence. If a Participant is authorized by the
Participant's Employer for any reason to take a paid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Annual Deferral Amount
shall continue to be withheld during such paid leave of absence in
accordance with Article 3.
10.2 Unpaid Leave of Absence. If a Participant is authorized by the
Participant's Employer for any reason to take an unpaid leave of
absence from the employment of the Employer, the Participant shall
continue to be considered employed by the Employer and the Participant
shall be excused from making deferrals until the earlier of the date
the leave of absence expires or the Participant returns to a paid
employment status. Upon such expiration or return, deferrals shall
resume for the remaining portion of the Plan Year in which the
expiration or return occurs, based on the deferral election, if any,
made for that Plan Year. If no election was made for that Plan Year,
no deferral shall be withheld.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
11.1 Termination. Any Employer reserves the right to terminate the Plan at
any time with respect to its participating Employees by the action of
its board of directors. Upon the termination of the Plan, all Plan
Agreements of a Participant shall terminate and his or
16
<PAGE> 21
her Account Balance, determined as if he or she had experienced a
Termination of Employment on the date of Plan termination or, if Plan
termination occurs after the date upon which the Participant was
eligible to Retire, the Participant had Retired on the date of Plan
termination, shall be paid to the Participant as follows. Prior to a
Change of Control Event, an Employer shall have the right, in its sole
discretion, and notwithstanding any elections made by the Participant,
to pay such benefits in a lump sum or in monthly installments for up
to 15 years, with interest credited during the installment period as
provided in Section 3.6. After a Change of Control Event, the
Employer shall be required to pay such benefits in a lump sum. The
termination of the Plan shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of any benefits
under the Plan as of the date of termination; provided however, that
the Employer shall have the right to accelerate installment payments
by paying the Participant's remaining Account Balance in one lump sum
amount.
11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in
whole or in part with respect to that Employer by the action of its
board of directors; provided, however, that no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's Account Balance in existence at the time the amendment
or modification is made, calculated as if the Participant had
experienced a Termination of Employment as of the effective date of
the amendment or modification, or, if the amendment or modification
occurs after the date upon which the Participant was eligible to
Retire, the Participant had Retired as of the effective date of the
amendment or modification. The amendment or modification of the Plan
shall not affect any Participant or Beneficiary who has become
entitled to the payment of benefits under the Plan as of the date of
the amendment or modification; provided, however, that the Employer
shall have the right to accelerate installment payments by paying
Participant's remaining Account Balance in one lump sum amount.
11.3 Effect of Payment. The full payment of the applicable benefit under
Articles 5, 6, or 7 of the Plan shall completely discharge all
obligations to a Participant and his or her designated Beneficiaries
under this Plan and the Participant's Plan Agreement shall terminate.
ARTICLE 12
ADMINISTRATION
12.1 Committee Duties. This Plan shall be administered by a Committee
which shall consist of the Compensation Committee of the Board.
Members of the Committee may be Participants under this Plan. The
Committee shall have the authority in its sole and unfettered
discretion to (i) make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Plan and (ii)
decide or resolve any and all questions including claims for benefits
and interpretations of this Plan, as may arise in connection with the
Plan.
17
<PAGE> 22
12.2 Agents. In the administration of this Plan, the Committee may, from
time to time, employ agents and delegate to them such administrative
duties as it sees fit (including acting through a duly appointed
representative) and may from time to time consult with counsel who may
be counsel to any Employer.
12.3 Binding Effect of Decisions. The decision or action of the Committee
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the
rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the
Plan.
12.4 Indemnity of Committee. All Employers shall indemnify and hold
harmless the members of the Committee against any and all claims,
losses, damages, expenses or liabilities arising from any action or
failure to act with respect to this Plan, except in the case of
willful misconduct by the Committee or any of its members.
12.5 Employer Information. To enable the Committee to perform its
functions, each Employer shall supply full and timely information to
the Committee on all matters relating to the compensation of its
Participants, the date and circumstances of the Retirement,
Disability, death or Termination of Employment of its Participants,
and such other pertinent information as the Committee may reasonably
require.
ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
The benefits provided for a Participant and Participant's Beneficiary
under the Plan are in addition to any other benefits available to such
Participant under any other plan or program for employees of the Participant's
Employer. The Plan shall supplement and shall not supersede, modify or amend
any other such plan or program except as may otherwise be expressly provided.
ARTICLE 14
CLAIMS PROCEDURES
14.1 Presentation of Claim. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below
as a "Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such
Claimant from the Plan. If such a claim relates to the contents of a
notice received by the Claimant, the claim must be made within 60 days
after such notice was received by the Claimant. The claim must state
with particularity the determination desired by the Claimant. All
other claims must be made within 180 days of the date on which the
event that caused the claim to arise occurred. The claim must state
with particularity the determination desired by the Claimant.
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<PAGE> 23
14.2 Notification of Decision. The Committee shall consider a Claimant's
claim within a reasonable time, and shall notify the Claimant in
writing:
(a) that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole
or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be
understood by the Claimant:
(i) the specific reason(s) for the denial of the claim,
or any part of it;
(ii) specific reference(s) to pertinent provisions of the
Plan upon which such denial was based;
(iii) a description of any additional material or
information necessary for the Claimant to perfect the
claim, and an explanation of why such material or
information is necessary; and
(iv) an explanation of the claim review procedure set
forth in Section 14.3 below.
14.3 Review of a Denied Claim. Within 60 days after receiving a notice
from the Committee that a claim has been denied, in whole or in part,
a Claimant (or the Claimant's duly authorized representative) may file
with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than 30 days after the review
procedure began, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
14.4 Decision on Review. The Committee shall render its decision on review
promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other
special circumstances require additional time, in which case the
Committee's decision must be rendered within 120 days after such date.
Such decision must be written in a manner calculated to be understood
by the Claimant, and it must contain:
(a) specific reasons for the decision;
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<PAGE> 24
(b) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 Legal Action. A Claimant's compliance with the foregoing provisions
of this Article 14 is a mandatory prerequisite to a Claimant's right
to commence any legal action with respect to any claim for benefits
under this Plan.
ARTICLE 15
TRUST
15.1 Establishment of the Trust. The Company shall establish the Trust,
and the Employers shall transfer over to the Trust such assets as the
Employers determine, in their sole discretion, are necessary to assist
in providing funds to meet the Employers' liabilities created
hereunder.
15.2 Interrelationship of the Plan and the Trust. The provisions of the
Plan and the Plan Agreement shall govern the rights of a Participant
to receive distributions pursuant to the Plan. The provisions of the
Trust shall govern the rights of the Employers, Participants and the
creditors of the Employers to the assets transferred to the Trust.
Each Employer shall at all times remain liable to carry out its
obligations under the Plan. Each Employer's obligations under the
Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the
Employer's obligations under this Agreement.
ARTICLE 16
MISCELLANEOUS
16.1 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of any Employer. Any
and all of all Employers' assets shall be, and remain, the general,
unpledged unrestricted assets of the Employers. An Employer's
obligation under the Plan shall be merely that of an unfunded and
unsecured promise to pay money in the future and a Participant shall
have only an unsecured contractual right to the amounts, if any,
payable hereunder, against the Company or a particular Employer, as
reflected in the Participant's one or more Plan Agreements.
16.2 Employer's Liability. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement, as
entered into between the Employer and a Participant. An Employer
shall have no obligation to a Participant under the Plan except as
expressly provided in the Plan and his or her Plan Agreement.
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<PAGE> 25
16.3 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt, the amounts, if any, payable hereunder, or
any part thereof, which are, and all rights to which are expressly
declared to be, unassignable and non-transferable, except that the
foregoing shall not apply to any family support obligations set forth
in a court order. No part of the amounts payable shall, prior to
actual payment, be subject to seizure or sequestration for the payment
of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of
law in the event of a Participant's or any other person's bankruptcy
or insolvency.
16.4 Not a Contract of Employment. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between any
Employer and the Participant. Such employment is hereby acknowledged
to be an "at will" employment relationship that can be terminated at
any time for any reason, with or without cause, unless expressly
provided in a written employment agreement. Nothing in this Plan
shall be deemed to give a Participant the right to be retained in the
service of any Employer, either as an Employee or a Director, or to
interfere with the right of any Employer to discipline or discharge
the Participant at any time.
16.5 Furnishing Information. A Participant or his or her Beneficiary will
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be
requested in order to facilitate the administration of the Plan and
the payments of benefits hereunder, including but not limited to
taking such physical examinations as the Committee may deem necessary.
16.6 Terms. Whenever any words are used herein in the masculine, they
shall be construed as though they were also in the feminine in all
cases where they would so apply; and whenever any words are used
herein in the singular or in the plural, they shall be construed as
though they were used in the plural or the singular, as the case may
be, in all cases where they would so apply.
16.7 Captions. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
16.8 Governing Law. Subject to ERISA, the provisions of this Plan shall be
construed and interpreted according to the laws of the State of
Washington without regard to its conflicts of laws principles.
16.9 Notice. Any notice or filing required or permitted to be given to the
Committee under this Plan shall be sufficient if in writing and
hand-delivered, or sent by registered or certified mail, to the
address below:
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<PAGE> 26
Plan Administrator of the Deferred Compensation Plan
The Hillhaven Corporation
The Cornerstone Building
1148 Broadway Plaza
Caller Service 2264
Tacoma, Washington 98402
Attn: Senior Vice President,
Human Resources and Administration
cc: General Counsel
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification.
Any notice or filing required or permitted to be given to a
Participant under this Plan shall be sufficient if in writing and
hand- delivered, or sent by mail, to the last known address of the
Participant.
16.10 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Participant's Employer and its successors and assigns
and the Participant and the Participant's designated Beneficiaries.
16.11 Spouse's Interest. The interest in the benefits hereunder of a spouse
of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be transferable by
such spouse in any manner, including but not limited to such spouse's
will, nor shall such interest pass under the laws of intestate
succession.
16.12 Incompetent. If the Committee determines in its discretion that a
benefit under this Plan is to be paid to a minor, a person declared
incompetent or to a person incapable of handling the disposition of
that person's property, the Committee may direct payment of such
benefit to the guardian, legal representative or person having the
care and custody of such minor, incompetent or incapable person. The
Committee may require proof of minority, incompetency, incapacity or
guardianship, as it may deem appropriate prior to distribution of the
benefit. Any payment of a benefit shall be a payment for the account
of the Participant and the Participant's Beneficiary, as the case may
be, and shall be a complete discharge of any liability under the Plan
for such payment amount.
16.13 Court Order. The Committee is authorized to make any payments
directed by court order in any action in which the Plan or the
Committee has been named as a party.
22
<PAGE> 27
16.4 Distribution in the Event of Taxation.
(a) General. If, for any reason, all or any portion of a
Participant's benefit under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee for a distribution of that portion of his or her
benefit that has become taxable. Upon the grant of such a
petition, which grant shall not be unreasonably withheld, a
Participant's Employer shall distribute to the Participant
immediately available funds in an amount equal to the taxable
portion of his or her benefit (which amount shall not exceed a
Participant's unpaid vested Account Balance under the Plan).
