<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1996
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
REGENCY HEALTH SERVICES, INC.*
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0210226
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>
2742 DOW AVENUE
TUSTIN, CALIFORNIA 92780
(714) 544-4443
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
BRUCE D. BROUSSARD
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
2742 DOW AVENUE
TUSTIN, CALIFORNIA 92780
(714) 544-4443
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
KENNETH H. LEVIN, ESQ.
SIDLEY & AUSTIN
555 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90013-1010
(213) 896-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH
GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
12 1/4% Subordinated Notes due 2003......... $50,000,000 100% $50,000,000 $17,242
Guarantees.................................. -- -- -- (1)
</TABLE>
(1) Pursuant to Rule 457(n) under the Securities Act, no separate fee is payable
for the Guarantees.
--------------------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(COVER PAGE CONTINUES)
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- --------------------------------------------------------------------------------
<PAGE>
- -------------
* The following subsidiaries of Registrant are co-Registrants:
<TABLE>
<CAPTION>
I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION
SUBSIDIARY INCORPORATION NUMBER
- --------------------------------------------- --------------- --------------------
<S> <C> <C>
Braswell Enterprises, Inc. California 95-2506400
Brel, Inc. California 95-3277260
Brittany Rehabilitation Center, Inc. California 68-0258445
Care Finance, Inc. California 33-0234899
Care Home Health Services California 95-3701776
Carmichael Rehabilitation Center California 33-0273967
Casa de Vida Rehabilitation Center California 77-0173223
Coalinga Rehabilitation Center California 33-0276607
Covina Rehabilitation Center California 95-4143257
Evergreen Rehabilitation Center California 33-0275077
Fairfield Rehabilitation Center California 68-0147623
First Class Pharmacy, Inc. California 33-0482814
Fullerton Rehabilitation Center California 33-0275051
Glendora Rehabilitation Center California 95-4254586
Grand Terrace Rehabilitation Center California 33-0275058
Hallmark Health Services, Inc. California 33-0238351
Harbor View Rehabilitation Center California 33-0282137
Hawthorne Rehabilitation Center California 33-0273795
HealthCare Network California 95-2452305
Heritage Rehabilitation Center California 33-0275060
Huntington Beach Convalescent Hospital California 33-0188584
Jackson Rehabilitation Center, Inc. California 33-0590471
Linda-Mar Rehabilitation Center California 33-0275064
Meadowbrook Rehabilitation Center California 33-0275079
Meadowview Rehabilitation Center California 33-0275081
Newport Beach Rehabilitation Center California 33-0275085
North State Home Health Care, Inc. California 68-0295781
Paradise Rehabilitation Center, Inc. California 68-0296046
Paso Robles Rehabilitation Center California 33-0275086
RHS Management Corporation California 33-0261108
Rose Rehabilitation Center California 33-0275088
Rosewood Rehabilitation Center, Inc. California 68-0296043
Shandin Hills Rehabilitation Center California 33-0274086
Stockton Rehabilitation Center, Inc. California 68-0296045
Vista Knoll Rehabilitation Center, Inc. California 33-0569625
Willowview Rehabilitation Center California 33-0273968
Oasis Mental Health Treatment Center, Inc. California 33-0674542
Care Enterprises, Inc. Delaware 95-3311961
Regency - North Carolina, Inc. North Carolina 56-1954175
Americare HomeCare, Inc. Ohio 31-1221902
Americare Midwest, Inc. Ohio 34-1052139
Circleville Health Care Corp. Ohio 31-0921482
Marion Health Care Corp. Ohio 31-1037975
New Lexington Health Care Corp. Ohio 31-1005156
SCRS & Communicology, Inc., of Ohio Ohio 33-0486774
Regency - Tennessee, Inc. Tennessee 33-0690226
Care Enterprises West Utah 87-0309021
Americare of West Virginia, Inc. West Virginia 31-1096121
Beckley Health Care Corp. West Virginia 31-1042548
Dunbar Health Care Corp. West Virginia 55-0593872
Glenville Health Care, Inc. West Virginia 55-0618169
Putnam Health Care Corp. West Virginia 31-0996773
Salem Health Care Corp. West Virginia 31-0996769
</TABLE>
2742 DOW AVENUE
TUSTIN, CALIFORNIA 92780
(714) 544-4443
(Address, including zip code, and telephone number, including area code, of
co-Registrants' principal executive offices)
BRUCE D. BROUSSARD
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
2742 DOW AVENUE
TUSTIN, CALIFORNIA 92780
(714) 544-4443
(Name, address, including zip code, and telephone number, including area code,
of agents for service)
<PAGE>
REGENCY HEALTH SERVICES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION
OF INFORMATION REQUIRED BY PART I OF FORM S-4
<TABLE>
<CAPTION>
ITEM NO. FORM S-4 CAPTION LOCATION OR CAPTION IN PROSPECTUS
- --------- ------------------------------------------------ ----------------------------------------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................. Facing Page; Outside Front Cover Page of Prospectus;
Cross-Reference Sheet
Item 2 Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front Cover Page; Available Information;
Incorporation of Certain Documents by Reference;
Table of Contents
Item 3 Risk Factors, Ration of Earnings to Fixed
Charges and Other Information.................. Summary; Risk Factors; Selected Consolidated
Financial Data
Item 4 Terms of the Transaction........................ Use of Proceeds; The Exchange Offer; Description of
the Exchange Notes
Item 5 Pro Forma Financial Information................. Pro Forma Financial Information
Item 6 Material Contacts with the Company Being
Acquired....................................... Not Applicable
Item 7 Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................... Plan of Distribution
Item 8 Interests of Named Experts and Counsel.......... Not Applicable
Item 9 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
Item 10 Information with Respect to S-3 Registrants..... The Summary; Pro Forma Financial Information
Item 11 Incorporation of Certain Information by
Reference...................................... Incorporation of Certain Documents by Reference
Item 12 Information with Respect to S-2 or S-3
Registrants.................................... Business; Index to Financial Statements; Pro Forma
Financial Information; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 13 Incorporation of Certain Information by
Reference...................................... Incorporation of Certain Documents by Reference
Item 14 Information with Respect to Registrants Other
than S-2 or S-3 Registrants.................... Not Applicable
Item 15 Information with Respect to S-3 Companies....... Not Applicable
Item 16 Information with Respect to S-2 or S-3
Companies...................................... Not Applicable
Item 17 Information with Respect to Companies Other than
S-2 or S-3 Companies........................... Not Applicable
Item 18 Information if Proxies, Consents or
Authorizations are to be Solicited............. Not Applicable
Item 19 Information if Proxies, Consents or
Authorizations are not to be Solicited in an
Exchange Offer................................. Incorporation of Certain Documents by Reference
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION)
DATED AUGUST 26, 1996
REGENCY HEALTH SERVICES, INC.
OFFER TO EXCHANGE
12 1/4% SUBORDINATED NOTES DUE 2003
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
OUTSTANDING 12 1/4% SUBORDINATED NOTES DUE 2003
($50,000,000 PRINCIPAL AMOUNT)
The Exchange Offer will expire at 5:00 P.M., New York City time, on
, 1996, unless extended. As described in this Prospectus,
withdrawal rights with respect to the Exchange Offer will expire at the
expiration of the Exchange Offer.
Regency Health Services, Inc., a Delaware corporation ("Regency" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal"), to exchange $1,000 in principal amount of Regency's 12 1/4%
Subordinated Notes due 2003 that have been registered under the Securities Act
of 1933, as amended (the "Exchange Notes") for each $1,000 in principal amount
of its outstanding 12 1/4% Subordinated Notes due 2003 (the "Outstanding Notes"
and, together with the Exchange Notes, the "Notes") (the "Exchange Offer"). The
Outstanding Notes were sold without registration under the Securities Act of
1933, as amended (the "Securities Act") pursuant to an exemption under Section
4(2) thereof, and resales were limited to certain qualified institutional buyers
in reliance on, and subject to the restrictions contained in, Rule 144A under
the Securities Act and to a limited number of institutional investors that are
"accredited investors" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act ("Institutional Accredited Investors"). The Exchange
Notes have been registered under the Securities Act pursuant to a Registration
Statement (as defined herein) of which this Prospectus constitutes a part. The
Exchange Offer is being made pursuant to the terms of the Notes Registration
Rights Agreement, dated as of June 28, 1996 (the "Registration Rights
Agreement"), among Regency and Bear, Stearns & Co. Inc. and NationsBanc Capital
Markets, Inc. as the placement agents for the Outstanding Notes (the "Initial
Purchasers").
SEE "RISK FACTORS" COMMENCING ON PAGE 12 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
The date of this Prospectus is , 1996.
<PAGE>
(COVER PAGE CONTINUED)
The Exchange Notes will evidence the same indebtedness as the Outstanding
Notes that they will replace, will be entitled to the benefits of the Indenture
dated June 28, 1996 (the "Indenture"), among Regency, as Issuer, certain
subsidiaries of Regency, as Guarantors, and U.S. Trust Company of California,
N.A., as Trustee (the "Trustee").
