<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
SEPTEMBER 1, 1995
(DATE OF REPORT; DATE OF EARLIEST EVENT REPORTED)
VENCOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1-10989 61-1055020
(STATE OF INCORPORATION) (COMMISSION FILE NO.) (IRS EMPLOYER
IDENTIFICATION NO.)
3300 PROVIDIAN CENTER 40202
400 WEST MARKET STREET (ZIP CODE)
LOUISVILLE, KENTUCKY
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
(502) 569-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<PAGE> 2
INTRODUCTION
On April 23, 1995, Vencor, Inc. (the "Company" or "Vencor") announced the
signing of a definitive agreement to merge with The Hillhaven Corporation
("Hillhaven") (the "Hillhaven Merger" or the "Merger") in a tax-free
stock-for-stock transaction intended to qualify as a pooling of interests for
accounting purposes. The Hillhaven Merger is subject to certain regulatory
approvals, as well as the approval of the stockholders of both companies.
On August 11, 1995, the Company filed Amendment No. 3 to a Registration
Statement on Form S-4 which included, among other things, a description of the
terms of the Hillhaven Merger, selected historical financial information for
both companies and unaudited pro forma condensed combined financial information.
Special meetings of the stockholders of both companies to approve the Hillhaven
Merger are scheduled to occur on September 27, 1995.
This report on Form 8-K includes the following financial information: (i)
selected historical financial information for both the Company and Hillhaven,
(ii) selected financial data, management's discussion and analysis of financial
condition and results of operations, and the consolidated financial statements
and financial statement schedules of Hillhaven, all included in its Annual
Report on Form 10-K for the year ended May 31, 1995 (filed with the Securities
and Exchange Commission ("the Commission") on August 28, 1995), (iii) the
supplemental consolidated financial statements and financial statement schedules
of Hillhaven for each of the three years ended May 31, 1995 (filed with the
Commission on August 31, 1995) which reflect the merger with Nationwide Care,
Inc. consummated on June 30, 1995, and (iv) the unaudited pro forma condensed
combined financial information of the Company and Hillhaven for each of the
three years ended December 31, 1994, 1993 and 1992 and the six months ended June
30, 1995 and 1994.
The consent of KPMG Peat Marwick LLP is included as Exhibit 23.
1
<PAGE> 3
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial data of Vencor and the
supplemental selected historical financial data of Hillhaven (which reflects the
merger with Nationwide Care, Inc. ("Nationwide") (the "Nationwide Transactions")
consummated on June 30, 1995) coincides with their respective annual reporting
periods: Vencor (December 31) and Hillhaven (May 31). It is anticipated that
upon consummation of the Merger, Vencor's annual financial reporting period
ending on December 31 will be adopted by the combined entity.
Vencor
The selected historical consolidated financial data of Vencor have been
derived from the consolidated financial statements of Vencor for each of the
five fiscal years for the period ended December 31, 1994 and the unaudited
six-month periods ended June 30, 1995 and 1994. The selected historical
consolidated financial data should be read in conjunction with the historical
consolidated financial statements included in Vencor's 1994 Annual Report on
Form 10-K/A, its Quarterly Report on Form 10-Q for the six months ended June 30,
1995 and the unaudited pro forma condensed combined financial information
contained elsewhere herein.
Hillhaven
The supplemental selected historical consolidated financial data of
Hillhaven have been derived from the supplemental consolidated financial
statements of Hillhaven for each of the five fiscal years ended May 31, 1995.
The supplemental selected historical consolidated financial data should be read
in conjunction with the historical supplemental consolidated financial
statements of Hillhaven and the unaudited pro forma condensed combined financial
information, both of which are contained elsewhere herein.
2
<PAGE> 4
VENCOR, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues
Patient revenues.................. $259,005 $183,741 $396,766 $276,587 $210,721 $132,404 $ 77,194
Other revenues.................... 2,089 1,756 3,252 5,648 3,969 2,897 2,650
-------- -------- -------- -------- -------- -------- --------
Net revenues................ 261,094 185,497 400,018 282,235 214,690 135,301 79,844
Expenses
Salaries, wages and benefits...... 133,440 91,514 197,336 132,492 102,133 64,848 39,719
Supplies.......................... 28,975 22,273 46,662 33,020 26,399 17,041 10,400
Rent.............................. 9,416 8,134 16,757 14,930 12,924 9,173 5,210
Other operating expenses.......... 40,312 28,568 59,535 44,328 35,147 23,178 16,058
Depreciation and amortization..... 11,898 9,531 20,390 12,705 7,402 3,248 1,494
Interest.......................... 4,349 3,473 6,787 6,375 2,129 725 1,373
-------- -------- -------- -------- -------- -------- --------
Total expenses.............. 228,390 163,493 347,467 243,850 186,134 118,213 74,254
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.......... 32,704 22,004 52,551 38,385 28,556 17,088 5,590
Income taxes........................ 12,743 8,802 21,135 15,461 11,128 7,002 2,274
-------- -------- -------- -------- -------- -------- --------
Net income.................. $ 19,961 $ 13,202 $ 31,416 $ 22,924 $ 17,428 $ 10,086 $ 3,316
======== ======== ======== ======== ======== ======== ========
Net income per share
Primary........................... $ 0.71 $ 0.51 $ 1.20 $ 0.85 $ 0.63 $ 0.42 $ 0.19
Fully diluted..................... $ 0.66 $ 0.49 $ 1.13 $ -- $ -- $ -- $ --
Shares used in per share calculation
Primary........................... 28,083 25,719 25,994 27,072 27,507 24,047 17,348
Fully diluted..................... 32,506 30,142 30,417 -- -- -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital..................... $ 95,591 $ 74,133 $ 76,907 $ 61,670 $ 54,546 $ 72,826 $ 20,265
Total assets........................ 495,788 336,069 390,372 294,265 294,229 148,234 56,123
Long-term debt, less current
portion........................... 144,285 129,164 141,899 116,370 116,830 866 12,761
Shareholders' equity................ 275,418 149,729 183,727 131,096 144,801 126,047 30,191
Book value per common share......... $ 9.72 $ 6.00 $ 7.19 $ 5.31 $ 5.38 $ 4.75 $ 1.58
SELECTED STATISTICAL DATA
(UNAUDITED)
(AT END OF PERIOD):
Number of hospitals................. 36 31 34 29 22 17 13
Number of licensed beds............. 3,275 2,316 2,511 2,198 1,717 1,250 996
Patient days........................ 237,851 201,671 403,623 293,367 223,483 150,564 109,303
Percentage of net revenues from
inpatient hospital operations..... 82% 91% 90% 97% 98% 98% 97%
Average daily census................ 1,417 1,114 1,123 875 620 459 312
</TABLE>
3
<PAGE> 5
THE HILLHAVEN CORPORATION
SUPPLEMENTAL SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net operating revenues............... $1,704,206 $1,592,819 $1,445,201 $1,360,535 $1,290,328
Expenses:
General and administrative......... 1,455,154 1,352,624 1,231,810 1,175,582 1,121,225
Interest........................... 55,238 60,890 67,184 60,403 47,639
Depreciation and amortization...... 61,616 57,384 56,421 49,006 35,931
Rent............................... 60,913 63,411 59,393 73,018 103,023
Restructuring...................... -- (20,225) 5,769 92,529 --
Adjustment to carrying value of
properties previously reported
as discontinued operations...... -- -- -- 20,736 --
---------- ---------- ---------- ---------- ----------
Net expenses......................... 1,632,921 1,514,084 1,420,577 1,471,274 1,307,818
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 71,285 78,735 24,624 (110,739) (17,490)
Interest income...................... 13,139 13,749 16,056 12,820 17,013
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
reinstatement of discontinued
operations, extraordinary charge
and cumulative effect of accounting
change............................. 84,424 92,484 40,680 (97,919) (477)
Income tax (expense) benefit......... (29,328) (27,985) 5,372 (923) (136)
Reinstatement of discontinued
operations......................... -- -- -- 24,743 4,379
Extraordinary charge -- early
extinguishment of debt, net of
income taxes....................... (570) (1,062) (2,217) 380 --
Cumulative effect of change in
accounting for income taxes........ -- -- (1,103) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 54,526 $ 63,437 $ 42,732 $ (73,719) $ 3,766
========== ========== ========== ========== ==========
Net income (loss) per common share
-- primary......................... $ 1.41 $ 1.80 $ 1.37 $ (2.77) $ 0.14
-- fully diluted................... $ 1.31 $ 1.59 $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital...................... 70,005 40,309 80,733 60,149 77,566
Total assets......................... 1,337,931 1,269,314 1,293,965 1,220,196 855,859
Long-term debt....................... 625,857 621,423 861,275 872,168 480,214
Stockholders' equity................. 435,950 377,583 190,919 137,603 176,027
OTHER INFORMATION (unaudited)
(at end of period):
NURSING CENTERS
Number of nursing centers............ 295 295 308 352 361
Number of licensed beds.............. 37,451 37,419 38,496 43,156 44,366
Average occupancy rate for the
year............................... 92.6% 93.3% 93.3% 91.7% 90.6%
Nursing centers managed for others... 15 16 17 17 19
PHARMACY OUTLETS..................... 56 77 88 131 118
RETIREMENT HOUSING COMMUNITIES....... 23 22 24 29 29
</TABLE>
4
<PAGE> 6
ITEM 7.(A) FINANCIAL STATEMENTS.