If the petition is granted, the tax liability distribution
shall be made within 90 days of the date when the
Participant's petition is granted. Such a distribution shall
affect and reduce the benefits to be paid under this Plan.
(b) Trust. If the Trust terminates and benefits are distributed
from the Trust to a Participant, the Participant's benefits
under this Plan shall be reduced to the extent of such
distributions.
16.15 Legal Fees to Enforce Rights After a Change of Control Event. The
Company is aware that upon the occurrence of a Change of Control
Event, the Board (which might then be composed of new members) or a
shareholder of the Company, or of any successor corporation might then
cause or attempt to cause the Company or such successor to refuse to
comply with its obligations under the Plan and might cause or attempt
to cause the Company to institute, or may institute, litigation
seeking to deny Participants the benefits intended under the Plan. In
these circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change of Control Event, it should appear
to any Participant that the Company or the Trustee has failed to
comply with any of its obligations under the Plan or any agreement
thereunder or, if the Company or any other person takes any action to
declare the Plan void or unenforceable or institutes any litigation or
other legal action designed to deny, diminish or to recover from any
Participant the benefits intended to be provided, then the Company
irrevocably authorizes such Participant to retain counsel of his or
her choice at the expense of the Company to represent such Participant
in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director,
officer, shareholder or other person affiliated with the Company or
any successor thereto in any jurisdiction.
16.16 Taxes and Withholding. The Participant's Employer(s), or the trustee
of the Trust, may withhold from any distribution under this Plan any
and all employment and income taxes that are required to be withheld
under applicable law.
23
<PAGE> 28
16.17 Severability. If and to the extent any provision hereof is held to be
void or unenforceable, the Plan shall remain in full-force and effect
with such provision severed as though such provision had not been
included in the original Plan.
IN WITNESS WHEREOF, the Company has executed this Plan document as of
October 1, 1994.
THE HILLHAVEN CORPORATION, a Nevada corporation
By:____________________________________________
Title:_________________________________________
24
<PAGE> 1
EXHIBIT 10.21
THE HILLHAVEN CORPORATION
SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1994
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1 - Statement of Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2 - Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Actual Final Average Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Change of Control Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.6 Date of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 Date of Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Early Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Eligible Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.13 Employment or Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 Existing Retirement Benefit Plans Adjustment Factor . . . . . . . . . . . . . . . . . 5
2.15 Final Average Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.16 Normal Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.17 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.18 Prior Service Credit Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.19 Projected Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.20 Projected Final Average Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.21 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.22 Surviving Spouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.23 Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.24 Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.25 Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3 - Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Normal Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Early Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Vesting of Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.5 Duration of Benefit Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.6 Recipients of Benefit Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.7 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.8 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4 - Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Withholding; Unemployment Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Recipients of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 No Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.5 Withdrawal Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5 - Conditions Related to Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Administration of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 No Right to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 No Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Right to Terminate or Amend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.7 Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.4 Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.5 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.6 Successors in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.7 No Representation on Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
ii
<PAGE> 4
THE HILLHAVEN CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1994
SECTION 1 - STATEMENT OF PURPOSE
The Supplemental Executive Retirement Plan (the "Plan") was originally
adopted effective January 31, 1990, by The Hillhaven Corporation ("THC") to
attract, retain, motivate and provide financial security to highly compensated
management employees (the "Participants") who render valuable services to THC
and its Subsidiaries. The Plan is hereby amended and restated, effective
October 1, 1994.
SECTION 2 - DEFINITIONS
2.1 Acquisition. "Acquisition" refers to a company of
which substantially all of its assets or a majority of its capital stock are
acquired by, or which is merged with or into, THC or a Subsidiary.
2.2 Actual Final Average Earnings. "Actual Final Average
Earnings" means the highest average monthly Earnings for any 60 consecutive
months during the ten years, or actual employment period if less, preceding
Termination of Employment.
2.3 Agreement. "Agreement" means a written agreement
substantially in the form of Exhibit A between THC (or a Subsidiary or both)
and a Participant.
2.4 Committee. "Committee" means the Compensation
Committee of the Board of Directors of THC.
2.5 Change of Control Event. A "Change of Control Event"
shall be deemed to occur if any of the following events has occurred:
(i) A Person, alone or together with its
Affiliates and Associates, or "group", within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, becomes, after the
date hereof, the beneficial owner of 20% or more of the general voting
power of the Company. Notwithstanding the preceding sentence, a
Change of Control Event shall not be deemed to occur if the "Person"
described in the preceding sentence has acquired 20% or more of the
general voting power of the Company as consideration in a transaction
or series of related transactions involving the Company's acquisition
(by stock acquisition, merger, asset purchase or otherwise) of one or
more businesses approved prior to such transactions or series of
transactions by the Incumbent Board (as defined in (ii) below),
andprovided that, if such
<PAGE> 5
transaction or series of transactions results in the merger,
consolidation or reorganization of the Company and such Person, the
Company is the surviving entity following such merger, consolidation
or reorganization.
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board"), cease for any reason to
constitute at least a majority of the Board, provided that any person
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an individual
whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors
of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Securities Exchange Act of 1934) shall be
considered as though such person were a member of the Incumbent Board.
(iii) Consummation or effectiveness of:
a. a merger, consolidation or
reorganization involving the Company (a "Business
Combination"), unless
1. the stockholders of the
Company, immediately before the Business Combination,
own, directly or indirectly immediately following the
Business Combination, at least fifty-one percent
(51%) of the combined voting power of the outstanding
voting securities of the corporation resulting from
the Business Combination (the "Surviving
Corporation") in substantially the same proportion as
their ownership of the voting securities immediately
and before the Business Combination, and
2. the individuals who were
members of the Incumbent Board immediately prior to
the execution of the agreement providing for the
Business Combination constitute at least a majority
of the members of the Board of Directors of the
Surviving Corporation, and
3. no Person (other than any
Person who, immediately prior to the Business
Combination, had beneficial ownership of twenty
percent (20%) or more of the then outstanding Voting
Securities) has Beneficial Ownership of twenty
percent (20%) or more of the combined voting power of
the Surviving Corporation's then outstanding voting
securities;
2
<PAGE> 6
b. a complete liquidation or
dissolution of the Company; or
c. the sale or other disposition of all
or substantially all of the assets of the Company to any
Person.
For purposes of determining whether a Change of Control Event has
occurred, the following additional definitions apply:
"Affiliate or Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934.
"Person" shall mean an individual, firm, corporation or other entity
or any successor to such entity, but "Person" shall not include the
Company, any subsidiary of the Company, any employee benefit plan or
employee stock plan (including a trust relating thereto) of the
Company or any subsidiary of the Company, or any Person organized,
appointed, established or holding Voting Stock by, for or pursuant to
the terms of such a plan. "Person" shall also not include National
Medical Enterprises, Inc. ("NME"), any subsidiary of NME, any
Affiliate or Associate of NME, any employee benefit plan or employee
stock plan of NME or any subsidiary of NME to the extent that such
entities, individually or collectively, own any or all of (x)
8,878,147 shares of the Company's common stock (approximately 31% of
the general voting power of the Company as of December 6, 1994)
registered in the name of NME or any subsidiary of NME as of the date
of this Agreement, or (y) such additional number of shares of the
Company's common stock issued to NME or any subsidiary of NME in
exchange for shares of the Company's Series C Preferred Stock or
Series D Preferred Stock so long as such exchange has been approved in
advance by the Incumbent Board.
"Voting Stock" shall mean shares of the Company's capital stock having
general voting power, with "voting power" meaning the power under
ordinary circumstances (and not merely upon the happening of a
contingency) to vote in the election of directors.
2.6 Date of Employment. "Date of Employment" means the
date on which a person became an Employee of THC or a Subsidiary, or the date
on which a person became an employee of NME or a subsidiary of NME prior to the
divestiture of THC by NME. Where a person is an employee of an entity that is
acquired by THC or a Subsidiary through an Acquisition, "Date of Employment"
means the effective date of the Acquisition; provided, the Committee, in its
sole discretion, may approve as a Date of Employment the date on which a person
began to perform services for the acquired entity in a position comparable to
one at THC which would have been eligible for participation in the Plan.
3
<PAGE> 7
2.7 Date of Enrollment. For purposes of determining
benefits under the Plan, "Date of Enrollment" means the date on which an
Employee first becomes a Participant in the Plan.
2.8 Disability. "Disability" means any Termination of
Employment during the life of a Participant and prior to Normal Retirement or
Early Retirement by reason of a Participant's total and permanent disability,
as determined by the Committee, in its sole and absolute discretion. A
Participant, who makes application for and qualifies for disability benefits
under THC's Group Long-Term Disability Plan or under any similar plan provided
by THC or a Subsidiary, as now in effect or as hereinafter amended (the "LTD
Plans"), shall usually qualify for Disability under this Plan, unless the
Committee determines that the Participant is not totally and permanently
disabled. A Participant who fails to qualify for disability benefits under the
LTD Plans (whether or not the Participant makes application for disability
benefits thereunder) shall not be deemed to be totally and permanently disabled
under this Plan, unless the Committee otherwise determines, based upon the
opinion of a qualified physician or medical clinic selected by the Committee to
the effect that a condition of total and permanent disability exists.
2.9 Early Retirement. "Early Retirement" means any
Termination of Employment during the life of a Participant prior to Normal
Retirement and after the Participant attains age 55 and has completed ten Years
of Service or attains age 62 with no minimum Years of Service.
2.10 Earnings. "Earnings" means the base salary paid to a
Participant by THC or a Subsidiary prior to any reduction as a result of
participation in The Hillhaven Corporation Deferred Compensation Plan,
Retirement Savings Plan, Deferred Savings Plan, or Flexible Benefit Plan (Code
Section 125), excluding bonuses, car and other allowances and other cash and
non-cash compensation.
2.11 Eligible Children. "Eligible Children" means all
natural or adopted children of a Participant under the age of 21, including any
child conceived prior to the death of a Participant.
2.12 Employee. "Employee" means any person who regularly
performs Services on a full-time basis (that is, works a minimum of 32 hours a
week) for THC or a Subsidiary and receives a salary plus employee benefits
normally made available to persons of similar status.
2.13 Employment or Service. "Employment" or "Service"
means any continuous period during which an Employee is actively engaged in
performing services for THC and its Subsidiaries plus the term of any leave of
absence approved by the Committee plus any continuous period of service
performed with NME or a subsidiary of NME immediately prior to the divestiture
of THC by NME. Service with an entity prior to its
4
<PAGE> 8
becoming a Subsidiary or a unit thereof or of THC shall be determined by the
Committee in its absolute discretion.
2.14 Existing Retirement Benefit Plans Adjustment Factor.
"Existing Retirement Benefit Plans Adjustment Factor" means the assumed benefit
the Participant would be eligible for under Social Security and all retirement
plans of THC and its Subsidiaries whether or not he participates in such plans.