The form and terms of the Exchange Notes will be substantially identical to
the Outstanding Notes, except that the issuance of the Exchange Notes has been
registered under the Securities Act and thus the Exchange Notes will not bear
legends restricting their transferability. The Exchange Notes will be treated as
a single class under the Indenture with any Outstanding Notes that remain
outstanding after the Exchange Offer. For federal income tax purposes, the
Exchange Offer will result in a tax-free exchange. Upon the completion of the
Exchange Offer, any Outstanding Notes not tendered in the Exchange Offer will
remain outstanding and will be entitled to the benefits of the Indenture, but
will not be entitled to any registration rights or have any other rights under
the Registration Rights Agreement. See "The Exchange Offer."
The Exchange Notes will be unsecured indebtedness of Regency ranking junior
in right of payment to the Company's "Senior Debt" (as defined in the
Indenture), and ranking pari passu in right of payment with the Outstanding
Notes not exchanged in the Exchange Offer, if any. The Notes are unconditionally
guaranteed on a subordinated basis (the "Guarantees") by substantially all of
the Company's existing subsidiaries (all of which are wholly owned) and certain
of the Company's future subsidiaries (the "Guarantors"). The Guarantees will be
subordinated in right of repayment to all existing and future Senior Debt of the
Guarantors. As of July 31, 1996, the aggregate principal amount of Senior Debt
of the Company was $119.0 million, which includes reimbursement obligations in
respect of $9.0 million of letters of credit (relating to the Company's
self-insurance programs) and the Company has availability of $41.0 million under
the Credit Agreement (as defined herein), all of which would be Senior Debt.
While the Indenture limits the ability of the Company to incur additional
indebtedness, there is no limitation on the amount of such additional
indebtedness that may be Senior Debt.
The Notes will mature on July 15, 2003. Interest on the Notes will be
payable on January 15 and July 15 of each year, commencing January 15, 1997, at
a rate of 12 1/4% per annum. The interest rate on the Outstanding Notes will
increase if the Exchange Offer is not consummated by , 1996. See
"Description of the Exchange Notes -- Purpose and the Effect of the Exchange
Offer."
The Notes are redeemable, in whole or in part, at the option of Regency at
any time on or after July 15, 2000, initially at 106.125% of their principal
amount at maturity, plus accrued interest, declining to 100% of their principal
amount, plus accrued interest, on or after July 15, 2002. See "Description of
the Exchange Notes -- Optional Redemption."
The Outstanding Notes are eligible for trading in the Private Offerings,
Resale and Trading through Automated Linkages (PORTAL) market. The Exchange
Notes will constitute a new issue of securities with no established trading
market. Although Bear, Stearns & Co. Inc. has informed Regency that it currently
makes a market in the Notes, it is not obligated to do so and any such market
making activities may be discontinued at any time without notice. Regency does
not intend to list the Exchange Notes on any national securities exchange or to
seek approval for quotation through any automated quotation system. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes. If a trading market does not develop, holders of the Exchange
Notes may experience difficulty in reselling the Exchange Notes or may be unable
to sell them.
The Exchange Notes issued in the Exchange Offer may be offered for resale,
resold and otherwise transferred by the holders thereof (other than any holder
that is an "affiliate" of Regency within the meaning of Rule 405 under the
Securities Act and certain broker-dealers) without complying with the
registration and prospectus delivery requirements of the Securities Act,
provided that the Exchange Notes are acquired in the ordinary course of the
holder's business and the holder has no arrangement or understanding with any
person to participate in a distribution of the Exchange Notes received in the
Exchange Offer. See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer."
<PAGE>
(COVER PAGE CONTINUED)
The Exchange Offer is not conditioned upon any minimum amount of Outstanding
Notes being tendered. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1996, unless extended (the "Expiration Date"). Tenders
of Outstanding Notes may be withdrawn at any time prior to the Expiration Date
in the manner set forth in this Prospectus. Subject to the terms and conditions
of the Exchange Offer, including such withdrawal rights, Outstanding Notes
validly tendered prior to the Expiration Date will be accepted on or promptly
after the Expiration Date. See "The Exchange Offer -- Withdrawal Rights."
This Prospectus and the Letter of Transmittal are being sent to all
registered holders of the Outstanding Notes as of , 1996.
Participation in the Exchange Offer is voluntary and holders of Outstanding
Notes should carefully consider whether to accept the offer made hereby.
Neither Regency nor the Guarantors will receive any proceeds from the
Exchange Offer. No dealer-manager or other soliciting agent is being used in
connection with the Exchange Offer. See "Use of Proceeds; the Redemption."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY REGENCY OR THE GUARANTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
REGISTERED SECURITIES TO WHICH THIS PROSPECTUS RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF REGENCY OR THE GUARANTORS SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act for the registration of the Exchange Notes
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Notes,
reference is made to the Registration Statement, including exhibits thereto, and
the financial statements and notes filed as a part thereof. Statements made in
this Prospectus concerning the contents of any contract, agreement or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or other document filed with the Commission as an
exhibit, reference is made to the exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a site on the World Wide Web at http:/www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
Company's common stock is traded on the New York Stock Exchange, and the
Company's reports and proxy statements and other information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
<PAGE>
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
REGENCY HEALTH SERVICES, INC., 2742 DOW AVENUE, TUSTIN, CALIFORNIA 92680,
ATTENTION: INVESTOR RELATIONS (TELEPHONE NUMBER: (714) 544-4443). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER
THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
------------------------
Information with respect to the Company's voting securities and principal
holders thereof, directors and executive officers, executive compensation and
certain relationships and related transactions is incorporated by reference from
the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1996, as amended.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.................................................................................................... 3
Risk Factors............................................................................................... 12
Use of Proceeds; the Redemption............................................................................ 18
Capitalization............................................................................................. 18
The Exchange Offer......................................................................................... 19
Selected Consolidated Financial Data....................................................................... 27
Pro Forma Financial Information............................................................................ 29
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 34
Business................................................................................................... 39
Description of the Exchange Notes.......................................................................... 53
Description of Certain Indebtedness........................................................................ 72
Plan of Distribution....................................................................................... 73
Independent Accountants.................................................................................... 73
Legal Matters.............................................................................................. 74
Incorporation of Certain Documents by Reference............................................................ 74
Index to Financial Statements.............................................................................. F-1
</TABLE>
<PAGE>
SUMMARY
THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE TERMS "COMPANY" AND "REGENCY" REFER TO REGENCY HEALTH SERVICES,
INC. AND ITS SUBSIDIARIES AND THEIR RESPECTIVE OPERATIONS.
THE COMPANY
Regency is one of the largest post-acute care providers in the United
States, with operations in 14 states. The Company provides a broad continuum of
post-acute care through in-patient services such as subacute care, skilled
nursing care, intermediate care and residential care, together with ancillary
services such as rehabilitation, home healthcare and pharmacy services.
As of July 31, 1996 the Company provided in-patient care in 112 facilities
with an aggregate of 11,541 licensed beds. In addition, Regency provides
contract rehabilitation services, including physical, speech, occupational and
audiology therapy in 140 Company-owned and non-affiliated facilities with over
15,000 beds in 14 states. The Company also provides pharmacy services in three
states to 136 Company-owned and non-affiliated healthcare facilities with over
13,000 beds. To augment the continuum of care provided, Regency offers home
healthcare services in 29 locations in California and Ohio.
The Company's strategy is to become an integrated provider of
cost-effective, outcome-oriented post-acute healthcare services in selected
geographic areas. The fundamental elements of the Company's strategy include:
- expanding the continuum of care and overall scope of services
provided by the Company;
- in-sourcing ancillary services such as pharmacy and
rehabilitation services;
- expanding the Company's marketing of ancillary services to
third-party facilities;
- acquiring new facilities and ancillary service providers in
markets where the Company currently operates as well as in
selected new markets;
- continuing its investment in management information systems;
and
- utilizing the principles of Total Quality Management.
Historically, the Company's operations have been concentrated in California,
which is characterized by a high penetration of managed healthcare. Operating in
this environment, the Company is focused on controlling operating costs while
delivering outcome-oriented healthcare. Accordingly, the Company believes it has
significant competitive advantages in the expanding national market for
post-acute managed healthcare.
STRATEGY IMPLEMENTATION
To provide Regency with the capital resources to implement its strategy, the
Company sold $110.0 million of its 9 7/8% Senior Subordinated Notes due 2002
(the "Senior Subordinated Notes") in October 1995, and entered into a revolving
credit agreement with NationsBank of Texas, N.A. that established a $50.0
million revolving credit facility (the "Credit Facility") in December 1995.
Consistent with the Company's strategy to enter new markets in selected
areas of the United States, in 1996 the Company completed the acquisition of 19
in-patient facilities with 2,461 licensed beds in North Carolina and Tennessee
and three institutional pharmacies with operations in California, Tennessee and
North Carolina. The aggregate purchase price for these acquisitions consisted of
$47.0 million in cash, which was funded with a portion of the proceeds of the
Senior Subordinated Notes offering, and $5.9 million in promissory notes.
3
<PAGE>
To further implement its strategy, the Company is actively integrating
ancillary services it provides into Company-operated in-patient facilities. For
example, subsequent to the 1995 acquisition of SCRS & Communicology, Inc.
("SCRS"), the Company began providing rehabilitation services to 48 of its
facilities.
The implementation of the Company's strategy has contributed to:
- a reduction in the Company's net operating revenue from
Medi-Cal from 34% for the six months ended June 30, 1995 to 25%
for the six months ended June 30, 1996; and
- an increase in the Company's ancillary services revenues from
9% of net operating revenue in the first six months of 1995 to
17% of net operating revenue in the first six months of 1996.