VENCOR, INC.
FORM 8-K
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORM 10-K OF THE HILLHAVEN CORPORATION FOR THE YEAR ENDED MAY 31, 1995:
Item 6. Selected Financial Data.................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 7
Item 8. Financial Statements and Supplementary Data:
Independent Auditors' Report..................................................... 12
Consolidated Balance Sheets, May 31, 1995 and 1994............................... 13
Consolidated Statements of Income for the years ended May 31,
1995, 1994 and 1993............................................................ 14
Consolidated Statements of Cash Flows for the years ended May 31,
1995, 1994 and 1993............................................................ 15
Consolidated Statements of Stockholders' Equity for the years
ended May 31, 1995, 1994 and 1993.............................................. 16
Notes to Consolidated Financial Statements....................................... 18
Quarterly Financial Summary (Unaudited).......................................... 34
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts for the years
ended May 31, 1995, 1994 and 1993.............................................. 35
</TABLE>
5
<PAGE> 7
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>
6
<PAGE> 8
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 $1.37
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
7
<PAGE> 9
$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.
8
<PAGE> 10
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
9
<PAGE> 11
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
10
<PAGE> 12
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.
11
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 accompanying
index. 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
---------------------
KPMG PEAT MARWICK LLP
Seattle, Washington
July 7, 1995
12
<PAGE> 14
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.
13
<PAGE> 15
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.
14
<PAGE> 16
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.
15
<PAGE> 17
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 (3,211) --
</TABLE>
16
<PAGE> 18
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.
17
<PAGE> 19
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>
18
<PAGE> 20
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>
19
<PAGE> 21
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>
20
<PAGE> 22
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.
21
<PAGE> 23
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, 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
22
<PAGE> 24
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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.
23
<PAGE> 25
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
24
<PAGE> 26
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 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.
25
<PAGE> 27
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
26
<PAGE> 28
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, 1995 amounted to 1,015,000, which may be
awarded over the next five years subject to the aforementioned conditions.
27
<PAGE> 29
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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
28
<PAGE> 30
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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
29
<PAGE> 31
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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.
30
<PAGE> 32
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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
31
<PAGE> 33
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
ENDED ENDED SIX MONTHS
AUGUST 31, MAY 31, ENDED MAY 31,
1993 1993 1992
----------- ------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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
ENDED ENDED SIX MONTHS
AUGUST 31, MAY 31, ENDED MAY 31,
1993 1993 1992
----------- -------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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 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
32
<PAGE> 34
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $1.37
Fully diluted earnings per share....... 1.31 1.59 N/A
</TABLE>
33
<PAGE> 35
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.
34
<PAGE> 36
SCHEDULE II
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.
35
<PAGE> 37
VENCOR, INC.
FORM 8-K
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORM 8-K/A OF THE HILLHAVEN CORPORATION:
Independent Auditors' Report...................................................... 37
Supplemental Consolidated Financial Statements:
Supplemental Consolidated Balance Sheets, May 31, 1995 and 1994................ 38
Supplemental Consolidated Statements of Income for the years ended May 31,
1995, 1994 and 1993........................................................... 39
Supplemental Consolidated Statements of Cash Flows for the years ended May 31,
1995, 1994 and 1993........................................................... 40
Supplemental Consolidated Statements of Stockholders' Equity for the years
ended May 31, 1995, 1994 and 1993............................................. 41
Notes to Supplemental Consolidated Financial Statements........................ 43
Supplemental Financial Statements Schedules:
Supplemental Schedule II -- Valuation and Qualifying Accounts for the years
ended May 31, 1995, 1994 and 1993............................................. 59
</TABLE>
36
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of The Hillhaven Corporation:
We have audited the supplemental consolidated balance sheets of The
Hillhaven Corporation and subsidiaries (Hillhaven) as of May 31, 1995 and 1994
and the related supplemental 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 supplemental consolidated
financial statements, we have also audited the supplemental financial statement
schedule as listed in the accompanying index. These supplemental consolidated
financial statements are the responsibility of the management of Hillhaven. Our
responsibility is to express an opinion on these supplemental 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 supplemental 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 applied on a consistent basis applicable after financial
statements are issued for a period which includes the date of consummation of
the business combination. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic supplemental consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The supplemental consolidated financial statements give retroactive effect
to the merger of Hillhaven and Nationwide Care, Inc. and Affiliated Entities on
June 30, 1995, which has been accounted for as a pooling of interests as
described in notes 1 and 2 to the supplemental consolidated financial
statements. Generally accepted accounting principles proscribe giving effect to
a consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation,
however, they will become the historical consolidated financial statements of
Hillhaven after financial statements covering the date of consummation of the
business combination are issued.
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
---------------------
KPMG PEAT MARWICK LLP
Seattle, Washington
July 14, 1995
37
<PAGE> 39
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 55,921 $ 52,512
Accounts and notes receivable, less allowance for doubtful
accounts of $13,265 and $10,702 in 1995 and 1994............... 191,526 164,944
Inventories....................................................... 18,196 20,920
Prepaid expenses and other current assets......................... 32,682 37,484
---------- ----------
Total current assets...................................... 298,325 275,860
---------- ----------
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......................................... 869,226 834,108
Intangible assets, net of accumulated amortization of $20,120 and
$19,955 in 1995 and 1994.......................................... 34,669 37,500
Other noncurrent assets, net........................................ 54,267 36,902
---------- ----------
$1,337,931 $1,269,314
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 43,234 $ 49,922
Accounts payable.................................................. 67,882 69,466
Employee compensation and benefits................................ 78,181 69,050
Other accrued liabilities......................................... 39,023 47,113
---------- ----------
Total current liabilities................................. 228,320 235,551
---------- ----------
Convertible debentures.............................................. 131,172 134,223
---------- ----------
Other long-term debt................................................ 494,685 487,200
---------- ----------
Other long-term liabilities......................................... 47,804 34,757
---------- ----------
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;
37,850,463 and 33,434,756 issued and outstanding in 1995 and
1994........................................................... 28,388 25,076
Additional paid-in capital........................................ 440,168 336,105
Retained earnings................................................. 56,676 19,599
Unearned compensation............................................. (3,804) (3,211)
---------- ----------
521,443 377,583
Less 4,067,473 common shares held in trust........................ (85,493) --
---------- ----------
Total stockholders' equity................................ 435,950 377,583
---------- ----------
$1,337,931 $1,269,314
========== ==========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
38
<PAGE> 40
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL 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................................. $1,704,206 $1,592,819 $1,445,201
---------- ---------- ----------
Expenses:
General and administrative........................... 1,455,154 1,352,624 1,231,810
Interest............................................. 55,238 60,890 67,184
Depreciation and amortization........................ 61,616 57,384 56,421
Rent................................................. 60,913 63,411 59,393
Restructuring........................................ -- (20,225) 5,769
---------- ---------- ----------
Net expenses................................. 1,632,921 1,514,084 1,420,577
---------- ---------- ----------
Income from operations................................. 71,285 78,735 24,624
Interest income........................................ 13,139 13,749 16,056
---------- ---------- ----------
Income before income taxes, extraordinary charge and
cumulative effect of accounting change............... 84,424 92,484 40,680
Income tax (expense) benefit........................... (29,328) (27,985) 5,372
---------- ---------- ----------
Income before extraordinary charge and cumulative
effect of accounting change.......................... 55,096 64,499 46,052
Extraordinary charge -- early extinguishment of debt,
net of income taxes.................................. (570) (1,062) (2,217)
Cumulative effect of change in accounting for income
taxes................................................ -- -- (1,103)
---------- ---------- ----------
Net income............................................. $ 54,526 $ 63,437 $ 42,732
========== ========== ==========
Income available to common stockholders (net income
less preferred stock dividends and accretion)........ $ 47,526 $ 55,604 $ 39,797
Primary income per common share:
Income before extraordinary charge and cumulative