This Factor will be used for calculating all benefits under the Plan and is a
projection of the benefits payable under the Social Security regulations and
retirement plans in effect on June 1, 1984 and once established for a
Participant will not thereafter be altered to reflect any reduction in benefits
under Social Security or such retirement plans unless the Participant is
transferred to different retirement plans or unless such company sponsored
retirement plans are substantially altered in terms of benefit provided. The
existing Retirement Benefit Plans Adjustment Factor is expressed as a
percentage and is determined by specific formula as approved by the Committee.
2.15 Final Average Earnings. "Final Average Earnings"
means the lesser of (i) Actual Final Average Earnings or (ii) if the
Participant has completed at least 60 months of Service, Projected Final
Average Earnings; provided that in the case of a Participant who receives one
or more Promotions, as described in Section 2.19 hereof, and whose most recent
(or only) Promotion is less than 60 months prior to his or her Termination of
Employment, "Final Average Earnings" shall mean Actual Final Average Earnings.
2.16 Normal Retirement. "Normal Retirement" means any
Termination of Employment during the life of a Participant on or after the date
on which the Participant attains age 65.
2.17 Participant. "Participant" means any Employee
selected to participate in this Plan by the Committee, in its sole and absolute
discretion and who completes a Plan Agreement with either THC or one or more
Subsidiaries or any combination of them. An Employee shall be eligible for
selection upon completion of a Year of Service in an eligible position. The
Date of Enrollment shall be retroactive to the date of appointment to an
eligible position. A Participant may be required to enter into more than one
Agreement depending on the entity employing him or her at any time and the
manner in which THC and such entity have agreed to allocate and assume
responsibility and liability for benefits accrued hereunder.
5
<PAGE> 9
2.18 Prior Service Credit Percentage. "Prior Service
Credit Percentage" means the percent to be applied to a Participant's Years of
Service with THC and its subsidiaries (and NME and its subsidiaries prior to
the divestiture of THC by NME) which is Prior to his Date of Enrollment in the
Plan, in accordance with the following formula:
<TABLE>
<CAPTION>
Years of Service Prior Service Credit
After Date of Enrollment Percentage
------------------------ --------------------
<S> <C>
During 1st year 25
During 2nd year 35
During 3rd year 45
During 4th year 55
During 5th year 75
After 5th year 100
</TABLE>
2.19 Projected Earnings. "Projected Earnings" means the
actual Earnings of an Employee on the Date of Enrollment plus an assumed
increase of 8% per annum. In the case of a Participant who receives one or
more Promotions, his or her Date of Enrollment for purposes of this Section
2.19 shall be the effective date of his or her new salary pursuant to the most
recent Promotion. For purposes of this Section 2.19, a "Promotion" shall be a
substantial increase in duties and responsibilities with an attendant
substantial increase in compensation, as determined by the Committee in its
absolute discretion.
2.20 Projected Final Average Earnings. "Projected Final
Average Earnings" means the average of a Participant's Projected Earnings
during the 60 months preceding Termination of Employment.
2.21 Subsidiary. A "Subsidiary" of the Company is (i) any
corporation, partnership, venture or other entity in which the Company owns 50%
of the capital stock or otherwise has a controlling interest, or (ii) any
employer that has entered into a contract with THC or a Subsidiary (as defined
in clause (i) of this Section 2.21) for the receipt of management services at
one or more facilities owned by such entity, and, in either case, which has
adopted this Plan with the consent of the Committee.
2.22 Surviving Spouse. "Surviving Spouse" means the
person legally married to a Participant for at least one year prior to the
Participant's death or Termination of Employment.
2.23 Termination of Employment. "Termination of
Employment" means the ceasing of the Participant's Employment for any reason
whatsoever, whether voluntarily or involuntarily.
6
<PAGE> 10
2.24 Year. A "Year" is a period of twelve consecutive
calendar months.
2.25 Year of Service. "Year of Service" means each
complete Year (up to a maximum of 20) of continuous Service (up to age 65) as
an Employee of THC and its Subsidiaries beginning with the Date of Employment
with THC and its Subsidiaries or with NME and its subsidiaries immediately
prior to the divestiture of THC by NME. Years of Service shall be deemed to
have begun as of the first day of the calendar month of Employment and to have
ceased on the last day of the calendar month of Employment.
SECTION 3 - RETIREMENT BENEFITS
3.1 Normal Retirement Benefit.
(a) Upon a Participant's Normal Retirement, the
Company agrees to pay to the Participant a monthly Normal Retirement Benefit
for the Participant's lifetime which is determined in accordance with the
Benefit Formula set forth below, adjusted by the Vesting Percentage in Section
3.3 Except as provided below, the amount of such monthly Normal Retirement
Benefit will be determined by using the following formula:
R = A x [B1 + [B2 x C]] x [2.7% - D] x E
<TABLE>
<S> <C> <C>
R = Normal Retirement Benefit
A = Final Average Earnings
B1 = Years of Service After Date of Enrollment
B2 = Years of Service Prior to Date of Enrollment
C = Prior Service Credit Percentage
D = Existing Retirement Benefit Plans Adjustment Factor
E = Vesting Percentage
</TABLE>
Note: B1 and B2 Years of Service combined cannot exceed 20 years.
(b) In the event of the death or Disability of a
Participant at any age or the Normal or Early Retirement of a Participant after
age 60, the Normal or Early Retirement Benefit will be determined on the basis
of a Prior Service Credit Percentage of 100.
(c) If a Participant who is receiving a Normal
Retirement Benefit dies, his Surviving Spouse or Eligible Children shall be
entitled to receive (in accordance with Sections 3.5 and 3.6) 50% of the
Participant's Normal Retirement Benefit.
7
<PAGE> 11
(d) If a Participant who is eligible for Normal
Retirement dies while an Employee of the Company after attaining age 65, his
Surviving Spouse or Eligible Children shall be entitled to receive (in
accordance with Sections 3.5 and 3.6) the installments of the Normal Retirement
Benefit which would have been payable to the Surviving Spouse or Eligible
Children in accordance with this Section 3.1 as if the Participant had retired
on the day before he died.
3.2 Early Retirement Benefit.
(a) Upon a Participant's Early Retirement, THC
shall pay the Participant a monthly Early Retirement Benefit for the
Participant's lifetime commencing on the first day of the calendar month
following the date he attains age 65, calculated in accordance with Section 3.1
and Section 3.3 with the following adjustments:
(i) Only the Participant's actual Years of Service,
adjusted appropriately for the Prior Service Credit
Percentage, as of the date of Early Retirement shall
be used.
(ii) For purposes of determining the Actual Final Average
Earnings and Projected Final Average Earnings, only
the Participant's Earnings and Projected Earnings as
of the date of Early Retirement shall be used.
(iii) To arrive at the payments to commence at age 65 the
amount calculated under paragraphs (a)(i) and (a)(ii)
of this Section 3.2 will be reduced by .42% for each
month Early Retirement commences before age 62.
(b) Upon the written request of the Participant
prior to Termination of Employment, the Committee, in its sole and absolute
discretion, may authorize payment of the Early Retirement Benefit at a date
prior to the Participant's attainment of age 65; provided, however, that in
such event the amount calculated under paragraphs a(i), (ii) and (iii) of this
Section 3.2 shall be further reduced by .42% for each month that the date of
the commencement of payment precedes the date on which the Participant will
attain age 62.
(c) If a Participant dies after commencement of
payment of his Early Retirement Benefit, the Surviving Spouse or Eligible
Children shall be entitled to receive (in accordance with Sections 3.5 and 3.6)
50% of the Participant's Early Retirement Benefit.
(d) If a Participant dies after his Early
Retirement but before benefits have commenced, or while on Disability, the
Surviving Spouse or Eligible Children shall be entitled to receive (in
accordance with Sections 3.5 and 3.6) 50% of the benefit that would have been
payable on the date the Participant elected to have benefits commence.
8
<PAGE> 12
(e) If a Participant dies after becoming eligible
for Early Retirement but before taking Early Retirement or while on Disability,
the Surviving Spouse or Eligible Children shall entitled to receive (in
accordance with Sections 3.5 and 3.6) 50% of the Participant's Early Retirement
Benefit determined as if the Participant had retired on the day prior to his
death, with payments commencing on the first of the month following the
Participant's death. The benefits payable to a Surviving Spouse or Eligible
Children under this paragraph shall be no less than the benefits payable to a
Surviving Spouse or Eligible Children under Section 3.4 as if the Participant
had died immediately prior to age 55.
3.3 Vesting of Retirement. A Participant's interest in
his Retirement Benefit shall, subject to Sections 5.5 and 5.7, vest in
accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vesting
---------------- -------
<S> <C>
Less than 5 -0-
5 but less than 6 25%
6 through 20 5% per year additional
</TABLE>
Notwithstanding the foregoing, a Participant who is at least 60 years old and
who has completed at least 5 Years of Service will be fully vested, subject to
Sections 5.5 and 5.7, in his Retirement Benefits. No Years of Service will be
credited for Service after age 65 or for more than 20 years.
3.4 Termination. Upon any Termination of Employment of
the Participant before Normal Retirement or Early Retirement for reasons other
than death or Disability, THC shall pay, commencing at age 65, to the
Participant a Retirement Benefit calculated under Sections 3.1 and 3.3 but with
the following adjustments:
(a) Only the Participant's actual Years of
Service, adjusted appropriately for the Prior Service Credit Percentage, as of
the date of Termination of Employment shall be used.
(b) For purposes of determining the Actual Final
Average Earnings and the Projected Final Average Earnings as used in Section
3.1, only the Participant's Earnings and Projected Earnings prior to the date
of his Termination of Employment shall be used.
(c)(i) If a Participant dies after commencement of
payment of his Retirement Benefit under this
Section 3.4, the Surviving Spouse or Eligible
Children shall be entitled at the
Participant's death to receive (in accordance
with Sections 3.5 and 3.6) 50% of the
Participant's Retirement Benefit.
9
<PAGE> 13
(ii) If a Participant, who has a vested interest
under Section 3.3, dies after Termination of
Employment but at death is not receiving any
Retirement Benefits under this Plan, the
Surviving Spouse or Eligible Children shall
be entitled to receive (in accordance with
Sections 3.5 and 3.6), commencing on the date
when the Participant would have attained age
65, 50% of the Retirement Benefit which would
have been payable to the Participant at age
65.
(iii) If a Participant, who has a vested interest
under Section 3.3, dies while still actively
employed by THC or a Subsidiary or on
Disability before he was eligible for Early
Retirement, his Surviving Spouse or Eligible
Children shall be entitled at Participant's
death to receive (in accordance with Sections
3.5 ad 3.6) 50% of the Retirement Benefit
calculated as if Participant were age 55 and
eligible for Early Retirement on the day
before Participant's death; however, the
combined reductions for Early Retirement and
early payment shall not exceed 35.28% of the
amount calculated under paragraphs a(i) and
(ii) of Section 3.2.