On a pro forma basis, after giving effect to the acquisitions discussed
above and other acquisitions and dispositions, the Offering and the Redemption,
the Company's net operating revenue was $495.0 million in 1995, as compared to
actual operating revenue of $416.1 million for such year. Similarly, Adjusted
EBITDA (as defined herein) in 1995 was $49.0 million, as compared to actual
Adjusted EBITDA of $43.7 million for such year. See "Pro Forma Financial
Information."
The Company believes the continued expansion of the continuum of care
offered to its patients is a significant element of the Company's growth
strategy. In addition to an expansion of services offered by the Company, this
growth may also permit the Company to decrease its reliance on Medi-Cal over
time. Accordingly, the Company from time to time reviews acquisition
opportunities, certain of which, if consummated, could be material to the
Company. See "Business -- Business Strategy; -- Expanding the Continuum of Care"
and "-- Expanding Through Acquisition."
The principal executive offices of the Company are located at 2742 Dow
Avenue, Tustin, California 92780, and the Company's telephone number is (714)
544-4443.
USE OF PROCEEDS; THE REDEMPTION
The Company will not receive any of the cash proceeds from the issuance of
the Exchange Notes for Outstanding Notes.
The Outstanding Notes were issued on June 28, 1996. Concurrently with the
issuance of the Outstanding Notes, the Company commenced, and on July 29, 1996
the Company consummated, the redemption of all $48.9 million of the Company's
outstanding 6 1/2% Convertible Subordinated Debentures due 2002 (the
"Convertible Debentures") for cash in such amount plus accrued interest. All of
the net proceeds from the issuance of the Outstanding Notes was used to
consummate the Redemption. See "Use of Proceeds; the Redemption."
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered.............. Up to $50,000,000 principal amount of 12 1/4%
Subordinated Notes due 2003 (the "Exchange
Notes" and, together with the Outstanding
Notes, the "Notes"). The form and terms of the
Exchange Notes will be substantially identical
to the Outstanding Notes, except that the
issuance of the Exchange Notes has been
registered under the Securities Act and thus
the Exchange Notes will not bear legends
restricting their transferability.
The Exchange Offer.............. Each $1,000 principal amount of the Exchange
Notes is being offered in exchange for $1,000
principal amount of the Outstanding Notes. The
issuance of the Exchange Notes is intended to
satisfy obligations of the Company set forth
in the Registration Rights Agreement, dated
June 28, 1996, among the Company, the
Guarantors, Bear Stearns & Co., Inc. and
NationsBanc Capital Markets, Inc. (the
"Initial Purchasers").
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Expiration Date................. The Exchange Offer will expire at 5:00 p.m.
New York City time, on , 1996,
unless extended, in which case the term
"Expiration Date" means the latest date and
time to which the Exchange Offer shall have
been extended. The Company will accept for
exchange any and all Outstanding Notes that
are properly tendered in the Exchange Offer
prior to 5:00 p.m. New York City time on the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the Expiration
Date.
Federal Income Tax
Considerations.................. Generally, for federal income tax purposes,
holders of Outstanding Notes will not
recognize any gain or loss upon the receipt of
Exchange Notes pursuant to the Exchange Offer.
See "The Exchange Offer -- Certain Federal
Income Tax Consequences."
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer --
Conditions to the Exchange Offer." The
Exchange Offer is not conditioned upon any
minimum aggregate principal amount of
Outstanding Notes being tendered for exchange.
Procedures for Tendering
Outstanding Notes............... Each holder of Outstanding Notes wishing to
accept the Exchange Offer must complete, sign
and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Outstanding Notes and any other required
documentation, to U.S. Trust Company of
California, N.A., as Exchange Agent, at the
address set forth herein. By tendering an
Outstanding Note for exchange, each holder
will represent to the Company that, among
other things, the Exchange Note to be issued
in exchange for that Outstanding Note is being
obtained in the ordinary course of business of
the person receiving such Exchange Note
whether or not such person is the holder of
that Outstanding Note; that neither the holder
nor any such other person has an arrangement
or understanding with any person to
participate in the distribution of such
Exchange Notes; and that neither the holder
nor any such other person is an "affiliate,"
as defined in Rule 405 under the Securities
Act, of the Company.
Special Procedures for
Beneficial
Owners.......................... Any beneficial owner of Outstanding Notes
whose Notes are registered in the name of a
broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender such
Outstanding Notes in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering the Outstanding
Notes, either make appropriate arrangements to
register ownership of the Outstanding Notes in
such owner's name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
</TABLE>
5
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<TABLE>
<S> <C>
may take considerable time and, if initiated
after the date of this Prospectus, may not be
able to be completed prior to the Expiration
Date.
Guaranteed Delivery
Procedures...................... Holders of Outstanding Notes who wish to
tender their Outstanding Notes and whose
Outstanding Notes are not immediately
available or who cannot deliver their
Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter
of Transmittal to U.S. Trust Company of
California, N.A., as Exchange Agent, prior to
the Expiration Date, must tender their
Outstanding Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Procedures for Tendering."
Exchange Agent.................. U.S. Trust Company of California.
Resales of Exchange Notes....... Based upon interpretations contained in
letters issued by the staff of the Commission
to independent third parties, the Company
believes that Exchange Notes issued pursuant
to the Exchange Offer in exchange for
Outstanding Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than (i) a broker-dealer who
purchased such Outstanding Notes directly from
the Company to resell pursuant to Rule 144A or
any other available exemption under the
Securities Act or (ii) a person that is an
"affiliate" (within the meaning of Rule 405 of
the Securities Act) of the Company), without
compliance with the registration and
prospectus delivery requirements of the
Securities Act, provided that the holder
acquired the Outstanding Notes, and is
acquiring the Exchange Notes, in the ordinary
course of such person's business and is not
participating, and has no arrangement or
understanding with any person to participate,
in the distribution of the Exchange Notes.
Holders of Outstanding Notes who have any such
arrangement or understanding or who otherwise
intend to participate in a distribution of the
Exchange Notes may not rely upon the position
of the staff of the Commission enunciated in
such no-action letters, and, in the absence of
an applicable exemption, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with a secondary resale
transaction. Each holder of Outstanding Notes
that desires to tender Outstanding Notes for
exchange in the Exchange Offer must represent
to the Company in the Letter of Transmittal
that such holder has no intention of
distributing the Exchange Notes.
Each broker-dealer (other than an affiliate of
the Company) that wishes to participate in the
Exchange Offer with respect to Outstanding
Notes acquired for such broker-dealer's own
account may be a statutory underwriter as to
Exchange Notes acquired and must acknowledge
that such broker-dealer will deliver a pro-
spectus meeting the requirements of the
Securities Act in connection with any resale
of such Exchange Notes. The Letter of Trans-
mittal states that by so acknowledging and
delivering such prospectus, a broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as
supplemented or amended from time to time, may
</TABLE>
6
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<TABLE>
<S> <C>
be used in connection with resales of Exchange
Notes received in exchange for Outstanding
Notes where such Outstanding Notes were
acquired by such broker-dealer as a result of
market-making or other activities. See "--
Terms of the Exchange Offer" below.
Any broker-dealer who purchased Outstanding
Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act and/or who
is an affiliate of the Company may not rely on
the no-action letters referred to above and
must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction involving the Exchange
Notes.
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify
for sale or register the Exchange Notes prior
to offering or selling such Exchange Notes.
The Company does not currently intend to take
any action to register or qualify the Exchange
Notes for resale in any such jurisdiction.
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
Issuer.......................... Regency Health Services, Inc.
Aggregate Amount................ $50,000,000 principal amount of 12 1/4%
Subordinated Notes due 2003.
Maturity Date................... July 15, 2003.
Interest Payment Dates.......... January 15 and July 15, commencing January 15,
1997.
Guarantees...................... The Notes are fully and unconditionally
guaranteed (the "Guarantees") on an unsecured
subordinated basis by substantially all of the
Company's existing subsidiaries and certain of
the Company's future subsidiaries
(collectively, the "Guarantors").
Ranking......................... The Notes are general unsecured obligations of
the Company, subordinated in right of payment
to all existing and future Senior Debt. The
Guarantees are subordinated in right of
payment to all existing and future Senior Debt
of the Guarantors. As of July 31, 1996, the
aggregate outstanding principal amount of
Senior Debt of the Company and the Guarantors
was $119.0 million, which includes
reimbursement obligations in respect of
approximately $9.0 million of letters of
credit (primarily related to the Company's
self-insurance programs), and the Company had
availability of approximately $41.0 million
under the Credit Facility (all of which would
be Senior Debt). See "Description of Certain
Indebtedness -- Credit Facility." While the
Indenture limits the ability of the Company to
incur additional indebtedness, there is no
limitation on the amount of such additional
indebtedness that may be Senior Debt. The
Indenture (as defined herein) prohibits the
Company from incurring, assuming or
guaranteeing any indebtedness that is
subordinated to any Senior Debt and senior in
right of payment to the Notes.
</TABLE>
7
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<TABLE>
<S> <C>
Optional Redemption............. The Notes are redeemable for cash, at the
option of the Company, in whole or in part, on
or after July 15, 2000, at the redemption
prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as
defined herein), if any, through the
redemption date.