effect of accounting change....................... $ 1.43 $ 1.83 $ 1.49
Extraordinary charge................................. (.02) (.03) (.08)
Cumulative effect of change in accounting for income
taxes............................................. -- -- (.04)
---------- ---------- ----------
Net income per share................................... $ 1.41 $ 1.80 $ 1.37
========== ========== ==========
Fully diluted income per common share:
Income before extraordinary charge................... $ 1.32 $ 1.62 --
Extraordinary charge................................. (.01) (.03) --
---------- ---------- ----------
Net income per share................................... $ 1.31 $ 1.59 N/A
========== ========== ==========
Weighted average common shares and equivalents
outstanding:
Primary.............................................. 33,824,847 30,952,021 29,394,165
Fully diluted........................................ 41,840,944 39,326,350 N/A
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
39
<PAGE> 41
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL 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............................................. $ 54,526 $ 63,437 $ 42,732
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....................... 61,616 57,384 56,421
Provision for losses on accounts and notes
receivable........................................ 5,633 8,730 4,515
Loss (gain) on sales of property and equipment ..... (13,425) (9,224) 1,913
Deferred income taxes............................... 6,478 8,726 (13,667)
Amortization of unearned stock compensation......... 3,619 3,627 3,442
Other charges and credits, net...................... 6,973 (7,749) (8,350)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts and notes receivable..................... (33,509) (25,356) (15,101)
Inventories....................................... (576) 262 (852)
Prepaid expenses and other current assets......... 13,234 (618) (4,771)
Accounts payable.................................. (6,942) 3,082 (53)
Other accrued liabilities......................... (6,430) 4,018 5,620
-------- --------- ---------
Net cash provided by operating activities................ 91,197 84,415 72,952
-------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (62,125) (52,685) (33,212)
Purchase of previously leased nursing centers.......... (13,032) (1,667) (18,972)
Proceeds from sales of property and equipment.......... 4,947 15,877 22,341
Proceeds from collection of notes receivable........... 4,974 22,117 22,590
Investment in joint ventures and partnerships.......... (3,367) (1,698) (1,799)
Distributions from joint ventures and partnerships..... 1,183 2,283 3,833
Lease security deposits................................ -- -- (2,482)
Increase in other assets............................... (7,532) (2,599) (4,616)
-------- --------- ---------
Net cash used in investing activities.................... (74,952) (18,372) (12,317)
-------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in borrowings under revolving
lines of credit..................................... 21,000 8,000 (13,000)
Proceeds from issuance of preferred stock and stock
warrants............................................ -- 63,399 7,206
Dividends and distributions............................ (3,013) (3,074) (6,501)
Proceeds from long-term debt........................... 39,162 369,085 137,149
Payments of principal on long-term debt................ (77,231) (511,326) (152,915)
Proceeds from exercise of stock options................ 2,793 587 246
Increase in deferred financing costs................... (2,576) (15,239) (8,313)
Other, net............................................. 5,671 (270) 725
-------- --------- ---------
Net cash used in financing activities.................... (14,194) (88,838) (35,403)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents......... 2,051 (22,795) 25,232
Adjustment for change in fiscal year end of acquired
companies.............................................. 1,358 -- --
Cash and cash equivalents at beginning of year........... 52,512 75,307 50,075
-------- --------- ---------
Cash and cash equivalents at end of year................. $ 55,921 $ 52,512 $ 75,307
======== ========= =========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
40
<PAGE> 42
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL 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
adjustments:
AIS and CPS................... -- 946 (935) 1,252 -- --
Nationwide.................... -- 3,750 (4,729) (1,351) -- --
--- ------- -------- ------- ------- --------
Balance, as restated............ 5 20,359 202,871 (76,716) (7,529) --
Net income...................... -- -- -- 42,732 -- --
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 --
Other dividends and
distributions................. -- -- -- (3,960) -- --
Accretion of discount on
redeemable preferred stock.... -- -- -- (47) -- --
Common stock issued by acquired
companies..................... -- -- 5,024 909 -- --
Tax benefit associated with
exercise of stock options..... -- -- 290 -- -- --
--- ------- -------- ------- ------- --------
BALANCE, MAY 31, 1993........... 5 20,430 207,517 (37,082) (6,132) --
Net income...................... -- -- -- 63,437 -- --
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 -- -- --
Other dividends and
distributions................. -- -- -- (184) -- --
Accretion of discount on
redeemable preferred stock.... -- -- -- (178) -- --
Common stock and warrants issued
by acquired companies......... -- -- 6,273 -- -- --
Increase in value of common
stock warrants................ -- -- -- (183) -- --
Preferred stock
dividends-in-kind............. 1 -- 4,766 (4,767) -- --
--- ------- -------- ------- ------- --------
BALANCE, MAY 31, 1994........... 14 25,076 336,105 19,599 (3,211) --
</TABLE>
41
<PAGE> 43
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL 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...................... -- -- -- 54,526 -- --
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 -- -- --
Increase in value of common
stock warrants................ -- -- 9,811 (9,811) -- --
Accretion of discount on
redeemable preferred stock.... -- -- -- (150) -- --
Other dividends................. -- -- -- (125) -- --
Preferred stock
dividends-in-kind............. 1 -- 3,961 (3,962) -- --
Adjustment for change in fiscal
year-end of acquired
companies..................... -- -- -- (513) -- --
--- ------- -------- ------- ------- --------
BALANCE, MAY 31, 1995........... $15 $28,388 $ 440,168 $ 56,676 $ (3,804) $(85,493)
=== ======= ======== ======= ======= ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
42
<PAGE> 44
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The supplemental consolidated financial statements
include the accounts of The Hillhaven Corporation and its wholly owned
subsidiaries ("Hillhaven" or the "Company") and have been prepared to give
retroactive effect to the merger with Nationwide Care, Inc. and Affiliated
Entities ("Nationwide") on June 30, 1995 (Note 2 and 14). Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of the consummation. These financial
statements do not extend through the date of consummation, however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
On October 31, 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. Accordingly, the accompanying
supplemental consolidated financial statements for the year ended May 31, 1995
are presented on the basis that Hillhaven, Nationwide, CPS and AIS were combined
for the entire year, and prior years have been restated to give effect to these
combinations.
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 $5,633, $8,730 and $4,515 for the years ended May 31, 1995, 1994 and
1993, respectively.
Approximately 73% of net patient care revenues for each of the years ended
May 31, 1995, 1994 and 1993 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 $39,031 and $66,532, respectively, at May 31, 1995, and
$20,777 and $68,837, 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 $1,145, $1,141 and $961 for the years
ended May 31, 1995, 1994 and 1993, respectively.
43
<PAGE> 45
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.................................. 8,392 7,979
------- -------
$18,196 $20,920
======= =======
</TABLE>
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. Goodwill is amortized using
the straight-line method over a period of 15 years.
Hillhaven recorded extraordinary charges of $851 ($570 net of tax), $1,543
($1,062 net of tax) and $3,496 ($2,217 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 June 30, 1995, the Company acquired Nationwide and its affiliated
corporations and partnerships in a business combination accounted for as a
pooling of interests (the "Share Exchange"). See Note 14. As part of the Share
Exchange, Hillhaven issued 5,000,000 shares of its common stock valued at
approximately $141,000.
Prior to the Share Exchange, Nationwide's fiscal year ended September 30.
In recording the pooling-of-interests combination, Nationwide's financial
statements for the twelve months ended May 31, 1995 were combined with
Hillhaven's financial statements for the same period and Nationwide's financial
statements for the years ended September 30, 1994 and 1993 were combined with
Hillhaven's financial statements for the years ended May 31, 1994 and 1993. An
adjustment has been made to stockholders' equity as of May 31, 1995 to eliminate
the effect of including Nationwide's results of operations for the four months
June 1, 1994 to September 30, 1994 in both the year ended May 31, 1995 and 1994.
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.
44
<PAGE> 46
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Summarized results of operations of Hillhaven, CPS and AIS 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 revenues and net
income to amounts previously reported for the years ended May 31, 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues:
As previously reported....................... $1,576,282 $1,471,190 $1,378,466
Nationwide................................... 127,924 121,629 66,735
---------- ---------- ----------
As restated.................................. $1,704,206 $1,592,819 $1,445,201
========== ========== ==========
Net income:
As previously reported....................... $ 51,289 $ 58,418 $ 39,239
Nationwide................................... 3,237 5,019 3,493
---------- ---------- ----------
As restated.................................. $ 54,526 $ 63,437 $ 42,732
========== ========== ==========
</TABLE>
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.............................................. $54,661 $49,498 $59,699
Income taxes.......................................... 23,977 15,424 7,881
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>
45
<PAGE> 47
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
<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................................................ $ 85,610 $ 80,086
Buildings........................................... 800,429 754,221
Leasehold improvements.............................. 22,914 17,208
Equipment........................................... 206,266 184,163
Construction in progress............................ 23,471 19,662
---------- ----------
1,138,690 1,055,340
Less accumulated depreciation and amortization...... (269,464) (221,232)
---------- ----------
Net property and equipment.......................... $ 869,226 $ 834,108
========== ==========
</TABLE>
Property and equipment includes buildings of $1,997 and equipment of $2,757
acquired under capital leases at both May 31, 1995 and 1994. Related accumulated
depreciation and amortization amounted to $2,423 and $2,141 at May 31, 1995 and
1994, respectively.