(d) To arrive at the payments to commence
at age 65, the amount calculated under paragraphs (a), (b), (c)(i) and (c)(ii)
of this Section 3.4 will be reduced by the maximum percentage reduction for
Early Retirement at age 55 (i.e., 35.28%).
3.5 Duration of Benefit Payment. Normal and Early
Retirement Benefit payments shall be for the life of the Participant.
Surviving Spouse Benefit payments shall be for the Surviving
Spouse's lifetime. All benefits payable to the Surviving Spouse are subject to
actuarial reduction if the Surviving Spouse is more than 3 years younger than
the Participant.
Eligible Children Benefit payments shall be made until the
youngest of the Eligible Children reaches 21.
3.6 Recipients of Benefit Payments. If a Participant
dies without a Surviving Spouse but is survived by any Eligible Children, then
benefits will be paid to the Eligible Children or their legal guardian, if
applicable. The total monthly benefit payable will be equal to the monthly
benefit that a Surviving Spouse would have received without actuarial
reduction. This benefit will be paid in equal shares to all Eligible Children
until the youngest of the Eligible Children attains age 21.
10
<PAGE> 14
If the Surviving Spouse dies after the death of the
Participant but is survived by Eligible Children, then the total monthly
benefit previously paid to the Surviving Spouse will be paid in equal shares to
all Eligible Children until the youngest of the Eligible Children attains age
21. When any of the Eligible Children reaches 21, his share will be
reallocated equally to the remaining Eligible Children.
3.7 Disability. Any Participant who is under Disability
upon reaching age 65 will be paid the Normal Retirement Benefit in accordance
with Sections 3.1 and 3.3.
Upon a Participant's Disability while an Employee of the
Company, the Participant will continue to accrue Years of Service during his
Disability until the earliest of:
(a) Recovery from Disability,
(b) 65th birthday, or
(c) Death.
If a Participant is receiving Disability payments, he shall
not be entitled to receive an Early Retirement Benefit.
For purposes of calculating the foregoing benefits, the
Participant's Actual Final Average Earnings and Projected Final Average
Earnings shall be determined using his Earnings and Projected Earnings up to
the date of Disability.
3.8 Change in Control. In the event of a Change of
Control Event while this Plan remains in effect, (i) a Participant's Retirement
Benefits hereunder (a) will be determined on the basis of receiving full Prior
Service Credit under Sections 3.1 and 3.2 for all Years of Service prior to his
Date of Enrollment and (b) will be fully vested in the Participant without
regard to his Years of Service with THC and its Subsidiaries, and (ii)
notwithstanding any other provisions of the Plan, a Participant will be
entitled to receive the Normal Retirement Benefit on or after age 60 with no
reduction by virtue of paragraphs (a)(iii) and (b) of Section 3.2.
SECTION 4 - PAYMENT
4.1 Commencement of Payments. Payments under this Plan
shall begin not later than the first day of the calendar month following the
occurrence of an event which entitles a Participant (or a Surviving Spouse or
Eligible Children) to payments under this Plan.
11
<PAGE> 15
4.2 Withholding; Unemployment Taxes. To the extent
required by the law in effect at the time payments are made, THC shall withhold
from payments made hereunder any taxes required to be withheld by the Federal
or any state or local government.
4.3 Recipients of Payments. All payments to be made by
THC under the Plan shall be made to the Participant during his lifetime. All
subsequent payments under the Plan shall be made by THC to Participant's
Surviving Spouse, Eligible Children or their legal guardian, if applicable.
4.4 No Other Benefits. THC shall pay no benefits
hereunder to the Participant, his Surviving Spouse, Eligible Children or their
legal guardian, if applicable, by reason of Termination of Employment or
otherwise, except as specifically provided herein.
4.5 Withdrawal Election. A Participant or his or her
beneficiary, as the case may be, may elect, at any time after he or she
commences to receive benefit payments under this Plan, to receive those
payments in a lump sum equal to 90% of the actuarial equivalent value of his or
her remaining vested benefits hereunder. No election to partially accelerate
benefits shall be allowed. The Participant shall make this election by giving
the Plan Administrator advance written notice of the election in a form
determined from time to time by the Committee. The actuarial equivalent of the
Participant's remaining vested benefit hereunder shall be, as determined by the
Committee in its absolute discretion, the single premium required, at the time
of distribution, to purchase the Participant's remaining vested benefits
hereunder as a nonqualified annuity from an insurance company rated AAA by both
Moody's and Standard and Poors. The Participant shall be paid the reduced
benefit amount within 60 days of his or her election. Once such amount is
paid, the Participant's participation in the Plan shall permanently terminate
for all purposes.
SECTION 5 - CONDITIONS RELATED TO BENEFITS
5.1 Administration of Plan. The Committee is hereby
authorized to administer the Plan and is given the authority in its sole and
unfettered discretion to interpret, construe and apply its provisions in
accordance with its terms. The Committee shall administer the Plan and shall
establish, adopt or revise such rules and regulations as it may deem necessary
or advisable for the administration of the Plan. All decisions of the
Committee shall be by vote or written consent of the majority of its members
and shall be final and binding. Members of the Committee shall not be eligible
to participate in the Plan while serving as a member of the Committee.
5.2 No Right to Assets. Neither a Participant nor any
other person shall acquire by reason of the Plan any right in or title to any
assets, funds or property of THC and its Subsidiaries whatsoever, including,
without limiting the generality of the foregoing, any specific funds or assets
which THC, in its sole discretion, may set aside in anticipation of a liability
hereunder. No trust shall be created in accordance with or by the execution or
12
<PAGE> 16
adoption of this Plan or any Agreement with a Participant, and any benefits
which become payable hereunder shall be paid from the general assets of THC;
provided, that one or more grantor trusts described in Section 671 of the
Internal Revenue Code of 1986, as amended, may be established to fund the Plan
in whole or in part, and benefits under this Plan may be paid in whole or in
part from such trust or trusts. A Participant shall have only an unsecured
contractual right to the amounts, if any, payable hereunder, against THC or one
or more Subsidiaries, as reflected in the Participant's one or more Agreements.
5.3 No Employment Rights. Nothing herein shall
constitute a contract of continuing employment or in any manner obligate THC
and its Subsidiaries to continue the service of a Participant, or obligate a
Participant to continue in the service of THC and its Subsidiaries, and nothing
herein shall be construed as fixing or regulating the compensation paid to a
Participant.
5.4 Right to Terminate or Amend. Except during any
two-year period after any Change of Control Event of THC, THC reserves the sole
right to terminate the Plan at any time and to terminate an Agreement with any
Participant at any time. In the event of termination of the Plan or of a
Participant's Agreement, a Participant shall be entitled to only the vested
portion of his accrued benefits under Section 3 of the Plan as of the time of
the termination of the Plan or his Agreement. All further vesting and benefit
accrual shall cease on the date of Plan or Agreement termination. Benefit
payments would be in the amounts specified and would commence at the time
specified in Section 3 as appropriate. THC further reserves the right in its
sole discretion to amend the Plan in any respect except that Plan benefits
cannot be reduced during any two-year period after any Change of Control Event
of THC. No amendment of the Plan (whether there has or has not been a Change
of Control Event of THC) that reduces the value of the benefits theretofore
accrued by and vested with respect to the Participant shall be effective.
5.5 Eligibility. Eligibility to participate in the Plan
is expressly conditional upon an Employee's furnishing to THC certain
information and taking physical examinations and such other relevant action as
may be reasonably requested by THC. Any Employee Participant who refuses to
provide such information or to take such action shall not be enrolled as or
cease to be a Participant under the Plan. Any Participant who commits suicide
during the two-year period beginning on the date of his Agreement, or who makes
any material misstatement of information or non-disclosure of medical history,
will not receive any benefits hereunder unless, in the sole discretion of the
Committee, benefits in a reduced amount are awarded.
13
<PAGE> 17
5.6 Offset. If at the time payments or installments of
payments are to be made hereunder, any Participant or his Surviving Spouse or
both are indebted to THC and its Subsidiaries, then the payments remaining to
be made to the Participant or his Surviving Spouse or both may, at the
discretion of the Committee, be reduced by the amount of such indebtedness;
provided, however, that an election by the Committee not to reduce any such
payment or payments shall not constitute a waiver of any claim for such
indebtedness.
5.7 Conditions Precedent. No Retirement Benefits will be
payable hereunder to any Participant (i) whose Employment with THC or a
Subsidiary is terminated because of his willful misconduct or gross negligence
in the performance of his duties or (ii) who within 3 years after Termination
of Employment becomes an employee with or consultant to any third party engaged
in any line of business in competition with THC and/or its Subsidiaries (a) in
a line of business in which Participant has performed Services for THC and its
Subsidiaries provided that a person who is also an employee of NME shall not be
construed to be a third party engaged in competition with THC and/or its
Subsidiaries or (b) that accounts for more than 10% of the gross revenues of
THC and its Subsidiaries taken as a whole. Notwithstanding the foregoing
paragraph, the Committee, in its sole discretion, may approve the payment of
Retirement Benefits to an Employee who would otherwise be ineligible under (ii)
above if the Committee determines that it is in THC's best interest to do so.
SECTION 6 - MISCELLANEOUS
6.1 Nonassignability. Neither a Participant nor any
other person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance any provision hereunder, or any part thereof, which are, and all rights
to which are, expressly declared to be unassignable and non-transferable. No
part of the amounts payable shall, prior to actual payment, be subject to
seizure or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or any
person's bankruptcy or insolvency. THC may assign this Plan to any Subsidiary
which employs any Participant.
6.2 Gender and Number. Wherever appropriate herein, the
masculine may mean the feminine and the singular may mean the plural or vice
versa.
6.3 Notice. Any notice required or permitted to be given
to the Committee under the Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, to the principal office of
THC, directed to the attention of the Secretary of the Committee. Such notice
shall be deemed given as of the date of delivery or, if delivery is made by
mail, as of the date shown on the postmark or on the receipt for registration
or certification.
14
<PAGE> 18
6.4 Validity. In the event any provision of this Plan is
held invalid, void or unenforceable, the same shall not affect, in any respect
whatsoever, the validity of any other provision of this Plan.
6.5 Applicable Law. This Plan shall be governed and
construed in accordance with the laws of the State of Washington.
6.6 Successors in Interest. This Plan shall inure to the
benefit of, be binding upon, and be enforceable by, any corporate successor to
THC or successor to substantially all of the assets of THC.
6.7 No Representation on Tax Matters. THC makes no
representation to Participants regarding current or future income tax
ramifications of the Plan.
IN WITNESS WHEREOF, THC has executed this instrument effective
October 1, 1994.