Change of Control............... Upon the occurrence of a Change of Control (as
defined herein), holders of the Notes will
have the option to require the Company to
repurchase their Notes at a repurchase price
equal to 101% of the principal amount thereof,
plus accrued and unpaid interest and
Liquidated Damages, if any, to the repurchase
date. The Company's ability to repurchase the
Notes following a Change in Control will be
dependent upon it having sufficient cash
therefor and the terms of its then outstanding
Senior Debt. The Indenture does not prohibit
the Company from incurring Senior Debt that
restricts the ability of the Company to offer
to repurchase the Notes upon a Change of
Control. The terms of the Credit Facility
effectively will prohibit, and the indenture
governing the Senior Subordinated Notes may
prohibit, the Company from repurchasing the
Notes upon the occurrence of a Change of
Control. There can be no assurance that the
Company will have the financial resources to
repurchase the Notes in the event of a Change
of Control, particularly if such Change of
Control requires the Company to refinance, or
results in the acceleration of, other indebt-
edness. See "Description of the Exchange Notes
-- Certain Covenants" and "Description of
Certain Indebtedness -- Credit Facility."
Certain Covenants............... The Indenture contains certain covenants,
including limitations on the ability of the
Company and the Subsidiaries (as defined
herein) to: (i) incur additional indebtedness
and issue preferred stock; (ii) create certain
liens; (iii) sell equity interests in the
Subsidiaries; (iv) engage in certain
transactions with affiliates; (v) make certain
restricted payments; (vi) apply the net
proceeds of certain asset sales; (vii) agree
to payment restrictions affecting certain
Subsidiaries; (viii) engage in substantially
different lines of business; or (ix) engage in
mergers, consolidations or the transfer of all
or substantially all of the assets of the
Company or the Subsidiaries to another person.
The Subsidiaries are defined to exclude
Unrestricted Subsidiaries.
</TABLE>
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data set forth below, other
than operating data and payor mix data included therein, for the three years
ended December 31, 1995 have been derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP. In April
1994, the Company merged with Care Enterprises, Inc. ("Care") in a stock
transaction accounted for as a pooling-of-interests. The summary consolidated
financial data include information with respect to Care for periods prior to the
consummation of such merger, restated as though the companies had been merged
since inception. Because the Guarantees are the joint and several obligations of
each of the Guarantors, and the Guarantors as a group constitute substantially
all of the Company's revenues and assets, management has determined that the
separate presentation of financial statements and financial data for each
Guarantor would not be material to investors.
The summary unaudited historical consolidated financial data set forth
below, other than operating data and payor mix data included therein, for the
six months ended June 30, 1995 and 1996 and as of June 30, 1996 have been
derived from the unaudited Consolidated Financial Statements of the Company and,
in the opinion of management, reflect and include all material adjustments
necessary to present fairly the Company's financial position, results of
operations and cash flows. The consolidated results of operations for the six
months ended June 30, 1996 may not be indicative of the results that may be
expected for the year ending December 31, 1996 or any future period.
The summary unaudited pro forma consolidated statement of operations and
other financial data set forth below for the fiscal year ended December 31, 1995
and the six months ended June 30, 1996 have been prepared to reflect the
consummation of the Offering, the Redemption, the issuance of the Senior
Subordinated Notes and the use of such proceeds, and certain acquisitions and
dispositions consummated between January 1, 1995 and June 30, 1996 (see note 1
below) as if they had occurred on January 1, 1995. The as adjusted balance sheet
data give effect the Redemption as if it had occurred on June 30, 1996. The pro
forma financial information does not purport to represent what the Company's
results of operations would have been if the Offering, the Redemption, the
issuance of the Senior Subordinated Notes and the use of such proceeds, and such
acquisitions and dispositions had in fact been consummated on such dates. The
pro forma adjustments are based upon currently available information and certain
assumptions that the Company believes to be reasonable.
The summary historical and pro forma consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Pro Forma Financial
Information" and with the Consolidated Financial Statements and the notes
thereto included elsewhere or incorporated by reference in this Prospectus.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue................... $336,954 $377,336 $416,084 $495,025 $197,314 $267,595 $263,610
Operating expenses...................... 272,957 307,807 335,840 397,218 159,853 218,693 214,640
Depreciation and amortization........... 7,650 9,295 10,122 13,089 4,622 7,186 7,120
Interest expense........................ 5,941 7,844 9,676 16,576 3,835 8,346 9,860
Net income (loss)....................... 11,742 (800)(2) 2,845(3) 4,867 5,802
OTHER FINANCIAL DATA:
EBITDA (4).............................. 32,806 18,332 29,959 43,104 16,307 25,532 25,065
Capital expenditures.................... 12,723 12,576 14,223 7,829 5,600
Rent expense............................ 13,544 15,555 16,767 29,002 8,358 11,690 12,225
Ratio of earnings to
fixed charges (5)...................... 2.80x 1.09x 1.74x 1.60x 2.14x 1.79x 1.56x
Net cash provided by (used in) operating
activities............................. 12,655 11,098 30,460 13,036 (6,038)
Net cash used in investing activities... (31,082) (12,512) (28,377) (6,500) (59,497)
Net cash provided by (used in) financing
activities............................. 33,989 767 76,478 (947) 28,197
Ratio of EBITDA to interest expense
(6).................................... 5.52x 2.34x 3.10x 2.60x 4.25x 3.06x 2.54x
OPERATING DATA:
Number of healthcare facilities......... 95 93 94 93 112
Number of licensed beds................. 9,325 9,134 9,178 9,134 11,541
Occupancy percentage.................... 91.3% 91.5% 91.4% 91.8% 91.5%
PAYOR MIX DATA (% OF NET OPERATING
REVENUE):
Private and other....................... 25.5% 26.0% 28.2% 26.0% 29.4%
Medicare................................ 29.9 31.3 31.9 32.9 30.4
Medicaid................................ 44.6 42.7 39.9 41.1 40.2
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(7)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 66,900 $ 17,996
Net property and equipment........................................................... 132,595 132,595
Total assets......................................................................... 399,937 351,033
Total long-term debt, including current portion...................................... 235,045 186,141
Stockholders' equity................................................................. 81,484 80,631
</TABLE>
- -------------
(1) Gives pro forma effect to (i) the acquisition in February 1996 of (a) 18
in-patient facilities from Liberty Healthcare Limited Partnership, (b) an
enteral feeding business from Liberty Assisted Living Centers Limited
Partnership, and (c) Executive Pharmacy Services, Inc. from persons
affiliated with such partnerships (collectively, the "Liberty Acquisition");
(ii) insignificant acquisitions and dispositions; (iii) the issuance of the
Senior Subordinated Notes and the use of such proceeds; and (iv) the
offering of the Outstanding Notes and the Redemption. See "Pro Forma
Financial Information."
(2) The net loss in the year ended December 31, 1994 includes a pre-tax charge
of approximately $16.3 million ($11.6 million net of taxes), which included
$12.0 million of merger and restructuring expenses related to the
acquisition of Care by Regency which was consummated in April 1994, a charge
of approximately $2.7 million which relates to the disposition of two
in-patient facilities and one residential facility, all of which were
disposed of prior to March 31, 1995, and a charge of approximately $1.6
million related to the closure of a facility damaged by the Northridge,
California earthquake in January 1994.
(3) Net income for the year ended December 31, 1995 includes (i) a pre-tax
charge of $3.1 million ($1.9 million net of taxes) related to the settlement
of a class action lawsuit, (ii) a pre-tax charge of $9.0 million ($8.2
million net of taxes) primarily related to the disposition of certain
facilities, and (iii) an extraordinary loss on extinguishment of debt of
$2.7 million ($1.6 million net of taxes).
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(4) EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA includes interest income of $1.4 million, $1.9
million, $3.1 million, $1.1 million and $1.5 million for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995
and 1996, respectively. EBITDA is presented because it is a widely accepted
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to net income or to cash flows
from operating activities, as determined by generally accepted accounting
principles, and should not be construed as an indicator of a company's
operating performance or as a measure of liquidity. Adjusted EBITDA (which
is defined as EBITDA before deducting non-recurring items that consist of
expenses incurred in connection with the settlement of a class action
lawsuit, merger and restructuring expenses, disposition of assets charges,
reorganization and other items and extraordinary items) was $32.9, $34.6,
$43.7, and $49.0 for the twelve months ended December 31, 1993, 1994, 1995
and pro forma 1995 and $19.4, $25.5, and $25.1 for the six months ended June
30, 1995, 1996 and pro forma 1996.
(5) The ratio of earnings to fixed charges is calculated by dividing income
before income taxes plus fixed charges by fixed charges. Fixed charges
consist of interest expense, including amortization of financing costs, and
one-third of rental expense (which is that portion of rental expense deemed
to be representative of the interest component of rental expense). The ratio
of earnings before non-recurring items to fixed charges was 2.80x, 2.28x,
2.50x, and 1.72x for the years ended December 31, 1993, 1994, 1995 and pro
forma 1995, respectively, and 2.58x, 1.79x and 1.56x for the six months
ended June 30, 1995, 1996 and pro forma 1996, respectively.