46
<PAGE> 48
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 agreements(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)........... 62,629 56,617
Other notes, payable in installments to 2001(4)...... 23,258 24,335
Capitalized lease obligations (Note 9)............... 4,275 5,606
Floating rate option notes(5)........................ 25,650 26,600
12 1/2% unsecured notes due 2000, net of unamortized
discounts of $3,577 and $3,836 in 1995 and 1994... 8,423 8,164
10 1/8% unsecured notes due 2001..................... 174,487 174,405
-------- --------
537,919 537,122
Less current portion................................. (43,234) (49,922)
-------- --------
$494,685 $487,200
======== ========
</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
47
<PAGE> 49
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 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 9.5%, 5.0% and
9.3%, respectively.
(5) On July 27, 1993, Nationwide issued $28,500 of floating rate option notes,
secured by an irrevocable direct pay letter of credit. The notes are payable
in installments and mature in August 2008. At May 31, 1995, the interest
rate on the notes was 7.8%. Nationwide purchased interest rate cap
protection (9%) through November 1997 with respect to the floating rate
option notes at a cost of approximately $100. Through May 31, 1995,
Nationwide had not received any amounts with respect to the interest rate
cap protection.
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.
48
<PAGE> 50
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.............................. $ 43,234
1997.............................. 45,296
1998.............................. 40,808
1999.............................. 48,104
2000.............................. 54,932
Later years....................... 436,717
--------
$669,091
========
</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 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................... $(17,730) $(14,941) $(6,715)
Current (expense) state..................... (5,050) (4,318) (1,580)
-------- -------- -------
(22,780) (19,259) (8,295)
-------- -------- -------
Deferred (expense) benefit federal.......... (5,712) (7,955) 12,556
Deferred (expense) benefit state............ (836) (771) 1,111
-------- -------- -------
(6,548) (8,726) 13,667
-------- -------- -------
$(29,328) $(27,985) $ 5,372
======== ======== =======
</TABLE>
49
<PAGE> 51
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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......... $(29,548) $(32,369) $(13,831)
State income tax expense net of federal
income tax effect........................ (3,826) (3,308) (305)
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 --
Non-taxable income......................... -- -- 948
Net operating loss carryforward utilized... -- -- 265
Other...................................... (888) 299 (464)
-------- -------- --------
Income tax (expense) benefit on income
before extraordinary charge and
cumulative effect of accounting change... $(29,328) $(27,985) $ 5,372
======== ======== ========
</TABLE>
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............................... $(25,667) $(21,537) $(29,207)
Installment sales.......................... (1,573) (1,691) (3,685)
Other...................................... (3,627) (3,563) (1,148)
-------- -------- --------
Gross deferred tax liabilities............. (30,867) (26,791) (34,040)
-------- -------- --------
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.......................... 6,842 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...................................... 7,649 5,672 4,066
-------- -------- --------
Gross deferred tax assets.................. 46,513 52,089 69,154
Less valuation allowance................... (8,173) (11,277) (12,367)
-------- -------- --------
Deferred tax assets, net................... 38,340 40,812 56,787
-------- -------- --------
Net deferred tax assets.................... 7,473 14,021 22,747
Less amount included in other current
assets................................... (17,444) (19,646) (16,032)
-------- -------- --------
Amount included in other noncurrent assets
(liabilities)............................ $ (9,971) $ (5,625) $ 6,715
======== ======== ========
</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
50
<PAGE> 52
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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.
51
<PAGE> 53
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
9. LEASES
As of May 31, 1995, Hillhaven leases 122 nursing centers, 80 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........................................ $ 818 $ 41,997 $ (9,740)
1997........................................ 839 37,194 (7,291)
1998........................................ 811 34,431 (7,048)
1999........................................ 823 26,857 (5,378)
2000........................................ 840 23,732 (4,899)
Thereafter.................................. 2,131 59,779 (13,074)
------- -------- --------
Total minimum lease payments (income)....... 6,262 $ 223,990 $(47,430)
======== ========
Less amount representing interest........... (1,987)
-------
Present value of net minimum lease
payments.................................. 4,275
Less current portion........................ (439)
-------
Long-term obligations....................... $ 3,836
=======
</TABLE>
Rent expense under operating leases is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Rent expense............................... $ 60,913 $ 63,411 $ 59,393
Sublease rental income..................... (14,026) (13,563) (10,390)
-------- -------- --------
$ 46,887 $ 49,848 $ 49,003
======== ======== ========
</TABLE>
52
<PAGE> 54
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 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.
53
<PAGE> 55
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
54
<PAGE> 56
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 an
$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 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
55
<PAGE> 57
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 prejudice all pending claims
with respect to Horizon's acquisition proposal or the Vencor merger. The stay in
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).................................... 533,644 529,488 531,516 527,124
</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
56
<PAGE> 58
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 are 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
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>
57
<PAGE> 59
THE HILLHAVEN CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
On February 27, 1995, Hillhaven signed a definitive agreement to acquire
Nationwide. Nationwide operates 23 nursing centers, two retirement housing
communities and two assisted living centers located in Indiana, Ohio and
Florida. Concurrent with the close of the transaction on June 30, 1995,
Nationwide's redeemable preferred stock, included in other long-term
liabilities, was redeemed in the amount of $3,000 and its 12 1/2% Senior
Subordinated Notes were repaid in the amount of $12,000 resulting in an
extraordinary charge of $2,413 net of taxes. In addition, detachable stock
warrants issued by Nationwide were exercised by the holder, and an adjustment to
fair market value in the amount of $9,811 was recorded to retained earnings
based on the acquisition price. Previously, the warrants had been valued based
on a predetermined formula as there was no otherwise determinable value.
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 healthcare services for 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) 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 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.
58
<PAGE> 60
SUPPLEMENTAL SCHEDULE II
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 $ (6,064)(2)
accounts and notes receivable.......... $ 21,801 $ 4,515 138(3) $20,390
========= ========= =========== ========
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............................. $ 20,390 $ 8,730 $ (3,810)(2) $25,310
========= ========= =========== ========
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............................. $ 25,310 $ 5,633 $ (2,667)(2) $28,276
========= ========= =========== ========
</TABLE>
---------------
(1) Information for all periods has been restated to reflect the acquisition of
Nationwide Care, Inc.
(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.
59
<PAGE> 61
ITEM 7.(B) PRO FORMA FINANCIAL INFORMATION
VENCOR, INC.
FORM 8-K
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION:
Unaudited Pro Forma Condensed Combined Income Statements for
the six months ended June 30, 1995............................................... 62
Unaudited Pro Forma Condensed Combined Income Statements for
the six months ended June 30, 1994............................................... 63
Unaudited Pro Forma Condensed Combined Income Statements for
the year ended December 31, 1994................................................. 64
Unaudited Pro Forma Condensed Combined Income Statements for
the year ended December 31, 1993................................................. 65
Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1992................................................. 66
Unaudited Pro Forma Condensed Combined Balance Sheet -- June 30, 1995............... 67
Notes to Unaudited Pro Forma Condensed Combined Financial Information............... 68
</TABLE>
60
<PAGE> 62
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger will be accounted for as a pooling of
interests.
The Merger Agreement provides that 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 ten consecutive
trading days ending with the second trading day immediately preceding the
effective time of the Merger (the "Effective Time") (the "Vencor Average
Price"), except that the Conversion Number will not be less than 0.768 or
greater than 0.977 except in certain limited circumstances. Each share of
Hillhaven preferred stock will be converted into the right to receive $900 in
cash, plus accrued and unpaid dividends, to the Effective Time. Each outstanding
share of Vencor common stock will remain outstanding and unaffected by the
Merger. For all applicable periods in the unaudited condensed combined income
statements, shares used in the computation of earnings per common and common
equivalent share assume a Conversion Number of 0.977 and the product of the
Conversion Number and the Vencor Average Price ("Transaction Value") equal to
$31.00.
On May 1, 1995, Vencor acquired a hospital in Arlington, Virginia
("Arlington") (the "Arlington Acquisition") which was recorded under the
purchase method of accounting.