THE HILLHAVEN CORPORATION, a Nevada corporation
By
------------------------------------------
Its
--------------------------------------
15
<PAGE> 1
EXHIBIT 10.45
AMENDMENT NO. 5
dated as of April 21, 1995
amending the
$360,000,000 CREDIT AGREEMENT
dated as of September 1, 1993
among
FIRST HEALTHCARE CORPORATION,
as Borrower
THE HILLHAVEN CORPORATION,
as Guarantor
THE BANKS PARTY THERETO
THE LC ISSUING BANKS PARTY THERETO
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
CHEMICAL BANK,
as Administrative Agent
and
J.P. MORGAN DELAWARE,
as Collateral Agent
<PAGE> 2
AMENDMENT NO. 5 TO CREDIT AGREEMENT
AMENDMENT NO. 5 dated as of April 21, 1995 ("Amendment No. 5")
to the Credit Agreement dated as of September 1, 1993 (as amended and restated
by Amendment No. 4 dated as of October 28, 1994 and as further amended from
time to time, the "Agreement") among FIRST HEALTHCARE CORPORATION, as Borrower,
THE HILLHAVEN CORPORATION, as Guarantor, the BANKS party thereto, the LC
ISSUING BANKS party thereto, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Agent, CHEMICAL BANK, as Administrative Agent, and J.P. MORGAN DELAWARE, as
Collateral Agent;
W I T N E S S E T H:
WHEREAS, the Guarantor wishes to consummate a statutory share
exchange pursuant to the Indiana Business Corporation Law and the Nevada
General Corporation Law, pursuant to which, among other things, Nationwide
Care, Inc. and two of its corporate affiliates would become subsidiaries of the
Guarantor (the "Nationwide Acquisition");
WHEREAS, in connection with the Nationwide Acquisition, the
Guarantor and the Borrower desire to be permitted to consummate some or all of
the transactions described in Exhibit A hereto (the "Related Transactions");
and
WHEREAS, subject to the terms and conditions set forth below,
the undersigned Banks are willing to waive and amend certain provisions of the
Agreement to permit the Guarantor and the Borrower to consummate the Nationwide
Acquisition and the Related Transactions;
NOW, THEREFORE, the parties hereto agree as follows:
2
<PAGE> 3
SECTION 1.01. Definitions; References. Unless otherwise
specifically defined herein, each term used herein which is defined in the
Agreement has the meaning assigned to such term in the Agreement. Each
reference to "hereof, "hereunder", "herein" and "hereby" and each other similar
reference and each reference to "this Agreement" and each other similar
reference contained in the Agreement shall from and after the date hereof refer
to the Agreement as amended hereby.
SECTION 2. Amendment of Section 1.01. (a) Clause (ii) at
the end of the definition of "Consolidated Capital Expenditures" is amended to
read as follows:
(ii) additions to the property, plant and equipment reflected in the
consolidated financial statements of the Guarantor and its
Consolidated Subsidiaries that are attributable to (x) the acquisition
by the Borrower of additional partnership interests in a Person which
was theretofore a Non-Consolidated Partnership and the resulting
inclusion of its pre-existing property, plant and equipment in such
consolidated financial statements or (y) the acquisition by the
Guarantor of the Nationwide Target Companies and the resulting
inclusion of their pre-existing property, plant and equipment in such
consolidated financial statements.
(b) The definition of "Consolidated Operating Cash Flow"
is amended by adding the following proviso at the end thereof:
; provided that, for any portion of such period before the
consummation of the acquisition of the Nationwide Target Companies by
the Guarantor, "Consolidated Operating Cash Flow" shall be determined
by combining (i) the amount determined in accordance with the
foregoing definition with respect to the Guarantor and its
Consolidated Subsidiaries on a consolidated basis and (ii) the
comparable amounts determined with respect to the Nationwide Target
Companies and their respective Consolidated Subsidiaries (if any) on a
consolidated basis.
3
<PAGE> 4
(c) The following four definitions shall be inserted
after the definition of "Multiemployer Plan":
"Nationwide" means Nationwide Care, Inc., an Indiana
corporation, and its successors.
"Nationwide Pre-Acquisition Debt" means (i) all Debt of the
Nationwide Target Companies outstanding immediately before the
consummation of the acquisition of the Nationwide Target Companies by
the Guarantor and not incurred in contemplation of such acquisition,
and any extensions or renewals of such Debt, (ii) all Debt of the
Nationwide Target Companies incurred to refinance Debt referred to in
clause (i) of this definition, and any extensions or renewals thereof,
(iii) any and all reimbursement obligations arising from drawings
under letters of credit to pay the principal of or interest on Debt
referred to in clauses (i) and (ii) of this definition and (iv) any
Guarantee by the Guarantor of Debt referred to in clauses (i), (ii)
and (iii) of this definition;provided that no such extension, renewal
or refinancing shall increase the principal amount of the relevant
Debt.
"Nationwide Share Exchange Agreement" means the Amended and
Restated Agreement and Plan of Share Exchange and Agreements to Assign
Partnership Interests dated as of February 27, 1995 by and among the
Guarantor, Nationwide, Phillippe Enterprises, Inc., Meadowvale Skilled
Care Center, Inc. and specified partners of Camelot Care Centers,
Evergreen Woods, Ltd, and Shangri-La Partnership, in or substantially
in the form of the draft thereof dated April 7, 1995.
"Nationwide Target Companies" means Nationwide, Phillippe
Enterprises, Inc., Meadowvale Skilled Care Center, Inc., Camelot Care
Centers, Evergreen Woods, Ltd, and Shangri-La Partnership.
(d) The definition of "Permitted Intercompany Debt" is
amended by deleting the word "and" at the end of paragraph (d) thereof,
changing the period at the end of paragraph (e) thereof to a semicolon and
adding the following new paragraphs (f) and (g):
4
<PAGE> 5
(f) Debt of the Guarantor owing to any Nationwide Target
Company so long as, immediately after giving effect to the incurrence
of such Debt, the sum of (i) the aggregate amount of dividends paid by
the Nationwide Target Companies to the Guarantor after the Guarantor's
acquisition thereof and (ii) the aggregate principal amount of Debt of
the Guarantor permitted to be outstanding pursuant to this paragraph
(f) would not exceed the consolidated net income (if positive) of the
Nationwide Target Companies for the period (treated as one accounting
period) beginning on the date of such acquisition and ending at the
end of the most recent Fiscal Quarter ending before such proposed Debt
is incurred; and
(g) Debt of any Nationwide Target Company owing to any other
Nationwide Target Company.
SECTION 3. Waiver to Permit Acquisition and Related
Transactions. The undersigned Banks waive the covenants in Article V of the
Agreement to the extent, but only to the extent, required to permit the
Guarantor and the Borrower to consummate the Nationwide Acquisition on or
substantially on the terms set forth in the Nationwide Share Exchange Agreement
and to consummate the Related Transactions as or substantially as described in
Exhibit A hereto.
SECTION 4. Limitation on Debt. Section 5.11 of the Agreement
is amended as follows:
(i) Insert the phrase "(other than Nationwide Pre-Acquisition
Debt)" after the word "Debt" in paragraph (g);
(ii) Delete the word "and" from the end of paragraph (m);
(iii) Replace the period at the end of paragraph (n) with ";
and"; and
(iv) Insert the following new paragraph (o):
(o) Nationwide Pre-Acquisition Debt (which may be secured to
the extent permitted by paragraphs (d) and
5
<PAGE> 6
(f) of Section 5.12) not exceeding $60,000,000 in aggregate
outstanding principal amount (which aggregate amount shall be
calculated without duplicating outstanding amounts and undrawn letters
of credit or Guarantees supporting the payment thereof).
SECTION 5. Consolidations, Mergers and Asset Sales. Section
5.13 of the Agreement is amended by adding the following new subsection (d) at
the end of said Section:
(d) Notwithstanding the foregoing provisions of this Section
5.13, any Nationwide Target Company may consolidate or merge with or
into, or sell, lease or otherwise dispose of all or substantially all
of its assets to, any other Nationwide Target Company.
SECTION 6. Restricted Payments. Section 5.14 of the
Agreement is amended by deleting the word "and" at the end of paragraph (h),
adding the word "and" at the end of paragraph (i) and adding the following new
paragraph (j):
(j) assets distributed to Nationwide upon the liquidation of
the Nationwide Target Companies that are partnerships and subsequent
distributions to partners of cash or other assets of any Subsidiary of
the Guarantor that is a partnership;
The reference in the proviso at the end of Section 5.14 to "paragraph (b), (g),
(h) or (i) above" is changed to "paragraph (b), (g), (h), (i) or (j) above".
SECTION 7. Limitation on Investments and Asset Acquisitions.
Section 5.15 of the Agreement is amended by deleting the word "and" at the end
of paragraph (k); redesignating existing paragraph (l) as paragraph (o) and
changing the reference in said paragraph from "this paragraph (l)" to "this
paragraph (o)"; and adding the following new paragraphs immediately after
paragraph (k):
(l) the formation of a new partnership by the Borrower and
Nationwide and the contribution by the Borrower and Nationwide to such
new partnership of some or all of the facilities of the Borrower and
Nationwide located in Indiana, together with associated real and
tangible and intangible personal property;
6
<PAGE> 7
(m) Investments by any Nationwide Target Company in any other
Nationwide Target Company and Asset Acquisitions by any Nationwide
Target Company from any other Nationwide Target Company;
(n) Investments by the Guarantor in the Nationwide Target
Companies expressly provided for in the Nationwide Share Exchange
Agreement and (without duplication) Investments by the Guarantor and
the Borrower described as "Related Transactions" in Exhibit A to
Amendment No. 5 hereto; and
SECTION 8. Capital Expenditures. Section 5.16 of the
Agreement is amended to read in full as follows:
SECTION 5.16. Capital Expenditures. Consolidated Capital
Expenditures will not exceed (i) $60,000,000 for the Fiscal Year
ending on May 31, 1995 or (ii) $65,000,000 for any Fiscal Year ending
after May 31, 1995.
SECTION 9. Limitation on Restrictions Affecting Subsidiaries.
Section 5.18 of the Agreement is amended by changing the word "or" at the end
of clause (F) to a comma and adding the following at the end of clause (G):
or (H) any agreement to which a Nationwide Target Company was a party
immediately before it was acquired by the Guarantor;provided that such
agreement was not entered into in contemplation of such acquisition.
SECTION 10. Limitation of Prepayments of Debt. Section 5.21
of the Agreement is amended by redesignating exception "(iv)" as exception
"(v)" and adding the following new exception (iv):
, (iv) any prepayment or other retirement by any Nationwide Target
Company of Nationwide Pre-Acquisition Debt
SECTION 11. Cash Flow Coverage. Section 5.23 of the
Agreement is amended by deleting the table of Cash Flow Ratios therein and
substituting the following table therefor:
7
<PAGE> 8
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
June 1, 1994 through
November 30, 1995 0.120 to 1
December 1, 1995 through
May 31, 1996 0.150 to 1
June 1, 1996 through
May 31, 1997 0.175 to 1
On and After
June 1, 1997 0.200 to 1
</TABLE>
SECTION 12. Leverage Ratio. Section 5.24 of the Agreement is
amended by deleting the table of Leverage Ratios therein and substituting the
following table therefor:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
June 1, 1994 through
May 31, 1995 2.30 to 1
June 1, 1995 through
May 31, 1996 2.15 to 1
June 1, 1996 through
May 31, 1997 1.50 to 1
On and After
June 1, 1997 1.25 to 1
</TABLE>
SECTION 13. Conditions to Effectiveness. (a) This Amendment
No. 5 shall become effective on the date when all of the following conditions
shall have been satisfied (the "Amendment No. 5 Effective Date"):
(i) the Agent shall have received counterparts hereof signed
by the Borrower, the Guarantor and the Required Banks (or, in the case
of any such party as to which an executed counterpart shall not have
been received, the Agent shall have received, in form satisfactory to
it, telegraphic, telex or other written confirmation from such party
that a counterpart hereof has been executed by such party) and
(ii) the Nationwide Acquisition shall have been consummated
substantially on the terms set forth in the Nationwide Share Exchange
Agreement;
8
<PAGE> 9
provided that this Amendment No. 5 shall not become effective unless the
Nationwide Acquisition shall have been consummated on or before July 31, 1995.