(6) Ratio of Adjusted EBITDA to interest expense was 5.53x, 4.41x, 4.51x and
2.96x for the years ended December 31, 1993, 1994, 1995 and pro forma 1995,
respectively, and 5.06x, 3.06x and 2.54x for the six months ended June 30,
1995, 1996 and pro forma 1996, respectively.
(7) As adjusted figures give effect to the consummation of the Redemption.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS OF THE NOTES SHOULD GIVE CAREFUL
CONSIDERATION TO THE SPECIFIC FACTORS SET FORTH BELOW.
DEPENDENCE ON REIMBURSEMENT FROM MEDICARE AND MEDICAID. The Company's
business is dependent upon its ability to obtain and maintain reimbursement from
Medicare and Medicaid. For the fiscal years ended December 31, 1994 and 1995 and
the six months ended June 30, 1996, the Company derived approximately, 42.7%,
39.9% and 40.2%, respectively, of its net operating revenue from Medicaid (known
as Medi-Cal in California); and approximately 31.3%, 31.9% and 30.4%,
respectively, from Medicare. In addition, a substantial portion of ancillary
services that are provided by the Company to both Company-owned and
non-affiliated facilities are ultimately reimbursed by Medicare and Medicaid.
However, the revenue derived from these services are not classified as Medicare
or Medicaid since the facilities served are billed directly and are subsequently
reimbursed by these programs. Charges to non-affiliates, though not directly
regulated, are effectively limited by regulatory reimbursement policies imposed
on the in-patient facilities whose patients receive these therapy services, as
well as competitive market factors. These government-sponsored healthcare
programs are highly regulated and are subject to budgetary and other
constraints. In addition, these government programs have instituted
cost-containment measures designed to limit payments made to healthcare
providers. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, administrative rulings and interpretations,
determinations of intermediaries, government funding restrictions and
retroactive reimbursement adjustments, all of which could materially increase or
decrease the services covered by such programs, the rates paid to healthcare
providers for their services, or the eligibility of providers to receive
reimbursement. In addition, there can be no assurance that the Company's
facilities and the provision of services by the Company in the future will
continue to meet the requirements for participation in Medicare or Medicaid
programs as presently enacted or as they may be changed.
In addition, the Company's cash flow could be adversely affected by periodic
government program funding delays, shortfalls or other difficulties, such as
that which occurred in 1995 when the State of California failed to adopt a new
budget prior to the end of the 1994-1995 fiscal year. As a result, Medi-Cal
delayed reimbursement payments for several weeks. Medi-Cal also delayed payments
and rate increases for several weeks in 1990 and 1991. In addition, in 1992, as
a result of the failure by the State of California to adopt a budget prior to
the end of the 1991-1992 fiscal year, Medi-Cal reimbursed providers with
registered warrants, which many banks refused to redeem at face value. There can
be no assurance that the Company will be able to mitigate the effects of any
future funding delays.
SUBSTANTIAL LEVERAGE. As of July 31, 1996, the Company had $186.1 million
of outstanding indebtedness. In the event that the Company's cash flow and
working capital are not sufficient to fund the Company's expenditures and to
service its indebtedness, including the Notes, the Company would be required to
raise additional funds through the sale of equity securities, the refinancing of
all or part of its indebtedness, the incurrence of additional permitted
Indebtedness, or the sale of assets. There can be no assurance that any of these
sources of funds would be available in amounts sufficient for the Company to
meet its obligations. The indenture pursuant to which the Notes were issued (the
"Indenture"), contains financial and operating covenants, including restrictions
on the Company's ability to incur additional indebtedness and to issue preferred
stock, pay dividends or make other distributions, create liens, sell assets,
enter into certain transactions with affiliates and enter into certain mergers
and consolidations. See "Description of the Exchange Notes." The Company's
ability to comply with the terms of the Indenture (including its ability to
comply with such covenants), to make cash payments with respect to the Notes and
to satisfy its other debt obligations will depend on the future performance of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of the Exchange Notes."
The Credit Facility and the indenture pursuant to which the Senior
Subordinated Notes were issued (the "Senior Subordinated Notes Indenture")
include, and subsequent indebtedness or working capital facilities may include,
covenants prohibiting or limiting, among other things, the sale of assets, the
making of
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acquisitions and other investments, capital expenditures, stock repurchases,
repurchases or redemptions of subordinated debt (including the Notes), the
incurrence of additional debt and liens and the payment of dividends, in
addition to a number of financial covenants. The Company's failure to comply
with any of these covenants could result in an event of default under its
indebtedness, including the Notes, which in turn could have a material adverse
effect on the Company. See "Description of the Exchange Notes -- Certain
Covenants." In the event the Company incurs additional indebtedness for
acquisitions or purposes other than repayment of indebtedness, the Company may
become more vulnerable to, and have less flexibility in satisfying its
obligations (including the Notes) in the event of a decline in the Company's
revenues (which could result from, among other factors, increased competition,
adverse regulatory developments or an economic downturn). The Company's high
degree of leverage may impair its ability to obtain financing in the future for
acquisitions, capital expenditures or other purposes.
SUBORDINATION OF THE NOTES. The Notes are subordinated to all existing and
future Senior Debt of the Company and the Guarantors, which includes all
reimbursement obligations and all borrowings under the Credit Facility and the
Senior Subordinated Notes. As of July 31, 1996, the aggregate outstanding
principal amount of Senior Debt was $119.0 million, which includes reimbursement
obligations in respect of $9.0 million of letters of credit issued under the
Credit Facility, and the Company had availability of $41.0 million under the
Credit Facility (all of which would be Senior Debt). While the Indenture limits
the ability of the Company to incur additional indebtedness, there is no
limitation on the amount of such additional indebtedness that may be Senior
Debt. Upon any payment or distribution of assets of the Company in a total or
partial liquidation, dissolution, reorganization or similar proceeding, the
holders of Senior Debt will be entitled to receive payment in full before the
holders of the Notes are entitled to receive any payment.
In addition, the subordination provisions of the Indenture limit the
Company's ability to make payments with respect to the Notes if the Company is
in default on any of its Senior Debt. If such default arises other than as a
result of the Company's failure to make any required payment on its Senior Debt
but would permit a holder of such Senior Debt to declare such indebtedness to be
due and payable, such holder has the right under the Indenture to block all
payments by the Company on the Notes (and the repurchase of the Notes) for
certain periods; and, at any time prior to the Company's curing of such default,
such holder may accelerate such indebtedness. If such a default arises as a
result of the Company's failure to make any payment on its Senior Debt (whether
scheduled, at maturity or as a result of such an acceleration), the Indenture
prohibits all payments on the Notes (and the repurchase of the Notes) until such
time, if any, as such default is cured or waived or otherwise ceases to exist.
The Company expects that most events that would result in an event of default
under the Notes (as well as any acceleration of the principal of the Notes)
would also constitute a default under the terms of the Senior Debt. See
"Description of the Exchange Notes -- Subordination," "-- Events of Default and
Remedies" and "Description of Certain Indebtedness -- Credit Facility."
HOLDING COMPANY STRUCTURE. Regency is a holding company whose only material
assets are its wholly owned subsidiaries. Regency conducts no business and is
dependent on distributions from its subsidiaries to service its debt
obligations, including the payment of interest and principal on the Notes. There
can be no assurance that such distributions will be adequate to fund the
interest and principal payments on the Notes when due. The Indenture provides
that if Regency fails to satisfy any payment obligation under the Notes, the
holders of the Notes would have a direct claim against the Guarantors. However,
if a court were to invalidate any one or more of the Guarantees under fraudulent
conveyance laws or other legal principles or if, by the terms of such
Guarantees, the obligations thereunder were limited as necessary to prevent such
avoidance, the claims of other creditors of the Guarantors, including claims of
trade creditors, would, to such extent, have priority as to the assets of the
Guarantors over the claims of the holders of the Notes. In addition, pursuant to
the terms of the Indenture, a Guarantee will be discharged upon the sale of such
Guarantor. See "Description of the Exchange Notes -- General."
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM. In the recently enacted
federal budget deficit reduction bill, various reimbursement rules and
regulations were adopted by the federal government that pertain to the Company.
There have been (and the Company expects that there will continue to be) a
number of other proposals to limit Medicare and Medicaid reimbursement for
healthcare services. The Company cannot
13
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predict at this time whether any of these types of proposals will be adopted or,
if adopted and implemented, what effect such proposals would have on the
Company. There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of those
programs will not have an adverse effect on the Company, or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the cost allocable to patients eligible for reimbursement
pursuant to such programs. Concern about the potential effects of the proposed
reform measures has contributed to the volatility of the prices of securities of
companies in healthcare and related fields, and may similarly affect the price
of the Notes.