The unaudited pro forma condensed combined income statements reflect the
combination of the historical operating results of Vencor for the years ended
December 31, 1994, 1993 and 1992 and for the six months ended June 30, 1995 and
1994 with the supplemental historical operating results of Hillhaven for twelve
months ended November 30, 1994 and supplemental historical operating results for
the years ended May 31, 1993 and 1992 (each of the three years of which include
the operating results of Nationwide for the twelve months ended September 30)
and for the six months ended May 31, 1995 and 1994. The unaudited pro forma
condensed combined income statement for the year ended December 31, 1994 and the
six months ended June 30, 1995 and 1994 include the Arlington Acquisition. The
unaudited pro forma condensed combined balance sheet reflects the combination of
the historical balance sheet of Vencor at June 30, 1995 with the supplemental
historical balance sheet of Hillhaven at May 31, 1995.
The unaudited pro forma condensed combined financial statements do not
reflect the restructuring charge expected to be incurred by Vencor and Hillhaven
in connection with the Merger. The restructuring charge will include costs
associated with the combination of Vencor and Hillhaven, including severance,
elimination of duplicative systems and other consolidation expenses. Also, no
provision has been reflected in the unaudited pro forma condensed combined
financial statements for the possible refinancing of certain of Hillhaven's debt
after the consummation of the Merger. The unaudited pro forma condensed combined
financial statements also do not give effect to the revenue enhancements and
cost savings expected to be realized in connection with the Merger. The
unaudited pro forma condensed combined financial statements are not necessarily
indicative of the results or financial position that actually would have
occurred had the Merger been consummated on the dates indicated or that may be
obtained in the future. These pro forma financial statements should be read in
conjunction with the related historical consolidated financial statements of
Vencor and the supplemental consolidated financial statements of Hillhaven.
61
<PAGE> 63
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN VENCOR ARLINGTON
SIX MONTHS SIX MONTHS FOUR MONTHS
ENDED ENDED ENDED
MAY 31, JUNE 30, APRIL 30, PRO FORMA VENCOR PRO FORMA PRO FORMA
1995 1995 1995 ADJUSTMENTS PRO FORMA ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues
Patient revenues............... $741,586 $259,005 $11,130 $ -- $270,135 $(1,195)(d) $1,010,526
Other revenues................. 132,356 2,089 85 -- 2,174 -- 134,530
---------- ---------- ----------- ----------- --------- ----------- ----------
Net revenues................. 873,942 261,094 11,215 -- 272,309 (1,195) 1,145,056
Expenses
Salaries, wages and benefits... 515,863 133,440 5,288 -- 138,728 -- 654,591
Supplies....................... 61,162 28,975 1,748 -- 30,723 -- 91,885
Rent........................... 30,042 9,416 212 -- 9,628 -- 39,670
Other operating expenses....... 167,337 40,312 1,711 -- 42,023 (1,195)(d) 208,165
Depreciation and
amortization................. 31,204 11,898 777 (667)(n) 12,008 -- 43,212
Interest....................... 28,792 4,349 464 187(n) 5,000 3,353(i) 37,145
---------- ---------- ----------- ----------- --------- ----------- ----------
Total expenses............. 834,400 228,390 10,200 (480) 238,110 2,158 1,074,668
---------- ---------- ----------- ----------- --------- ----------- ----------
Income before income taxes and
extraordinary charges.......... 39,542 32,704 1,015 480 34,199 (3,353) 70,388
Income tax expense (benefit)..... 13,594 12,743 407 192(n) 13,342 (1,341)(i) 25,595
---------- ---------- ----------- ----------- --------- ----------- ----------
Income before extraordinary
charges........................ $ 25,948 $ 19,961 $ 608 $ 288 $ 20,857 $(2,012) $ 44,793
========== ========== =========== =========== ========= =========== =========
Income before extraordinary
charges per share
Primary........................ $ 0.66 $ 0.71 $ 0.74 $ 0.73
Fully diluted.................. $ 0.62 $ 0.66 $ 0.68 $ 0.68
Shares used in per share
calculation
Primary........................ 33,930 28,083 28,083 33,150(m) 61,233
Fully diluted.................. 41,862 32,506 32,506 40,899(m) 73,405
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
62
<PAGE> 64
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN VENCOR ARLINGTON
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
MAY 31, JUNE 30, JUNE 30, PRO FORMA VENCOR PRO FORMA PRO FORMA
1994 1994 1994 ADJUSTMENTS PRO FORMA ADJUSTMENTS COMBINED
---------- ---------- ---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues
Patient revenues.............. $662,894 $183,741 $ 18,366 $ -- $202,107 $ -- $ 865,001
Other revenues................ 148,916 1,756 83 -- 1,839 -- 150,755
---------- ---------- ---------- --------- --------- ----------- ----------
Net revenues.............. 811,810 185,497 18,449 -- 203,946 -- 1,015,756
Expenses:
Salaries, wages and
benefits.................... 465,361 91,514 7,879 -- 99,393 -- 564,754
Supplies...................... 55,738 22,273 2,785 -- 25,058 -- 80,796
Rent.......................... 32,109 8,134 330 -- 8,464 -- 40,573
Other operating expenses...... 158,924 28,568 3,984 -- 32,552 -- 191,476
Depreciation and
amortization................ 28,729 9,531 1,264 (1,000)(n) 9,795 -- 38,524
Interest...................... 29,268 3,473 721 280(n) 4,474 -- 33,742
---------- ---------- ---------- --------- --------- ----------- ----------
Total expenses.............. 770,129 163,493 16,963 (720) 179,736 -- 949,865
---------- ---------- ---------- --------- --------- ----------- ----------
Income before income taxes and
extraordinary charges......... 41,681 22,004 1,486 720 24,210 -- 65,891
Income tax expense.............. 12,851 8,802 594 288(n) 9,684 -- 22,535
---------- ---------- ---------- --------- --------- ----------- ----------
Income before extraordinary
charges....................... $ 28,830 $ 13,202 $ 892 $ 432 $ 14,526 $ -- $ 43,356
========= ========= ========= ======== ======== ========== =========
Income available to common
stockholders.................. $ 24,542 $ 13,023 $ 14,347 $ 38,889
Income before extraordinary
charges per share
Primary....................... $ 0.77 $ 0.51 $ 0.56 $ 0.68
Fully diluted................. $ 0.70 $ 0.49 $ 0.53 $ 0.64
Shares used in per share
calculation
Primary....................... 31,932 25,719 25,719 31,198(m) 56,917
Fully diluted................. 40,064 30,142 30,142 39,143(m) 69,285
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
63
<PAGE> 65
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN
TWELVE
MONTHS VENCOR ARLINGTON
ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, DECEMBER 31, DECEMBER 31, PRO FORMA VENCOR PRO FORMA PRO FORMA
1994 1994 1994 ADJUSTMENTS PRO FORMA ADJUSTMENTS COMBINED
------------ ------------ ------------ ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues
Patient
revenues........ $1,363,386 $396,766 $ 36,339 $ -- $433,105 $ (374)(d) $1,796,117
Other revenues.... 290,621 3,252 -- -- 3,252 -- 293,873
---------- -------- ------- ------- -------- ------- ----------
Net revenues.... 1,654,007 400,018 36,339 -- 436,357 (374) 2,089,990
Expenses
Salaries, wages
and benefits.... 963,717 197,336 15,818 -- 213,154 -- 1,176,871
Supplies.......... 114,582 46,662 5,038 -- 51,700 -- 166,282
Rent.............. 62,886 16,757 639 -- 17,396 -- 80,282
Other operating
expenses........ 311,831 59,535 8,873 -- 68,408 (374)(d) 379,865
Depreciation and
amortization.... 58,397 20,390 2,485 (2,000)(n) 20,875 -- 79,272
Interest.......... 56,342 6,787 1,439 560(n) 8,786 5,875(i) 71,003
---------- -------- ------- ------- -------- ------- ----------
Total
expenses.... 1,567,755 347,467 34,292 (1,440) 380,319 5,501 1,953,575
---------- -------- ------- ------- -------- ------- ----------
Income before income
taxes and
extraordinary
charges........... 86,252 52,551 2,047 1,440 56,038 (5,875) 136,415
Income tax expense
(benefit)......... 26,029 21,135 819 576(n) 22,530 (2,350)(i) 46,209
---------- -------- ------- ------- -------- ------- ----------
Income before
extraordinary
charges........... $ 60,223 $ 31,416 $ 1,228 $ 864 $ 33,508 $(3,525) $ 90,206
========== ======== ======= ======= ======== ======= ==========
Income before
extraordinary
charges per share
Primary........... $ 1.60 $ 1.20 $ 1.29 $ 1.55
Fully diluted..... $ 1.45 $ 1.13 $ 1.20 $ 1.42
Shares used in per
share calculation
Primary........... 32,830 25,994 25,994 32,075(m) 58,069
Fully diluted..... 41,006 30,417 30,417 40,063(m) 70,480