(b) When the Amendment No. 5 Effective Date occurs, the Agent
shall promptly notify the other parties to the Agreement thereof and such
notice shall be conclusive and binding on all parties thereto.
SECTION 14. Confirmation of Agreement. Except as waived or
amended hereby, all of the terms of the Agreement shall remain in full force
and effect and are hereby confirmed in all respects.
SECTION 15. Governing Law. This Amendment No. 5 shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 16. Counterparts. This Amendment No. 5 may be signed
in any number of counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
9
<PAGE> 10
IN WITNESS WHEREOF, the undersigned parties have caused this
Amendment No. 5 to be duly executed by their respective authorized officers as
of the day and year first above written.
FIRST HEALTHCARE CORPORATION
By /s/ Robert Schneider
--------------------------------
Title: Vice President &
Treasurer
THE HILLHAVEN CORPORATION
By /s/ Robert Schneider
--------------------------------
Title: Vice President &
Treasurer
BANKS
Managing Agents:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ Diane H. Imhof
--------------------------------
Title: Vice President
CHEMICAL BANK
By /s/ Beth F. Herman
--------------------------------
Title: Vice President
10
<PAGE> 11
PNC BANK, NATIONAL ASSOCIATION
By /s/ J. Gregory Seibly
--------------------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ Mark F. Milner
--------------------------------
Title: Managing Director
SEATTLE-FIRST NATIONAL BANK
By /s/ Thomas P. Rook
--------------------------------
Title: Vice President
Co-Agent:
THE LONG-TERM CREDIT BANK
OF JAPAN, LTD.,
LOS ANGELES AGENCY
By /s/ Yutaka Kamisawa
--------------------------------
Title: Deputy General Manager
11
<PAGE> 12
BANKS (cont'd)
THE TORONTO-DOMINION BANK
By /s/ Frederic B. Hawley
--------------------------------
Title: Manager
U.S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Arnold J. Conrad
--------------------------------
Title: Vice President
THE BANK OF NEW YORK
By /s/ Robert J. Louk
--------------------------------
Title: Vice President
NATIONSBANK OF TEXAS, N.A.
By /s/ Pamela R. Levy
--------------------------------
Title: Senior Vice President
12
<PAGE> 13
BANKS (cont'd)
Participant:
BERLINER HANDELS-UND
FRANKFURTER BANK
By /s/ Joy S. Robin
-------------------------------
Title: Assistant Treasurer
By /s/ Evon Contos
-------------------------------
Title: Vice President
BANQUE NATIONALE DE PARIS
By /s/ Rafael C. Lumanlan
-------------------------------
Title: Vice President
By /s/ William La Herran
-------------------------------
Title: Assistant Vice President
FIRST INTERSTATE BANK OF
WASHINGTON, N.A.
By /s/ Donald H. Rolston
-------------------------------
Title: Vice President
BANK OF HAWAII
By /s/ Peter S. Ho
-------------------------------
Title: Vice President
13
<PAGE> 14
BANKS (cont'd)
THE CHASE MANHATTAN BANK, N.A.
By /s/ Ellen L. Gertzog
-------------------------------
Title: Vice President
DRESDNER BANK AG,
LOS ANGELES AGENCY/
GRAND CAYMAN BRANCH
By /s/ Kenneth I. Bowman
-------------------------------
Title: Vice President
By /s/ Sidney S. Jordan
-------------------------------
Title: Vice President
FLEET BANK OF MASSACHUSETTS
By /s/ Ginger C. Stolzenthaler
-------------------------------
Title: Vice President
THE FUJI BANK, LIMITED,
LOS ANGELES AGENCY
By /s/ N. Umemura
-------------------------------
Title: Joint General Manager
THE INDUSTRIAL BANK OF JAPAN,
14
<PAGE> 15
BANKS (cont'd)
LIMITED, LOS ANGELES AGENCY
By /s/ Toshinari Iyoda
--------------------------------
Title: Senior Vice President
KREDIETBANK N.V.
By /s/ Diane M. Grimmig
--------------------------------
Title: Vice President
By /s/ Robert Snauffer
--------------------------------
Title: Vice President
SWISS BANK CORPORATION,
SAN FRANCISCO BRANCH
By /s/ David L. Parrot
--------------------------------
Title: Associate Director
By /s/ Jamie Dillon
--------------------------------
Title: Director
WACHOVIA BANK OF GEORGIA, N.A.
By /s/ William F. Hamlet
--------------------------------
Title: Senior Vice President
15
<PAGE> 16
EXHIBIT A
RELATED TRANSACTIONS
The Guarantor may (i) prepay the Nationwide Subordinated Notes
referred to in Section 3.5 of the Nationwide Share Exchange Agreement, (ii) pay
the amounts owing to Donald Cheesman and Thomas E. Phillippe, Sr. referred to
in Section 11.3 thereof and/or (iii) prepay up to $5,000,000 aggregate
principal amount of other Nationwide Pre-Acquisition Debt. In connection
therewith, the Guarantor may pay the relevant amounts directly to the holders
of the relevant debt, make loans to or otherwise invest in one or more of the
Nationwide Target Companies to enable them to make such payments and/or cause
the Borrower to make such loans or investments; provided that the aggregate
amount of all payments, loans and investments made by the Guarantor and the
Borrower for such purpose will not exceed $20,000,000.
To the extent that such payments, loans and investments are
made by the Guarantor, it may obtain some or all of the funds required from a
dividend paid to it or a loan made to it by the Borrower.
To the extent that such payments, loans and investments are
made by the Borrower (or funded by a dividend paid or loan made to the
Guarantor by the Borrower), the Borrower may obtain some or all of the funds
required by borrowing from the Banks under the Agreement.
16
<PAGE> 1
EXHIBIT 11.01
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period (1) (2) 28,435 22,241 22,145
Shares issued upon exercise of stock options 25 49 27
Restricted share awards, net 97 (4) 29
Shares issued upon conversion of debentures 45 29 ---
Dilutive effect of outstanding stock options
and contingent shares 223 209 191
Dilutive effect of warrants held by NME --- 3,428 2,002
------- ------- -------
Weighted average number of shares and share
equivalents outstanding (3) 28,825 25,952 24,394
======= ======= =======
Income before extraordinary charge and
cumulative effect of accounting change $51,859 $59,480 $40,907
Adjustments related to proceeds from exercise
of options and warrants under the "modified
treasury stock" method --- --- 591
Preferred stock dividends (6,850) (7,655) (2,888)
------- ------- -------
Adjusted income 45,009 51,825 38,610
Extraordinary charge, net of income taxes (570) (1,062) (565)
Cumulative effect of change in accounting
for income taxes --- --- (1,103)
------- ------- -------
Net income as adjusted $44,439 $50,763 $36,942
======= ======= =======
Primary earnings per share:
Income before extraordinary charge and
cumulative effect of accounting change $ 1.56 $ 2.00 $ 1.58
Extraordinary charge (.02) (.04) (.02)
Cumulative effect of change in
accounting for income taxes --- (.05)
------- ------- -------
Income per share $ 1.54 $ 1.96 $ 1.51
======= ======= =======
</TABLE>
(Continued on next page)
<PAGE> 2
EXHIBIT 11.01
THE HILLHAVEN CORPORATION
Statement Re: Computation of Per Share Earnings
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in
primary calculation 28,825 25,952 24,394
Additional dilutive effect of stock options
and warrants 38 116 38
Assumed conversion of convertible debentures 7,978 8,258 6,470
------- ------- -------
Fully diluted weighted average number of shares (3) 36,841 34,326 30,902
======= ======= =======
Income before extraordinary charge and cumulative
effect of accounting change, adjusted per
primary calculation $45,009 $51,825 $38,610
Adjustments for interest expense and related
income taxes 7,204 6,816 7,056
------- ------- -------
Adjusted income used in fully diluted calculation 52,213 58,641 45,666
Extraordinary charge, net of income taxes (570) (1,062) (565)
Cumulative effect of change in accounting
for income taxes --- --- (1,103)
------- ------- -------
Adjusted income used in fully diluted calculation $51,643 $57,579 $43,998
======= ======= =======
Fully diluted earnings per share:
Income before extraordinary charge and
cumulative effect of accounting change $ 1.42 $ 1.71 $ 1.48
Extraordinary charge (.02) (.03) (.02)
Cumulative effect of change in accounting for
income taxes --- --- (.04)
------- ------- -------
Income per share (4) $ 1.40 $ 1.68 $ 1.42
======= ======= =======
</TABLE>
(1) On October 31, 1994, Hillhaven acquired CPS Pharmaceuticals, Inc. and
Advanced Infusion Systems, Inc. in a business combination accounted for
as a pooling of interests. The Company issued 1,262,062 common shares
in connection with the share exchange. All prior year information has
been restated to reflect these acquisitions.
(2) Share amounts have been adjusted for the effect of a one-for-five
reverse stock split effective November 1, 1993.
(3) 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.
(4) This calculation is submitted for 1993 in accordance with Regulation S-K
item 601(b)(11) although it is contrary to paragraph 37 of APB Opinion
No. 15.