GOVERNMENT REGULATION. The in-patient healthcare industry is subject to
extensive federal, state and local licensure and certification laws. In-patient
facilities and home healthcare agencies are often subject to certificate of need
requirements, the effect of which is to significantly limit internal growth, and
are also subject to annual and routine interim inspections to monitor compliance
with government regulations. Certain laws establish minimum healthcare standards
and provide for significant remedies for non-compliance including fines, new
patient admission moratoriums, federal or state monitoring of operations, and
closure of facilities. Changes in applicable laws and regulations or new
interpretations of existing laws and regulations could have a material adverse
effect on licensure, eligibility for participation, permissible activities,
operating costs or the levels of reimbursement from governmental, private and
other sources. There can be no assurance that regulatory authorities will not
adopt changes or interpretations that could adversely affect the Company. The
failure to maintain or renew any required regulatory approvals or licenses could
prevent the Company from offering existing services or from obtaining
reimbursement. In certain circumstances, failure of compliance at one facility
may affect the ability of the Company to obtain or maintain licenses or
approvals under Medicare and Medicaid programs at other facilities.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA") have expanded remedies available to
the Health Care Financing Administration ("HCFA") to enforce compliance with the
detailed regulations mandating minimum healthcare standards, and may
significantly affect the consequences to the Company if annual or other HCFA
facility surveys disclose noncompliance with these regulations. Remedies include
fines, new patient admission moratoriums, denial of reimbursement, federal or
state monitoring of operations, closure of facilities and termination of
provider reimbursement agreements.
The Company is also subject to federal and state laws that govern financial
and other arrangements between healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. These laws include (i) the federal "Stark legislations"
which prohibit, with limited exceptions, physician ownership of ancillary
service providers, and (ii) the federal "anti-kickback law" which prohibits,
among other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare and Medicaid patients. In
addition, some states restrict certain business relationships between physicians
and other providers of healthcare services. Many states prohibit business
corporations from providing, or holding themselves out as a provider of, medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs and civil and criminal penalties. These laws vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies. From time to time the Company has sought guidance as to
the interpretation of these laws; however, there can be no assurance that such
laws will ultimately be interpreted in a manner consistent with the practices of
the Company. See "Business -- Regulation."
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare, Medicaid and Medi-Cal
statutes and regulations. Further changes in the regulatory framework could have
a material adverse effect on the Company's operations.
RELATED-PARTY TRANSACTIONS. Medicare regulations that apply to transactions
between related parties, such as between subsidiaries of the Company, determine
in part the amount of Medicare reimbursement the Company is entitled to receive
for contract rehabilitation therapy and pharmacy services that it provides to
14
<PAGE>
Company-operated facilities. These regulations generally require that, among
other things, (i) the Company's rehabilitation therapy and pharmacy subsidiaries
must each be a bona fide separate organization; (ii) a substantial part of the
contract rehabilitation therapy services or pharmacy services, as the case may
be, of the relevant subsidiary must be transacted with non-affiliated entities,
and there must be an open, competitive market for the relevant services; (iii)
contract rehabilitation therapy services and pharmacy services, as the case may
be, are services that commonly are obtained by in-patient facilities from other
organizations and are not a basic element of patient care ordinarily furnished
directly to patients by such facilities; and (iv) the prices charged to the
Company's in-patient facilities by its contract rehabilitation therapy
operations subsidiary and pharmacy operations subsidiaries are consistent with
the charges for such services in the open market and no more than the prices
charged by its contract rehabilitation therapy operations subsidiary and
pharmacy operations subsidiaries under comparable circumstances to
non-affiliated in-patient facilities. The Company believes that each of the
foregoing requirements is currently being satisfied with respect to both its
contract rehabilitation therapy and pharmacy subsidiaries. Consequently, the
Company has claimed and received reimbursement under Medicare for contract
rehabilitation therapy services (since the acquisition of SCRS in July 1995) and
pharmacy services (beginning in January 1996) provided to patients in its own
facilities at a higher rate than if it did not satisfy these requirements. If
the Company is unable to satisfy these regulations in the future, the
reimbursement the Company receives for contract rehabilitation therapy and
pharmacy services provided to its own facilities would be materially adversely
affected. If, upon audit by relevant reimbursement agencies, such agencies find
that the requirements of any of these regulations has not been satisfied and if,
after appeal, such findings are sustained, the Company could be required to
refund some or all of the difference between its cost of providing these
services and the higher amount actually received. While the Company believes
that it has satisfied and will continue to satisfy these regulations, there can
be no assurance that its position would prevail if contested by relevant
reimbursement agencies.
DEPENDENCE ON CALIFORNIA. The Company's billings to Medi-Cal represented
33.3%, 30.8% and 25.1% of net operating revenue, respectively, during 1994, 1995
and the six months ended June 30, 1996. California has a less generous and more
heavily regulated healthcare reimbursement system, that typically provides for
lower reimbursement rates, than do a majority of other states, and historically
has enforced its regulations more strictly than most other jurisdictions. In
addition, California has a higher applicable minimum wage and higher workers'
compensation costs than most other states. The Company may be materially and
adversely affected by the failure of Medi-Cal reimbursement rates to increase in
proportion to cost increases, by any reduction in the levels of reimbursement,
or by healthcare reform measures that substantially increase its operating
costs. Further, there have been, and there are likely to continue to be, strong
legislative pressures to avoid increases in Medi-Cal reimbursement levels and to
impose reductions in such payments. The budget adopted by the State of
California for the 1995-1996 fiscal year (which commenced July 1, 1995 and ended
June 30, 1996) included no increase or decrease in Medi-Cal reimbursement rates.
EFFECT OF CHANGE OF CONTROL. The Company will be required to make an offer
to purchase all of the Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, upon the occurrence of any "change of
control" as defined in the Indenture (the "Repurchase Covenant"). A change of
control of the Company also constitutes an event of default under the Credit
Facility and an event requiring a similar repurchase offer under the Senior
Subordinated Notes. There can be no assurance that the Company will not in the
future incur other indebtedness subject to a similar repurchase requirement or
stipulating that a change of control is an event of default. See "Description of
the Exchange Notes -- Certain Covenants -- Repurchase of the Notes at the Option
of the Holder Upon a Change of Control" and "Description of Certain Indebtedness
- -- Credit Facility."
Unless a waiver is obtained from the lenders under the Credit Facility and
the holders of the Senior Subordinated Notes, upon the occurrence of a change of
control the Company would be unable to comply with the Repurchase Covenant. In
addition, there can be no assurance that the Company would have sufficient funds
available at the time of a change of control to repurchase the Notes as well as
all of its indebtedness that would prohibit the repurchase.
15
<PAGE>
EXPANSION RISK. The Company intends to pursue a strategy of growth through
strategic acquisitions. This growth is likely to increase the operating
complexity of the Company, as well as the level of responsibility for both
existing and new management personnel. In addition, there can be no assurance
that the Company will find suitable acquisition candidates.
The Company's growth strategy includes the selective acquisition of both new
facilities as well as other service providers. The Company incurs certain costs
and operating inefficiencies in connection with the acquisition of a new
facility relating to the integration of such facility's financial and
administrative systems, physical plant and other aspects of its operations into
those of the Company. In addition, the introduction of a substantial portion of
the Company's ancillary services to a new facility may take as long as twelve
months to fully implement. There can be no assurance that each of the service
providers the Company may acquire will be profitable following such acquisition.
The acquisition of a service provider that is not profitable, or the acquisition
of new facilities that result in significant integration costs and
inefficiencies, could adversely affect the Company's profitability. The Company
expects to finance new acquisitions from a combination of the cash on hand,
funds from operations and borrowings under the Credit Facility. Depending on the
number, size and timing of such transactions, the Company may in the future
require additional financing in order to continue to make acquisitions. There is
no assurance that such additional financing, if any, will be available to the
Company on acceptable terms. In addition, the Senior Subordinated Notes
Indenture includes limitations on the Company's ability to incur additional
indebtedness. See "Business -- Business Strategy -- Expanding Through
Acquisition."
UNCERTAINTY OF LITIGATION. The Company is from time to time sued by or on
behalf of patients at one or more of its facilities or to whom healthcare
services were provided seeking to recover for injuries sustained as a result of
alleged errors and omissions. Often these suits also allege that the injuries
resulted from intentional actions or omissions of healthcare personnel for whom
the Company is asserted to have legal responsibility, and consequently seek
awards of punitive damages. The Company also is from time to time sued by
persons claiming that their employment by the Company was improperly terminated,
that they were denied employment or promotions because of their race, creed,
religion, gender, ethnic origin or sexual orientation, or that they suffered
other tortious conduct, which suits seek awards of compensatory, incidental and
punitive damages. Although the Company maintains insurance for its professional
errors and omissions, it is not insured for damages sustained as a result of
wrongful termination or intentional torts, nor for punitive damages. The
Company's financial condition and results of operations could be adversely
affected by a significant award of damages that is not covered by insurance.
However, the Company is not aware of any pending litigation for which it has not
established an appropriate reserve or for which, in the Company's opinion, it
does not have valid legal defenses.
CONTROL BY STOCKHOLDER GROUPS AND OFFICERS AND DIRECTORS. As of the date of
their most recent filings on Schedule 13D, two stockholder groups reported
beneficial ownership of 21.4% and 6.5%, on a primary basis, respectively, of the
Common Stock, and the officers and directors of the Company have reported
beneficial ownership of 8.6%, on a primary basis, of the Common Stock. As a
result of such holdings, these stockholder groups and the Company's officers and
directors have the ability to exert significant influence over the outcome of
all matters submitted to the Company's stockholders for approval, including the
election of directors.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the management
experience and continued services of the Company's executive officers. The loss
of the services of one or more of such officers for any reason could have a
material adverse effect on the Company's business. In addition, the Company's
continued growth depends on its ability to attract and retain skilled employees,
and on the ability of its officers and key employees to manage growth
successfully.