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
64
<PAGE> 66
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN VENCOR
YEAR ENDED YEAR ENDED
MAY 31, DECEMBER 31, PRO FORMA PRO FORMA
1993 1993 ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenues
Patient revenues.......................... $1,191,735 $276,587 $ -- $1,468,322
Other revenues............................ 269,522 5,648 -- 275,170
---------- ------------ ----------- ----------
Net revenues........................... 1,461,257 282,235 -- 1,743,492
Expenses
Salaries, wages and benefits.............. 852,671 132,492 -- 985,163
Supplies.................................. 93,453 33,020 -- 126,473
Rent...................................... 59,393 14,930 -- 74,323
Other operating expenses.................. 285,686 44,328 -- 330,014
Depreciation and amortization............. 56,421 12,705 -- 69,126
Interest.................................. 67,184 6,375 -- 73,559
Restructuring............................. 5,769 -- -- 5,769
---------- ------------ ----------- ----------
Total expenses.................... 1,420,577 243,850 -- 1,664,427
---------- ------------ ----------- ----------
Income before income taxes, extraordinary
charges and cumulative effect of change in
accounting for income taxes............... 40,680 38,385 -- 79,065
Income tax expense (benefit)................ (5,372) 15,461 -- 10,089
---------- ------------ ----------- ----------
Income before extraordinary charges and
cumulative effect of change in accounting
for income taxes.......................... $ 46,052 $ 22,924 $ -- $ 68,976
========= ========== ========= =========
Income before extraordinary charges and
cumulative effect available to common
stockholders.............................. $ 43,164 $ 22,924 $ -- $ 66,088
========= ========== ========= =========
Income before extraordinary charges and
cumulative effect per share
Primary................................ $ 1.49 $ 0.85 $ 1.20
Shares used in per share calculation
Primary................................ 29,394 27,072 28,718(m) 55,790
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
65
<PAGE> 67
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN VENCOR
YEAR ENDED YEAR ENDED
MAY 31, DECEMBER 31, PRO FORMA PRO FORMA
1992 1992 ADJUSTMENTS COMBINED
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net revenues
Patient revenues.......................... $1,136,892 $210,721 $ -- $1,347,613
Other revenues............................ 236,463 3,969 -- 240,432
---------- ------------ ----------- ----------
Net revenues...................... 1,373,355 214,690 -- 1,588,045
Expenses
Salaries, wages and benefits.............. 819,375 102,133 -- 921,508
Supplies.................................. 91,541 26,399 -- 117,940
Rent...................................... 73,044 12,924 -- 85,968
Other operating expenses.................. 264,670 35,147 -- 299,817
Depreciation and amortization............. 49,006 7,402 -- 56,408
Interest.................................. 60,270 2,129 -- 62,399
Restructuring............................. 92,529 -- -- 92,529
Adjustment to carrying value of properties
previously reported as discontinued
operations............................. 20,736 -- -- 20,736
---------- ------------ ----------- ----------
Total expenses.................... 1,471,171 186,134 -- 1,657,305
---------- ------------ ----------- ----------
Income (loss) before income taxes and
extraordinary charges..................... (97,816) 28,556 -- (69,260)
Income tax expense.......................... 923 11,128 -- 12,051
Reinstatement of discontinued operations,
net of tax................................ 24,743 -- -- 24,743
---------- ------------ ----------- ----------
Income (loss) before extraordinary
charges................................... $ (73,996) $ 17,428 $ -- $ (56,568)
========= ========== ========= =========
Income (loss) before extraordinary charges
available to common stockholders.......... $ (75,440) $ 17,428 $ -- $ (58,012)
========= ========== ========= =========
Income (loss) before extraordinary charges
per share
Primary................................ $ (2.79) $ 0.63 $ (1.08)
Shares used in per share calculation
Primary................................ 27,073 27,507 26,450(m) 53,957
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
66
<PAGE> 68
VENCOR, INC. AND THE HILLHAVEN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HILLHAVEN VENCOR
MAY 31, PRO FORMA HILLHAVEN JUNE 30, PRO FORMA PRO FORMA
1995 ADJUSTMENTS PRO FORMA 1995 ADJUSTMENTS COMBINED
---------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................ $ 55,921 $ (3,000)(b)
(4,500)(c) $ 48,421 $ 3,496 $ (1,131)(e) $ 50,786
Accounts and notes receivable, net....... 191,526 -- 191,526 120,091 -- 311,617
Inventories.............................. 18,196 -- 18,196 6,952 -- 25,148
Other current assets..................... 32,682 1,332(a) 34,014 23,021 19,491(j) 76,526
---------- ----------- ---------- -------- ----------- ----------
Total Current Assets.............. 298,325 (6,168) 292,157 153,560 18,360 464,077
Long-term notes receivable, net............ 81,444 -- 81,444 -- -- 81,444
Property and equipment, net................ 869,226 -- 869,226 295,205 -- 1,164,431
Investments available for acquisitions and
general corporate purposes............... -- -- -- 20,469 (20,469)(e) --
Other assets............................... 88,936 (463)(b) 88,473 26,554 -- 115,027
---------- ----------- ---------- -------- ----------- ----------
Total Assets...................... $1,337,931 $ (6,631) $1,331,300 $495,788 $ (2,109) $1,824,979
========== =========== ========== ========= ============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable......................... $ 67,882 -- $ 67,882 $ 23,625 $ -- $ 91,507
Accrued expenses......................... 117,105 -- 117,105 25,826 -- 142,931
Income taxes payable..................... 99 $ (1,431)(a) (27,173)(j)
1,332(a) -- 7,682 19,491(j) --
Current portion of long-term debt........ 43,234 -- 43,234 836 -- 44,070
---------- ----------- ---------- -------- ----------- ----------
Total Current Liabilities......... 228,320 (99) 228,221 57,969 (7,682) 278,508
Deferred credits and other liabilities..... 47,804 1,599(a)
(3,000)(b) 46,403 18,116 -- 64,519
Long-term debt............................. 625,857 3,577(a)
(12,000)(b) (2,822)(h)
12,000(b) 629,434 144,285 90,387(i) 861,284
SHAREHOLDERS' EQUITY:
Preferred stock.......................... 15 -- 15 -- (15)(i) --
Common stock............................. 28,388 -- 28,388 7,502 65(f)
189(g)
411(h)
(20,551)(l) 16,004
Additional paid-in capital............... 440,168 -- 440,168 181,556 (65)(f)
23,764(g)
2,411(h)
(100,415)(i)
24,178(j)
20,551(l) 592,148
Retained earnings........................ 56,676 (1,599)(a) (21,600)(e)
(3,577)(a) (3,804)(f)
1,431(a) (23,953)(g)
(463)(b) 10,043(i)
(4,500)(c) 47,968 107,578 2,995(j) 119,227
Other shareholders' equity............... (89,297) -- (89,297) (21,218) 3,804(f) (106,711)
---------- ----------- ---------- -------- ----------- ----------
Net shareholders' equity.......... 435,950 (8,708) 427,242 275,418 (81,992) 620,668
---------- ----------- ---------- -------- ----------- ----------
Total liabilities and equity...... $1,337,931 $ (6,631) $1,331,300 $495,788 $ (2,109) $1,824,979
========== =========== ========== ========= ============ ==========
BASED ON A CONVERSION NUMBER OF 0.977
Book value per share..................... $ 12.90 $ 12.65 $ 9.72 $ 9.70
Common shares outstanding, excluding
shares held in trust or treasury....... 33,783 33,783 28,348 1,883(k) 64,014
BASED ON A CONVERSION NUMBER OF 0.768
Book value per share..................... $ 12.90 $ 12.65 $ 9.72 $ 11.03
Common shares outstanding, excluding
shares held in trust or treasury....... 33,783 33,783 28,348 (5,690)(k) 56,441
</TABLE>
See notes to unaudited pro forma condensed combined financial information.
67
<PAGE> 69
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF PRESENTATION
For accounting purposes, the Merger will be treated as a pooling of
interests. Accordingly, the accompanying unaudited pro forma condensed combined
financial statements give retroactive effect to the Merger and include the
combined operations of Vencor and Hillhaven for all periods presented. Hillhaven
net revenues of $734,034 and net income of $33,355 for the period June 1, 1993
to November 30, 1993 have been excluded from the pro forma financial statements.
Hillhaven net revenues and net income for the period from June 1, 1994 to
November 30, 1994 amounted to $781,473 and $27,412, respectively.
Vencor's annual financial reporting period ending on December 31 will be
adopted by the combined entity upon consummation of the Merger.