<PAGE> 1
EXHIBIT 21.01
REGISTRANT'S SUBSIDIARIES
The Hillhaven Corporation, a Nevada corporation
First Healthcare Corporation, a Delaware corporation
Hillhaven of Central Florida, Inc., a Delaware corporation
Northwest Health Care, Inc., an Idaho corporation
Pasatiempo Development Corp., a California corporation
Professional Medical Enterprises, Inc., a Massachusetts
corporation
Hillhaven Home Care, Inc., a Delaware corporation
CIC Risk Management Corporation, a Delaware corporation
Hillhaven Health Services Malaysia, Inc., a Delaware
corporation
Hillhaven Properties, Ltd., an Oregon corporation
Brim-Olive Grove, Inc., an Oregon corporation
Fairview Living Centers, Inc., an Oregon corporation
Twenty-Nine Hundred Corporation, a Florida corporation
Ledgewood Health Care Corporation, a Massachusetts corporation*
Cornerstone Insurance Company, a Cayman Islands corporation
Brim of Massachusetts, Inc., a Massachusetts corporation
<PAGE> 2
Hillhaven Funding Corporation, a Nevada corporation
Medisave Pharmacies, Inc., a Delaware corporation
Medisave of Florida, Inc., a Delaware corporation
Medisave of Tennessee, Inc., a Delaware corporation
American X-Rays, Inc., a Louisiana corporation*
First Rehab, Inc., a Delaware corporation
Convalescent Pharmaceutical Services,
Inc., a California corporation
Advanced Infusion Systems, Inc., a California corporation
Hillhaven PIP Funding I, Inc., a Delaware corporation
NCI Corp. of Delaware, a Delaware corporation
Nationwide Care, Inc., an Indiana corporation
Nationwide Funding Corporation, a Delaware corporation
Phillippe Enterprises, Inc., a Delaware corporation
Meadowvale Skilled Care Center, Inc., a Delaware corporation
Hillhaven Community Health Partnership, a Florida General Partnership*
Windsor Woods Nursing Home Partnership, a Washington General Partnership
St. George Nursing Home Limited Partnership, an Oregon Limited Partnership
Bartlesville Nursing Home Partnership, an Oregon General Partnership*
Carrollwood Care Center, a Tennessee General Partnership
<PAGE> 3
Foothill Nursing Company Partnership, a California General Partnership*
San Marcos Nursing Home Partnership, a California General Partnership*
Fox Hill Village Partnership, a Massachusetts General Partnership*
Starr Farm Partnership, a Vermont General Partnership*
New Pond Village Associates, a Massachusetts General Partnership,
Tucson Retirement Center Limited, an Oregon Limited Partnership
San Marcos Retirement Village, a California General Partner
Castle Gardens Retirement Center Limited Partnership, an Oregon
Limited Partnership
Lantana Partners, Ltd., a Florida Limited Partnership, Hillhaven Properties,
Ltd
Woodhaven Partners, Ltd., a Florida Limited Partnership*
Hillcrest Retirement Center, Ltd., an Oregon Limited Partnership
Topeka Retirement Center, Ltd., a Kansas Limited Partnership
Sandy Retirement Center Limited Partnership, an Oregon Limited Partnership
Hillhaven-MSC Partnership, a California General Partnership*
Stockton Health Care Center Limited Partnership, an Oregon Limited Partnership
Twenty-Nine Hundred Associates, Ltd., a Florida Limited Partnership
MediLife Pharmacy Network Partnership, a Tennessee General Partnership*
Hillhaven/Indiana Partnership, a Washington General Partnership
<PAGE> 4
Hillhaven/Westfield Partnership, a Washington General Partnership
Pharmaceutical Infusion Therapy, a California General Partnership**
CPS-Sacramento, a California General Partnership***
Hillhaven-Columbia Investments, L.L.C., a Delaware Limited Liability Company*
VNA/CPS Pharmaceutical Services, a California General Partnership****
* Only fifty percent (50%) is owned by one of the Registrant's
subsidiaries
** Only fifty-one percent (51%) is owned by one of the Registrant's
subsidiaries
*** Only sixty percent (60%) is owned by one of the Registrant's
subsidiaries
**** Only forty-seven percent (47%) is owned by one of the Registrant's
subsidiaries
<PAGE> 1
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Hillhaven Corporation:
We consent to incorporation by reference in the Registration Statements (No.
33-57215 and 33-50833) on Form S-3 and in the Registration Statements (No.
33-35034 and 33-57679) on Form S-8 of The Hillhaven Corporation of our report
dated July 8, 1994 relating to the consolidated balance sheets of The Hillhaven
Corporation and subsidiaries as of May 31, 1995 and 1994, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the years in the three-year period ended May 31, 1995, and all related
schedules, which report appears in the May 31, 1995 Annual Report on Form 10-K
of The Hillhaven Corporation.
Our report refers to a change in the method of accounting for income taxes
effective June 1, 1992.
KPMG PEAT MARWICK LLP
Seattle, Washington
August 28, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE HILLHAVEN CORPORATION AT AND FOR THE
YEAR ENDED MAY 31, 1995 AND THE RELATED NOTES THERETO AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<CASH> 47,247
<SECURITIES> 0
<RECEIVABLES> 180,327
<ALLOWANCES> 12,883
<INVENTORY> 18,048
<CURRENT-ASSETS> 276,878
<PP&E> 814,954
<DEPRECIATION> 264,490
<TOTAL-ASSETS> 1,252,319
<CURRENT-LIABILITIES> 212,605
<BONDS> 578,601
<COMMON> 24,638
0
15
<OTHER-SE> 395,012
<TOTAL-LIABILITY-AND-EQUITY> 1,252,319
<SALES> 0
<TOTAL-REVENUES> 1,589,142
<CGS> 0
<TOTAL-COSTS> 1,344,321
<OTHER-EXPENSES> 111,052
<LOSS-PROVISION> 5,516
<INTEREST-EXPENSE> 50,839
<INCOME-PRETAX> 77,414
<INCOME-TAX> 25,555
<INCOME-CONTINUING> 51,859
<DISCONTINUED> 0
<EXTRAORDINARY> (570)
<CHANGES> 0
<NET-INCOME> 51,289
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.40
</TABLE>
<PAGE> 1
EXHIBIT 99.01
OPERATIONS AND MANAGEMENT AFTER THE MERGER
POST-MERGER OPERATIONS
Vencor and Hillhaven believe that the Merger presents a unique strategic
opportunity to form one of the nation's largest providers of healthcare services
primarily focusing on the needs of the elderly. After the Merger, Vencor will
have pro forma 1994 revenues of approximately $2.09 billion and pro forma 1994
net income before extraordinary charges of approximately $89 million. Because of
the resulting increase in size and range of services which Vencor and Hillhaven
will be able to provide, Vencor and Hillhaven managements believe the combined
company will be able to recognize both revenue and cost-saving synergies that
will position it for a leadership role in the rapidly changing U.S. healthcare
industry.
After the Merger, Vencor will have operations in 38 states, which contain
approximately 80% of the nation's population. Vencor's post-Merger operations
will include 35 long-term intensive care hospitals and 311 nursing centers with
more than 42,000 beds, 55 retail and institutional pharmacy outlets and 23
retirement housing communities with approximately 3,000 apartments. The
healthcare services which will be provided through this network of facilities
will include long-term intensive hospital care, long-term nursing care, contract
respiratory therapy services, acute cardiopulmonary care, subacute and
post-operative care, inpatient and outpatient rehabilitation therapy,
specialized care for Alzheimer's disease, hospice care, pharmacy services and
retirement and assisted living. In addition, through contracts with
approximately 1,700 non-affiliated nursing and subacute centers, the combined
companies will provide a broad array of respiratory, physical, occupational and
speech therapy and subacute services.
Projected Increased Revenues; Synergies
Vencor management believes that, as a result of the Merger, Vencor's
revenues will be increased by approximately $100 million annually by 1997 as
compared to the revenues that Vencor and Hillhaven would have separately earned
in that year. These increased revenues are expected to be achieved through the
cross-marketing of a broad array of contract services to non-affiliated nursing
and subacute care centers, as more fully described below, as well as
cross-referrals of long-term patients. Management of Vencor is unable to project
at this time the amount of net income, if any, that would be attributable to the
$100 million in revenue. The effect on net income will depend upon profit
margins in effect at that time.
Of Hillhaven's 311 nursing centers, approximately 65% of such nursing
centers are in states where Vencor operates hospitals and approximately 25% of
such nursing centers are within 50 miles of a Vencor hospital. Having both
long-term care hospitals and nursing centers within such close proximity will
facilitate the referral of patients within the combined Vencor-Hillhaven
network. Many of Vencor's patients are discharged into nursing centers when
their condition has improved sufficiently to require a continuous, but less
acute, level of care. Conversely, patients in nursing centers may be admitted to
long-term care hospitals when their condition requires a more acute level of
care.
On August 7, 1995, Vencor's Vencare division had contracts to provide
respiratory care services and supplies to approximately 1,200 nursing centers
and subacute care services to approximately 34 nursing centers and hospitals.
The Merger will enable Vencare to provide physical, occupational and speech
therapy services to such nursing centers in addition to respiratory therapy
services. Hillhaven operates 311 nursing centers and has contracts to provide
rehabilitation therapy management services to an additional 557 nursing centers.
The Merger will enable Vencor to provide respiratory care services and supplies
to these 868 nursing centers in addition to the services already provided by
Hillhaven. This benefit may be offset to some extent by concerns by
non-Hillhaven nursing centers about procuring services from Vencor after the
Merger. Certain nursing centers which currently obtain services from Vencor may
choose not to obtain services from a company which owns competing nursing
centers.
Management of Vencor believes that Vencor will be able to achieve revenue
growth of 20% per year (including revenue increases expected to result from the
Merger as described above) and net income and net
1
<PAGE> 2
income per share growth of 25% per year for the two years following the Merger
(not including transaction costs and restructuring charges) assuming the
continued growth of each company's current operations, the further
implementation of Vencor's strategy to develop long-term care networks through
expansion of products and services, the realization of projected revenue and
cost synergies resulting from the Merger and greater operational efficiencies
resulting from implementation of the Ventech ProTouch(TM) clinical information
system in Vencor and Hillhaven facilities. Many factors outside Vencor's
control, including competitive factors, changes in government regulation or
reimbursement policies and unanticipated expenses arising out of the combination
of Vencor and Hillhaven, could cause these expectations to be materially
inaccurate and there can be no assurance as to any future financial results. In
addition, although the foregoing forecasts represent management's good faith
assessment of Vencor's future performance, they were not prepared with a view
toward compliance with the Commission's policy on projections. Vencor does not
presently intend to update publicly the foregoing forecasts or provide similar
forecasts in the future.
Projected Cost Savings
After the Merger, Vencor expects to realize annual cost savings of
approximately $15 million (before taxes) by 1997. These cost savings would be
achieved through elimination of duplicate corporate services and functions,
improved purchasing and reduced financing costs. The managements of Vencor and
Hillhaven also expect to realize additional cost savings through implementation
of Vencor's Ventech clinical information system in the Hillhaven nursing
centers. This ProTouch(TM) system, which is now operating in a majority of the
Vencor hospitals, has resulted in increased productivity and decreased labor
costs. It is expected that similar results can be realized when the system is
installed in the Hillhaven nursing centers. These additional savings related to
the implementation of the Ventech system are expected to reach approximately $15
million (before taxes) annually by 1998.
It is expected that transaction costs of approximately $50 million will be
incurred in connection with the Merger. Such transaction costs are expected to
exceed the first year's cost savings. See Note 5 to the "Unaudited Pro Forma
Condensed Combined Financial Information." Vencor and Hillhaven have not yet
completed their plans for combining the companies and therefore have not
determined the restructuring charges to be incurred in connection with the
Merger.