COMPETITION. The Company operates in a highly competitive industry. The
Company's facilities, pharmacy operations, home healthcare agencies and
therapists generally operate in communities that are also served by similar
facilities and agencies operated by others. Some competing facilities and
agencies provide services that are not offered by the Company and some are
operated by entities having greater financial and other resources and longer
operating histories than the Company. In addition, some are
16
<PAGE>
operated by nonprofit organizations or government agencies supported by
endowments, charitable contributions, tax revenues and other sources that are
not available to the Company. There can be no assurance that the Company will
not encounter increased competition in the future that would adversely affect
the Company's results of operations.
LACK OF A PUBLIC MARKET. The Outstanding Notes are eligible for trading in
the Private Offerings, Resale and Trading through Automated Linkages (PORTAL)
market. The Exchange Notes will constitute a new issue of securities with no
established trading market. Although Bear, Stearns & Co., Inc. has informed the
Company that it currently makes a market in the Notes, it is not obligated to do
so and any such market making activities may be discontinued at any time without
notice. The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek approval for quotation through any automated
quotation system. Accordingly, no assurance can be given that an active public
or other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes. If a trading market does not develop,
holders of the Exchange Notes may experience difficulty in reselling the
Exchange Notes or may be unable to sell them.
CONSEQUENCES OF THE EXCHANGE OFFER TO NON-TENDERING HOLDERS OF THE
OUTSTANDING NOTES. In the event the Exchange Offer is consummated, the Company
will not be required to register the resale of the Outstanding Notes under the
Securities Act. In such event, holders of Outstanding Notes seeking to sell such
Notes would have to rely on exemptions to the registration requirements of the
Securities Act. If the Exchange Offer is consummated by , 1996,
following the Exchange Offer none of the Notes will be entitled to the
liquidated damages provided for (in the event of a failure to consummate the
Exchange Offer by such date). To the extent that Outstanding Notes are exchanged
in the Exchange Offer, a holder's ability to sell Outstanding Notes that remain
outstanding after the Exchange Offer could be adversely affected.
FORWARD-LOOKING STATEMENTS. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act. Discussions
containing such forward-looking statements may be found in the material set
forth under "Summary," "Pro Forma Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Business," as well as within this
Prospectus generally. In addition, when used in this Prospectus, the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties. Actual results in the future could differ materially
from those described in the forward-looking statements as a result of the risk
factors set forth above (which list may not be exhaustive) and the matters set
forth in this Prospectus generally. Neither the Company nor the Guarantors
undertake to publicly release any revisions to these forward-looking statements
to reflect any future events or circumstances.
17
<PAGE>
USE OF PROCEEDS; THE REDEMPTION
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Outstanding Notes in like
principal amount, the form and terms of which are identical in all material
respects to the form and terms of the Exchange Notes, except as otherwise
described herein. The Outstanding Notes surrendered in exchange for the Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the Exchange Notes will not result in any increase in the indebtedness of the
Company.
The proceeds to the Company from the sale of the Outstanding Notes were
approximately $48.4 million, net of Initial Purchasers' discount and certain
fees and expenses relating to the offering of the Outstanding Notes. Such
proceeds were used on July 29, 1996 to consummate the Redemption.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, as adjusted to give effect to the Redemption on July 29, 1996. The
information in the table below is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements and
the notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each contained elsewhere or incorporated
by reference herein.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents ......................................................................... $ 17,996(1)
-------------
-------------
Long-term debt (including current portion):
Industrial revenue bonds......................................................................... $ 9,675
Mortgage notes................................................................................... 14,977
9 7/8% Senior Subordinated Notes due 2002........................................................ 110,000
Capitalized leases and other..................................................................... 1,489
12 1/4% Subordinated Notes due 2003.............................................................. 50,000
-------------
Total long-term debt....................................................................... 186,141(1)
-------------
Stockholders' equity:
Common Stock, $0.01 par value, 35,000,000 shares authorized,
16,712,300 shares issued and outstanding........................................................ 167
Additional paid-in capital....................................................................... 51,972
Retained earnings................................................................................ 28,492(2)
-------------
Total stockholders' equity................................................................. 80,631
-------------
Total capitalization .................................................................... $ 266,772
-------------
-------------
</TABLE>
- ---------------
(1) Adjusted to give effect to the consummation of the Redemption. As of June
30, 1996, actual cash and cash equivalents was $66.9 million and actual
long-term debt (including current portion) was $235.0 million.
(2) Adjusted to give effect to write-off of unamortized loan costs
(approximately $0.8 million, net of taxes) upon consummation of the
Redemption which were incurred in connection with the issuance of the
Convertible Debentures.
18
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on June 28, 1996 to the
Placement Agents, who placed the Outstanding Notes with certain institutional
investors in reliance on Rule 144A and Regulation D promulgated by the
Commission under the Securities Act. In connection with the sale of the
Outstanding Notes, the Company, the Guarantors and the Placement Agents entered
into the Registration Rights Agreement, which provides that the Company and the
Guarantors will (i) file with the Commission within 60 days after the issue date
of the Outstanding Notes a registration statement for the purpose of registering
the offer of Exchange Notes for Outstanding Notes, and (ii) use their reasonable
best efforts to (a) cause such registration statement to become effective within
135 days after the issue date of the Outstanding Notes, (b) keep the Exchange
Offer open for not less than 30 days, and (c) consummate the Exchange Offer as
to all properly tendered Outstanding Notes within 45 days after the effective
date of such registration statement. A copy of the Registration Rights Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Unless the context requires otherwise, the term "holder"
with respect to the Exchange Offer means the registered holder of the
Outstanding Notes or any other person who has obtained a properly completed bond
power from the registered holder.
Based upon interpretations contained in letters issued by the staff of the
Commission to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than (i)
a broker-dealer who purchased such Outstanding Notes directly from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" (within the meaning of
Rule 405 of the Securities Act) of the Company), without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that the holder acquired the Outstanding Notes, and is acquiring the
Exchange Notes, in the ordinary course of such person's business and is not
participating, and has no arrangements or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Outstanding
Notes who have any such arrangement or understanding or who otherwise intend to
participate in a distribution of the Exchange Notes may not rely upon the
position of the staff of the Commission enunciated in such no-action letters,
and, in the absence of an applicable exemption, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Each holder of Outstanding Notes
that desires to tender Outstanding Notes for exchange in the Exchange Offer must
represent to the Company in the Letter of Transmittal that such holder has no
intention of distributing the Exchange Notes.
Each broker-dealer (other than an affiliate of the Company) that wishes to
participate in the Exchange Offer with respect to Outstanding Notes acquired for
such broker-dealer's own account may be a statutory underwriter as to Exchange
Notes acquired in exchange for such Outstanding Notes and must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Letter of Transmittal contains an
acknowledgement by any such broker-dealer that it will deliver such a prospectus
in connection with any such resale and a statement to the effect that by so
acknowledging and delivering such prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
See "-- Terms of the Exchange Offer" below.
Any broker-dealer who purchased Outstanding Notes directly from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act and/or who is an affiliate of the Company may not rely on the
no-action letters referred to above and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction involving the Exchange Notes. See "Plan of
Distribution."
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the Exchange Notes prior to offering
or selling such Exchange Notes. The Company does not currently intend to take
any action to register or qualify the Exchange Notes for resale in any such
jurisdiction.
19
<PAGE>
By tendering its Outstanding Notes in the Exchange Offer, each holder of
Outstanding Notes will represent to the Company that, among other things, (i)
the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in
the ordinary course of business of the person receiving such Exchange Notes,
whether or not such person is such holder, (ii) neither the holder of
Outstanding Notes nor any person receiving such Exchange Notes has an
arrangement or understanding with any person (including the Company) to
participate in a distribution of such Exchange Notes, (iii) if the holder or any
person receiving such Exchange Notes is not a broker-dealer, or is a
broker-dealer but will not receive Exchange Notes for its own account in
exchange for Outstanding Notes, neither the holder nor any such other person is
engaged in or intends to participate in a distribution of such Exchange Notes
and neither the holder nor any person receiving such Exchange Notes is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act; or, if such holder or any such other person is an "affiliate," or a
broker-dealer who is acquiring Exchange Notes in exchange for Outstanding Notes
acquired either directly from the Company to resell pursuant to Rule 144A or any
other applicable exemption or for such broker-dealer's own account as a result
of trading activities, that such holder or such other person will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
Following consummation of the Exchange Offer, the holders of Outstanding
Notes will continue to be subject to the existing restrictions upon transfer
thereof and the Company will have no further obligation to such holders to
provide for the registration under the Securities Act of the Outstanding Notes
held by them. To the extent that Outstanding Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Outstanding Notes
could be adversely affected. It is not expected that an active trading market
for the Outstanding Notes will develop while they are subject to restrictions on
transfer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Notes validly tendered and not withdrawn prior to the Expiration
Date. Subject to the minimum denomination requirements of the Exchange Notes,
the Company will issue $1,000 principal amount at maturity of Exchange Notes in
exchange for each $1,000 principal amount at maturity of Outstanding Notes
accepted in the Exchange Offer. Holders may tender some or all of their
Outstanding Notes pursuant to the Exchange Offer. However, Outstanding Notes may
be tendered only in integral multiples of $1,000 principal amount at maturity.
Holders tendering less than the entire principal amount of any Outstanding Note
must appropriately indicate such fact on the Letter of Transmittal accompanying
the tendered Outstanding Note.