The unaudited pro forma condensed combined financial statements of
Hillhaven have been prepared to give retroactive effect to the merger with
Nationwide on June 30, 1995. On October 31, 1994, Hillhaven acquired CPS and AIS
in a business combination accounted for as a pooling of interests and,
accordingly, Hillhaven's results of operations have been restated to include the
operations of CPS and AIS for all periods presented.
Shares of Hillhaven common stock held in the Grantor Trust are excluded in
the calculation of net income per share and book value per share. Upon
consummation of the Merger, the Grantor Trust will be terminated and the shares
used to satisfy Hillhaven's obligations under the Stock Incentive Plan,
Performance Investment Plan and certain other employee benefit plans. Shares
held in the Grantor Trust totalled 4,067 at May 31, 1995.
68
<PAGE> 70
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 -- PRO FORMA ADJUSTMENTS
The adjustments to the pro forma financial statements are discussed below:
The Nationwide Transaction
The pro forma adjustments (a), (b) and (c) below reflect those transactions
relating to the Nationwide Transaction occurring subsequent to May 31, 1995.
(a) To (i) adjust the redeemable preferred stock in the amount of $1,599 to
its $3,000 par value, (ii) write off the unamortized discount on the Nationwide
Senior Subordinated Notes in the amount of $3,577 (tax benefit of $1,431) and
(iii) reclassify $1,332 from income taxes payable to income tax refunds
receivable (other current assets).
(b) To record (i) the redemption of the redeemable preferred stock for
$3,000 in cash and (ii) the redemption of the Nationwide Senior Subordinated
Notes in the amount of $12,000, financed by borrowings, and (iii) the write-off
of deferred financing charges amounting to $463.
(c) To record transaction costs in the amount of $4,500 in connection with
the Nationwide Transaction which were paid in cash and are nondeductible for tax
purposes. Aggregate transaction costs totalling $8,707 also include the
write-off of the unamortized discount on the Nationwide Senior Subordinated
Notes in the amount of $3,744 and the write-off of deferred financing charges
amounting to $463 included in adjustments (a) and (b) above, respectively.
The Merger
(d) To eliminate service fees between Vencor and Hillhaven.
(e) To record transaction costs in the amount of $21,600 in connection with
the Merger which are not deductible for income tax purposes. The remaining
$27,757 of transaction costs are included in adjustments (f) and (g) below, with
the tax effects included in adjustment (j).
(f) To record approximately 261 shares of Vencor common stock issued in
consideration of the required cancellation of options granted under certain
Hillhaven stock option plans based on a Conversion Number of 0.977 and a
Transaction Value of $31.00. The adjustment includes the write-off of unearned
compensation amounting to $3,804. The adjustment to common stock and additional
paid-in capital is calculated as follows:
<TABLE>
<S> <C>
Transaction Value......................................................... $ 31.00
Less average exercise price of options.................................... (13.27)
-------
Difference................................................................ 17.73
Divide by Transaction Value............................................... / 31.00
-------
Ratio..................................................................... 0.572
Conversion Number......................................................... X 0.977
-------
0.559
Stock options outstanding................................................. X 467
-------
Equivalent Vencor shares.................................................. 261
Par value of Vencor stock................................................. X 0.25
-------
Reclassification from additional paid-in capital to common stock.......... $ 65
========
</TABLE>
(g) To record approximately 755 shares of Vencor common stock issued in
consideration of the satisfaction of performance shares granted under certain
Hillhaven option plans based on a Conversion
69
<PAGE> 71
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Number of 0.977 and a Transaction Value of $31.00. The adjustment to common
stock and additional paid-in capital are calculated as follows:
<TABLE>
<S> <C>
Conversion Number......................................................... 0.977
Merger Agreement percentage............................................... X 75%
--------
Product................................................................... 0.733
Performance Shares........................................................ X 1,030
--------
Equivalent Vencor shares.................................................. 755
Vencor Average Price...................................................... X $31.73
--------
Compensation expense...................................................... $ 23,953
========
Equivalent Vencor shares.................................................. 755
Par value of Vencor stock................................................. X $0.25
--------
Adjustment to common stock................................................ 189
Adjustment to additional paid-in capital.................................. 23,764
--------
Total........................................................... $ 23,953
========
</TABLE>
(h) To record approximately 1,644 shares of Vencor common stock issued in
consideration of the required cancellation of the Performance Investment Plan
Options based on a Conversion Number of 0.977 and a Transaction Value of $31.00.
The adjustments to common stock and additional paid-in capital are
calculated as follows:
<TABLE>
<S> <C>
Transaction Value........................................................ $ 31.00
Exercise price........................................................... (15.71)
--------
Difference............................................................... 15.29
Transaction Value........................................................ / 31.00
--------
Ratio.................................................................... 0.493
Conversion Number........................................................ X 0.977
--------
0.482
Performance Investment Plan Options...................................... X 3,412
--------
Equivalent Vencor shares................................................. 1,644
Par value of Vencor stock................................................ X 0.25
--------
Adjustment to common stock............................................... 411
Original participants' capital contributions included in long-term
debt................................................................... (2,822)
--------
Adjustment to additional paid-in capital................................. $ 2,411
=========
</TABLE>
(i) To record the cash-out of Hillhaven preferred stock for $90,387, which
represents a 10% discount from the aggregate liquidation value of $100,430. The
payment to Tenet will be financed with external borrowings. Estimated interest
expense at 6.5% amounted to $5,875 for the year ended December 31, 1994 with a
tax benefit of $2,350. For the six months ended June 30, 1995, estimated
interest expense at 7.4% amounted to $3,353 with a tax benefit of $1,341. The
interest rate is based on Hillhaven's average interest rate for the period on
its term loan facility.
(j) To record (i) the decrease in income taxes payable and increase in
additional paid-in capital in the amount of $24,178 representing the tax benefit
arising from conversion of Performance Investment Plan Options and stock options
under certain Hillhaven stock option plans, (ii) the decrease in income taxes
70
<PAGE> 72
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
payable and increase in retained earnings in the amount of $2,995 which
represents the tax effect of compensation expense related to the conversion of
performance shares and (iii) a reclassification of $19,491 from income taxes
payable to income tax refunds receivable (other current assets).
(k) To adjust common shares outstanding at June 30, 1995 as follows:
<TABLE>
<CAPTION>
CONVERSION NUMBER
-----------------
0.977 0.768
------- -------
<S> <C> <C>
Hillhaven equivalent shares outstanding..................... 33,006 25,945
Hillhaven pro forma common shares outstanding............... 33,783 33,783
------- -------
Adjustment.................................................. (777) (7,838)
Vencor common shares issued in connection with certain
Hillhaven stock option plans.............................. 2,660 2,148
------- -------
Net increase (decrease) in pro forma combined common shares
outstanding............................................... 1,883 (5,690)
====== ======
</TABLE>
(l) To record the Merger under pooling of interests accounting based on
64,014 pro forma combined common shares outstanding with a par value of $0.25
per share.
(m) To reflect the Vencor shares issued in the Merger in the number of
shares used in earnings per share calculations. See Note 4.
Arlington Acquisition
(n) To record (i) the decrease in pro forma depreciation expense resulting
from the write down in basis of assets purchased in the Arlington Acquisition,
(ii) the pro forma interest expense on the $8,000 borrowings incurred to finance
the Arlington Acquisition based on an interest rate of 7% which represents the
average rate on Vencor's credit facility for the respective periods and (iii)
the tax effect with respect to the depreciation and interest adjustments in (i)
and (ii) above.
NOTE 3 -- INCOME TAXES
Estimated provisions for income taxes related to pro forma adjustments are
based on an assumed combined federal and state income tax rate of 40%, adjusted
for certain nondeductible items.