Because the markets in which Vencor and Hillhaven operate are highly
competitive and because of the inherent uncertainties associated with merging
two large companies, there can be no assurance that the combined entity will be
able to realize fully the revenue synergies and cost savings which Vencor and
Hillhaven currently expect to realize as a result of the Merger or that such
revenue synergies and cost savings will be realized at the times currently
anticipated. Further, there can be no assurance that cost savings which are
realized will not be offset by losses in revenues or other charges to earnings.
POST-MERGER CAPITALIZATION
Debt Tender and Consent Solicitation
In connection with the Merger, Vencor and Hillhaven expect to make a joint
tender offer (the "Debt Tender") to purchase for cash, subject to certain terms
and conditions, any and all of the 10 1/8% Senior Subordinated Notes due 2001 of
Hillhaven (the "Notes"). The Notes have an aggregate outstanding principal
amount of approximately $175 million. The principal purpose of the Debt Tender
is to adjust or reduce Vencor's aggregate interest expense by replacing the
higher interest costs associated with the Notes with lower interest costs
associated with the Credit Facility (as defined herein). The consummation of the
Debt Tender would be conditioned upon the occurrence of the Merger, although the
consummation of the Debt Tender is not a condition to the Merger. Any Notes that
are not tendered pursuant to the Debt Tender would remain outstanding and become
obligations of Vencor. In connection with the Debt Tender, Vencor and Hillhaven
would also solicit consents from the holders of the Notes (the "Consent
Solicitation") to, among other things, eliminate or modify certain restrictive
covenants (the "Proposed Amendments") in the Indenture pursuant to which the
Notes are outstanding (the "Indenture"). To effect the Proposed Amendments, the
Indenture requires, and consummation of the Debt Tender would be conditioned
upon the receipt of, the affirmative
2
<PAGE> 3
consent of the holders of at least a majority of the aggregate principal amount
of the Notes outstanding (the "Requisite Consents"), although receipt of the
Requisite Consents is not a condition to the Merger. The principal purpose of
the Consent Solicitation is to modify or eliminate certain restrictive covenants
and to make conforming amendments to certain event of default provisions
contained in the Indenture to provide Vencor with additional operating
flexibility following the Merger.
Redemption of Convertible Securities
Vencor's 6.0% Convertible Subordinated Notes (the "6.0% Notes") become
redeemable on October 15, 1995 and Vencor presently expects to redeem the 6.0%
Notes on such date. Hillhaven's 7.75% Convertible Debentures (the "7.75%
Debentures") become redeemable on November 1, 1995 and, assuming consummation of
the Merger, Vencor expects to redeem the 7.75% Debentures on such date. As of
June 30, 1995, there were approximately $115 million principal amount of 6%
Notes outstanding and as of June 30, 1995, there were approximately $75 million
principal amount of 7.75% Debentures outstanding. Because these securities are
convertible into common stock having a market price in excess of their
respective redemption prices, Vencor expects that substantially all of these
securities will be converted into common stock.
Credit Facility
Concurrently with the consummation of the Merger, Vencor expects to enter
into a senior credit facility (the "Credit Facility"), which will have a
maturity of five and one-half years. Although the terms of the Credit Facility
have not yet been finalized, it is presently expected to consist of a $400
million amortizing term loan facility and a $600 million revolving credit
facility, including a letter of credit option not to exceed $150 million. It is
anticipated that loans under the Credit Facility will bear interest, at Vencor's
option, at either (i) a base rate based on NationsBank's prime rate or the daily
federal funds rate, (ii) a LIBOR rate or (iii) a CD rate. It is expected that
Vencor's obligations under the Credit Facility will be secured by a first
priority lien on the capital stock of Vencor's present and future principal
subsidiaries and all intercompany indebtedness owed to Vencor by its
subsidiaries (collectively, the "Collateral") and that the Collateral will
automatically be released upon Vencor achieving investment grade ratings from
both Standard & Poors and Moody's. It is also contemplated that the Credit
Facility will contain various affirmative, negative and financial covenants. The
Credit Facility will be conditioned upon, among other things, consummation of
the Merger.
Vencor expects to use the Credit Facility to, among other things, (i)
refinance the existing bank credit facilities of Vencor and Hillhaven, (ii)
finance the Debt Tender and the Consent Solicitation, (iii) satisfy the
obligation to pay the merger consideration in respect of the Hillhaven Preferred
Stock pursuant to the Merger and (iv) additionally repay approximately $63
million in principal amount of Hillhaven's total outstanding indebtedness of
approximately $660 million. At July 1, 1995, the principal balance outstanding
under each of the existing Vencor bank credit facility and the Hillhaven bank
credit facility was approximately $28.5 million and $166 million, respectively
(excluding outstanding letters of credit in the approximate aggregate amount of
$500,000 and $116 million, respectively).
Although the amount of the after-tax loss that would be incurred by Vencor
in connection with the Debt Tender and the replacement of the existing Vencor
and Hillhaven bank credit facilities is contingent upon various market
conditions at the time of the transactions, Vencor anticipates that such
after-tax loss may approximate $18 million (consisting primarily of the writeoff
of capitalized debt costs and the payment of amounts in excess of the net
carrying value of certain long-term debt).
DIRECTORS AFTER THE MERGER
As provided in the Merger Agreement, Vencor must take all actions necessary
to cause the number of directors comprising the full Vencor Board at the
Effective Time to be increased so that three persons selected prior to the
Effective Time by Hillhaven's Board can be appointed to the Vencor Board to have
terms expiring at the Vencor Annual Meeting of Stockholders to be held in 1996.
The three persons to be added to the Vencor Board will be selected by the
Hillhaven Board from among the present directors of Hillhaven, two of
3
<PAGE> 4
whom will be neither officers of Hillhaven nor designees of any affiliate of
Hillhaven and the third of whom shall be Bruce L. Busby, the Chairman and Chief
Executive Officer of Hillhaven (the "Hillhaven Designated Directors"). Vencor
has also agreed to cause the Hillhaven Designated Directors to be nominated for
election to the Vencor Board at the Vencor Annual Meeting of Stockholders to be
held in 1996. In addition to Mr. Busby, Hillhaven has advised Vencor that Walter
F. Beran and Jack O. Vance will be selected for service on the Vencor Board.
Biographical information with respect to the current directors of Vencor and the
Hillhaven Designated Directors is set forth below.
Vencor Board
William C. Ballard Jr. (age 54) has been a director of Vencor since 1988.
From 1981 to 1992, he served as Executive Vice President -- Finance and
Administration of Humana Inc., a provider of healthcare services. Since 1992,
Mr. Ballard has been of counsel to the law firm of Greenebaum Doll & McDonald.
Mr. Ballard is a director of Mid-America Bancorp, United Healthcare Corp., LG&E
Energy Corp., American Safety Razor Inc., and Arjo AB (a medical products
manufacturer).
Michael R. Barr (age 46), a founder of Vencor, physical therapist and
certified respiratory therapist, has served as Vice President, Operations and a
director of Vencor since 1985. Mr. Barr is a director of Colorado MEDtech, Inc.,
a medical products and equipment company.
Donna R. Ecton (age 48) has served as a director of Vencor since 1992. She
has been a business consultant since 1994. From 1991 to 1994, she was President
and Chief Executive Officer of Van Houten North America, Inc. and Andes Candies
Inc., a confectionery products business. From 1989 to 1991, she was Senior Vice
President of Nutri/System, Inc., a weight loss business. Ms. Ecton is a director
of Barnes Group, Inc., a diversified manufacturing, aerospace and distribution
company, PETsMART, Inc., a pet supplies retailer, Tandy Corporation and H&R
Block, Inc.
Greg D. Hudson (age 47) has served as a director of Vencor since 1991. He
has been President of Hudson Chevrolet-Oldsmobile, Inc. since 1988.
William H. Lomicka (age 58) has served as a director of Vencor since 1987.
Since 1989, he has served as President of Mayfair Capital Inc., a private
investment firm. Mr. Lomicka serves as a director of Regal Cinemas Inc., a
regional motion picture exhibitor, the Regent Group and Advocat, Inc., an
operator of nursing facilities and retirement centers.
W. Bruce Lunsford (age 47), a founder of Vencor, certified public
accountant and attorney, has served as Chairman of the Board, President and
Chief Executive Officer of Vencor since Vencor commenced operations in 1985. Mr.
Lunsford is a director of Churchill Downs Incorporated and Res-Care, Inc., a
provider of residential training and support services for persons with
developmental disabilities and certain vocational training services.
W. Earl Reed, III (age 43), a certified public accountant, has served as a
director and Vice President, Finance and Development of Vencor since 1987.
R. Gene Smith (age 60), a founder of Vencor, has served as a director of
Vencor since 1985 and Vice Chairman of the Board since 1987. From 1988 to 1994,
Mr. Smith was Chairman of the Board and President of Commonwealth Investment
Group, Inc., a holding company for a broker-dealer firm and an investment
advisor firm. Since 1988, Mr. Smith has been Chairman of the Board of Taco Tico,
Inc., an operator of Mexican fast food restaurants. Since 1993, Mr. Smith has
been Managing and General Partner of Direct Programming Services, a digital
satellite system company.
Hillhaven Designated Directors
Bruce L. Busby (age 51) has served as a director and the Chief Executive
Officer of Hillhaven since 1991 and Chairman of Hillhaven since September 1993.
From 1988 to 1991, Mr. Busby was Chief Executive Officer and President of the
Venture Development Group of National Medical Enterprises, Inc.
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Walter F. Beran (age 69) has served as a director of Hillhaven since
December 1989. Since September 1986, Mr. Beran has served as Chairman of the
Pacific Alliance Group, a merger and acquisition services firm. Previously, Mr.
Beran served as Vice Chairman and Western Regional Managing Partner of the
accounting firm of Ernst & Whinney (now Ernst & Young) from 1971 until his
retirement in September 1986. Mr. Beran also serves as a director of Arco
Chemical Company, Pacific Scientific Company and Fleetwood Enterprises, Inc.
Jack O. Vance (age 70) has served as a director of Hillhaven since December
1989. From 1960 to 1990, Mr. Vance served as a director of McKinsey & Company,
Inc., a management consulting firm. In 1990, Mr. Vance formed Management
Research, Inc., where he has since served as managing director. Mr. Vance is a
director of ESCORP, F.C.G. Enterprises, Inc., International Rectifier Corp.,
International Technology Corporation, The Olson Company, SEMTECH and University
Restaurant Group.
EXECUTIVE OFFICERS AFTER THE MERGER
Each of the executive officers, including the chief executive officer and
the other senior executives of Vencor, is expected to continue as an executive
of Vencor after the Merger. In addition, Mr. Busby is expected to serve as
President of the newly formed nursing center division of Vencor after the
Merger. The management of Vencor also expects that after the Merger other
Hillhaven executives will assume significant executive roles in Vencor and its
subsidiaries. Each of Vencor's executive officers serves at the discretion of
the Vencor Board of Directors.
POST-MERGER DIVIDEND POLICY
Vencor does not pay dividends on outstanding shares of Vencor Common Stock
and does not expect to pay dividends on outstanding shares of Vencor Common
Stock for the foreseeable future.
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