71
<PAGE> 73
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4 -- EARNINGS PER COMMON SHARE
Shares used in pro forma earnings per common and common equivalent share
are computed as follows based on a Conversion Number of 0.977 and a Transaction
Value of $31.00:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED JUNE FOR THE YEARS ENDED
30, DECEMBER 31,
----------------- ------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PRIMARY
Vencor:
Weighted average common and common
equivalent shares.................... 28,083 25,719 25,994 27,072 27,507
Hillhaven:
Weighted average common and common
equivalent shares.................... 33,930 31,932 32,830 29,394 27,073
Conversion Number......................... 0.977 0.977 0.977 0.977 0.977
------ ------ ------ ------ ------
33,150 31,198 32,075 28,718 26,450
====== ====== ====== ====== ======
Shares used in earnings per common and
common share equivalent computations.... 61,233 56,917 58,069 55,790 53,957
====== ====== ====== ====== ======
FULLY DILUTED
Vencor:
Weighted average common and common
equivalent shares.................... 32,506 30,142 30,417 27,072 27,507
====== ====== ====== ====== ======
Hillhaven:
Weighted average common and common
equivalent shares.................... 41,862 40,064 41,006 29,394 27,073
Conversion Number....................... 0.977 0.977 0.977 0.977 0.977
------ ------ ------ ------ ------
40,899 39,143 40,063 28,718 26,450
====== ====== ====== ====== ======
Shares used in earnings per common and
common share equivalent
computations......................... 73,405 69,285 70,480 55,790 53,957
====== ====== ====== ====== ======
</TABLE>
72
<PAGE> 74
VENCOR, INC. AND THE HILLHAVEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The calculation of pro forma earnings per common and common equivalent
share reflects the maximum number of shares of Vencor common stock issuable in
connection with the Merger. The following pro forma share and per share data
reflect the minimum number of shares of Vencor common stock issuable in
connection with the Merger (based on a Conversion Number of 0.768 and a
Transaction Value of $32.25) and are presented below for informational purposes
only.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED JUNE FOR THE YEARS ENDED
30, DECEMBER 31,
----------------- ------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PRIMARY
Shares used in earnings per common and
common share equivalent computations.... 54,141 50,243 51,207 49,647 48,299
Pro forma earnings per share.............. $ 0.81 $ 0.79 $ 1.76 $ 1.34 ($1.20)
FULLY DILUTED
Shares used in earnings per common and
common share equivalent computations.... 64,656 60,911 61,910 49,647 48,299
Pro forma earnings per share.............. $ 0.76 $ 0.73 $ 1.62 $ 1.34 $(1.20)
</TABLE>
Fully diluted earnings per share were not presented by either Vencor or
Hillhaven for their respective 1993 and 1992 annual reporting periods.
NOTE 5 -- TRANSACTION COSTS AND EXPENSES
No provision has been reflected in the unaudited pro forma condensed
combined income statements for expenses expected to be incurred in connection
with both the Nationwide Transaction and the Merger. Estimated costs for each
transaction are $8,707 and $49,357, respectively, including financial advisory,
legal and accounting fees and expenses, printing and mailing costs, and
compensation expense incurred as a result of the acceleration of vesting of
certain employee benefits. The unaudited pro forma condensed combined income
statements do not give effect to any revenue enhancements and cost savings which
may be realized following the Merger. 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.
Conditioned upon and concurrent with the consummation of the Merger, Vencor
expects to enter into a senior credit facility (the "Credit Facility")
aggregating $1 billion, the term of which will approximate five and one-half
years. The Credit Facility will, among other things, (i) replace prior revolving
credit agreements associated with both Vencor and Hillhaven, (ii) provide for
the liquidation of outstanding Hillhaven Preferred Stock in accordance with the
terms of the Merger Agreement and (iii) support anticipated refinancings of
certain Hillhaven long-term debt. Although the amount of after-tax loss that
would be incurred by Vencor in connection with anticipated refinancing
activities 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). No provision has been reflected in the unaudited pro forma condensed
combined financial statements for such after-tax loss which may be incurred in
connection with anticipated refinancings of long-term debt.
73
<PAGE> 75
ITEM 7.(C) EXHIBITS
The following exhibits are included in this Form 8-K:
<TABLE>
<S> <C>
11(a) Statement re Computation of Earnings per Common Share of The Hillhaven Corporation
for the three years ended May 31, 1995.
11(b) Statement re Supplemental Computation of Earnings per Common Share of The Hillhaven
Corporation for the three years ended May 31, 1995.
23 Consent of KPMG Peat Marwick LLP.
27 Supplemental Financial Data Schedule of The Hillhaven Corporation for the year ended
May 31, 1995 (included in filings under the Electronic Data Gathering, Analysis and
Retrieval System) (for SEC use only).
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: September 1, 1995 /s/ Jill L. Force
--------------------------------------
Jill L. Force
General Counsel and Secretary
74
<PAGE> 1
EXHIBIT 11(A)
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 Tenet......................... -- 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)
75
<PAGE> 2
EXHIBIT 11(A)
THE HILLHAVEN CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (CONTINUED)
(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.
76
<PAGE> 1
EXHIBIT 11(B)
THE HILLHAVEN CORPORATION
SUPPLEMENTAL 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)........................... 33,435 27,241 27,145
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 Tenet................................... -- 3,428 2,002
------- ------- -------
Weighted average number of shares and share equivalents outstanding (3)..... 33,825 30,952 29,394
======= ======= =======
Income before extraordinary charge and cumulative effect of accounting
change.................................................................... $55,096 $64,499 $46,052
Adjustments related to proceeds from exercise of options and warrants under
the "modified treasury stock" method...................................... -- -- 591
Accretion of discount on redeemable preferred stock......................... (150) (178) (47)
Preferred stock dividends................................................... (6,850) (7,655) (2,888)
------- ------- -------
Adjusted income............................................................. 48,096 56,666 43,708
Extraordinary charge, net of income taxes................................... (570) (1,062) (2,217)
Cumulative effect of change in accounting for income taxes.................. -- -- (1,103)
------- ------- -------
Net income as adjusted...................................................... $47,526 $55,604 $40,388
======= ======= =======
Primary earnings per share:
Income before extraordinary charge and cumulative
effect of accounting change............................................ $ 1.43 $ 1.83 $ 1.49
Extraordinary charge...................................................... (.02) (.03) (.08)
Cumulative effect of change in accounting for income taxes................ -- -- (.04)
------- ------- -------
Income per share.......................................................... $ 1.41 $ 1.80 $ 1.37
======= ======= =======
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in primary calculation............... 33,825 30,952 29,394
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)......................... 41,841 39,326 35,902
======= ======= =======
Income before extraordinary charge and cumulative effect of accounting
change, adjusted per primary calculation.................................. $48,096 $56,666 $43,708
Adjustments for interest expense and related income taxes................... 7,204 6,816 7,056
------- ------- -------
Adjusted income used in fully diluted calculation........................... 55,300 63,482 50,764
Extraordinary charge, net of income taxes................................... (570) (1,062) (2,217)
Cumulative effect of change in accounting for income taxes.................. -- -- (1,103)
------- ------- -------
Adjusted income used in fully diluted calculation........................... $54,730 $62,420 $47,444
======= ======= =======
Fully diluted earnings per share:
Income before extraordinary charge and cumulative effect of accounting
change................................................................. $ 1.32 $ 1.62 $ 1.41
Extraordinary charge...................................................... (.01) (.03) (.06)
Cumulative effect of change in accounting for income taxes................ -- -- (.03)
------- ------- -------
Income per share (4)........................................................ $ 1.31 $ 1.59 $ 1.32
======= ======= =======
</TABLE>
---------------
(1) On June 30, 1995, Hillhaven acquired Nationwide Care, Inc. and its
affiliated corporations and partnerships in a business combination accounted
for as a pooling of interests. The Company issued 5,000,000 common shares in
connection with the share exchange. All earnings per share information has
been restated to reflect this acquisition.
(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.
77
<PAGE> 1
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the use of our reports included herein dated July 7, 1995
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 our report dated July 14, 1995
relating to the supplemental consolidated balance sheets of The Hillhaven
Corporation and subsidiaries as of May 31, 1995 and 1994, and the related
supplemental consolidated statements of income, cash flows, and stockholders'
equity for each of the years in the three-year period ended May 31, 1995, which
reports appear in the Form 8-K of Vencor, Inc. dated September 1, 1995.
Our reports refer to a change in the method of accounting for income taxes
effective June 1, 1992.
LOGO
Seattle, Washington
September 1, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF THE HILLHAVEN CORPORATION 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> 55,921
<SECURITIES> 0
<RECEIVABLES> 191,526
<ALLOWANCES> 13,265
<INVENTORY> 18,196
<CURRENT-ASSETS> 298,325
<PP&E> 869,226
<DEPRECIATION> 269,464
<TOTAL-ASSETS> 1,337,931
<CURRENT-LIABILITIES> 228,320
<BONDS> 625,857
<COMMON> 28,388
0
15
<OTHER-SE> 407,547
<TOTAL-LIABILITY-AND-EQUITY> 1,337,931
<SALES> 0
<TOTAL-REVENUES> 1,704,206
<CGS> 0
<TOTAL-COSTS> 1,449,521
<OTHER-EXPENSES> 122,529
<LOSS-PROVISION> 5,633
<INTEREST-EXPENSE> 55,238
<INCOME-PRETAX> 84,424
<INCOME-TAX> 29,328
<INCOME-CONTINUING> 55,096
<DISCONTINUED> 0
<EXTRAORDINARY> (570)
<CHANGES> 0
<NET-INCOME> 54,526
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.31
</TABLE>