The form and terms of the Exchange Notes will be substantially identical to
the Outstanding Notes, except that the issuance of the Exchange Notes has been
registered under the Securities Act and thus the Exchange Notes will not bear
legends restricting their transferability. The Exchange Notes will be issued
under, and will be entitled to the benefits of, the Indenture and will be
treated as a single class thereunder with any Outstanding Notes that remain
outstanding after the completion of the Exchange Offer. The Exchange Offer is
not conditioned upon any minimum aggregate principal amount of Outstanding Notes
being tendered for exchange. As of , 1996, there were registered
holders of the Outstanding Notes. This Prospectus, together with the Letter of
Transmittal, is being sent to all such registered holders as of such date.
Holders of Outstanding Notes do not have any appraisal or dissenters' rights
in connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the Registration Rights Agreement, the
applicable requirements of the Securities Act and other federal securities laws
and the applicable rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Outstanding
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Exchange Notes from the Company. Any
Outstanding Notes that have been tendered for exchange but that are not accepted
for exchange or exchanged for any reason will be returned to the holder thereof
without cost to such holder (or, in the case of Outstanding Notes tendered by
book-entry transfer into the Exchange Agent's account at The Depositary
20
<PAGE>
Trust Company ("DTC") pursuant to the book-entry transfer procedures described
below, such Outstanding Notes will be credited to any account maintained with
DTC for the Outstanding Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Although the Company has
no current intention to extend the Exchange Offer, the Company reserves the
right to extend the Exchange Offer at any time and from time to time by giving
oral or written notice of such extension to the Exchange Agent. The Exchange
Notes will be issued for properly tendered Outstanding Notes as soon as
practicable following the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange Offer
and not accept for exchange any Outstanding Notes if any of the events set forth
below under "Conditions to the Exchange Offer" shall have occurred and shall not
have been waived by the Company, and (ii) amend the terms of the Exchange Offer
in any manner, whether before or after any tender of the Outstanding Notes.
ACCRUED INTEREST
Holders of Outstanding Notes that are accepted for exchange will not receive
any accrued interest thereon. However, each Exchange Note will bear interest
from the most recent date on which interest has been paid on the corresponding
Outstanding Note, or, if no interest has been paid, from June 28, 1996.
PROCEDURES FOR TENDERING
The tender to the Company of Outstanding Notes by a holder thereof pursuant
to one of the procedures set forth below and the acceptance of such tender by
the Company will constitute an agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal executed by such holder. A holder of Outstanding Notes
may tender Outstanding Notes by (i) properly completing and signing the Letter
of Transmittal or a facsimile thereof (and all references in this Prospectus to
the Letter of Transmittal shall be deemed to include a facsimile thereof),
having their signatures guaranteed if required, and delivering the same,
together with the Outstanding Notes being tendered (or a confirmation of an
appropriate book-entry transfer), to the Exchange Agent on or prior to the
Expiration Date, or (ii) requesting a broker, dealer, bank, trust company or
other nominee to effect the transaction for such holder prior to the Expiration
Date.
Exchange Notes will not be issued in the name of a person other than that of
a registered holder of the Outstanding Notes appearing on the note register.
The Exchange Agent will establish an account with respect to the Outstanding
Notes at DTC for purposes of the Exchange Offer promptly after the date of this
Prospectus, and any financial institution which is a participant in DTC may make
book-entry delivery of the Outstanding Notes by causing DTC to transfer such
Outstanding Notes into the Exchange Agent's account in accordance with DTC's
procedure for such transfer. Although delivery of Outstanding Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal, with any required signature guarantees and any other
required documents, must in any case be transmitted to and received by the
Exchange Agent on or prior to the Expiration Date at the address set forth below
under "-- Exchange Agent," or the guaranteed delivery procedure described below
must be complied with. Delivery of documents to DTC does not constitute delivery
to the Exchange Agent. See "-- Exchanging Book-Entry Notes."
21
<PAGE>
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER DOCUMENTS,
INCLUDING DELIVERY THROUGH DTC, IS AT THE ELECTION AND RISK OF THE HOLDER. IF
SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED,
BE USED AND THAT PROPER INSURANCE BE OBTAINED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR
OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
If a holder desires to tender Outstanding Notes pursuant to the Exchange
Offer and such holder's Outstanding Notes are not immediately available or time
will not permit all of the above-described documents to reach the Exchange Agent
prior to the Expiration Date, or such holder cannot complete the procedure for
book-entry transfer on a timely basis, such tender may be effected if the
following conditions are satisfied:
(i) such tender is made by or through an eligible guarantor institution
which is a member of one of the following signature guarantee programs: The
Securities Transfer Agent's Medallion Program (STAMP), The New York Stock
Exchange's Medallion Signature Program (MSP) or The Stock Exchange's
Medallion Program (SEMP) (each, an "Eligible Institution");
(ii) a properly completed and duly executed notice of guaranteed
delivery ("Notice of Guaranteed Delivery"), in substantially the form
provided by the Company, is received by the Exchange Agent as provided below
on or prior to the Expiration Date; and
(iii) the Outstanding Notes, in proper form of transfer (or confirmation
of book-entry transfer of such Outstanding Notes into the Exchange Agent's
account at DTC as described above), together with a properly completed and
duly executed Letter of Transmittal and all other documents required by the
letter of Transmittal, are received by the Exchange Agent within five New
York Stock Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile transmission or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such Notice of
Guaranteed Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Outstanding
Notes (or a timely confirmation received of a book-entry transfer of Outstanding
Notes into the Exchange Agent's account at DTC) or a Notice of Guaranteed
Delivery from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Notes in exchange for Outstanding Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Outstanding Notes (or a timely confirmation received of a
book-entry transfer of Outstanding Notes into the Exchange Agent's account at
DTC) to the Exchange Agent or confirmation of the Book-Entry Transfer Facility
Automated Tender Offer Program ("ATOP") procedures set forth below. See "--
Exchanging Book-Entry Notes."
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Outstanding Notes, such Outstanding Notes must
be endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder of holders that
appear on the Outstanding Notes.
If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Outstanding Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company
22
<PAGE>
also reserves the absolute right to waive any of the conditions of the Exchange
Offer or any defect or irregularity in the tender of any Outstanding Notes. None
of the Company, the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification. Any Outstanding Notes
received by the Exchange Agent that are not validly tendered and as to which the
defects or irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders, unless otherwise provided in the Letter
of Transmittal designated for such Outstanding Notes, as soon as practicable
following the Expiration Date (or, in the case of Outstanding Notes delivered by
book-entry transfer within DTC, will be credited to the account maintained
within DTC by the participant DTC which delivered such shares), promptly after
the Expiration Date.
In addition, the Company reserves the right in its sole discretion (i) to
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, and (ii) to the extent permitted by
applicable law, to purchase Outstanding Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC may utilize ATOP to tender Outstanding Notes.
Any DTC participant may make book-entry delivery of Outstanding Notes by
causing DTC to transfer such Outstanding Notes into the Exchange Agent's account
in accordance with DTC's ATOP procedures for transfer. However, the exchange for
the Outstanding Notes so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such book-entry transfer of Outstanding Notes into
the Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as such term is defined in the next sentence) and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of a Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Outstanding Notes that are
the subject of such Book-Entry Confirmation that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal, and that the
Company may enforce such agreement against such participant.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The party tendering Outstanding Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Outstanding Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Outstanding Notes to be exchanged,
assigned and transferred. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the
Outstanding Notes and to acquire Exchange Notes issuable upon the exchange of
such tendered Outstanding Notes and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Outstanding Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Company to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Outstanding Notes. All authority conferred by the
Transferor will survive the death, bankruptcy or incapacity of the Transferor
and every obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By tendering, each holder will be deemed to have made to the Company both
the foregoing representations and the representations set forth above under "--
Purpose and Effect of the Exchange Offer."
WITHDRAWAL OF TENDERS
Tenders of Outstanding Notes may be withdrawn at any time on or before the
Expiration Date.
23
<PAGE>
For a withdrawal to be effective, a written notice of withdrawal must be
made by telegram, telex, facsimile transmission or letter received by the
Exchange Agent at one of the addresses set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Outstanding Notes to be withdrawn, identify the Outstanding Notes
to be withdrawn (including the principal amount of Outstanding Notes), and
(where certificates for Outstanding Notes have been transmitted) specify the
name in which such Outstanding Notes are registered, if different from that of
the withdrawing holder. If certificates for Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution (unless such
holder is an Eligible Institution). If Outstanding Notes have been tendered
pursuant to the procedure for book-entry described above, any notice of
withdrawal must specify the name and number to the account at DTC to be credited
with the withdrawn Outstanding Notes and otherwise comply with the procedures of
such facility. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
above at any time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any properly tendered Outstanding
Notes not theretofore accepted, and may terminate the Exchange Offer, or, at its
option, modify or otherwise amend the Exchange Offer as provided herein before
accepting such Outstanding Notes, if either of the following events occur:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer, or
there shall have been proposed, adopted or enacted by law or regulation that
in the judgment of the Company, based upon advice of outside counsel, might
impair the ability of the Company to proceed with the Exchange Offer; or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in Company's judgment, based upon advice of
outside counsel, might materially impair the Company's ability to proceed
with the Exchange Offer.
If the Company determines that either or both of these events has occured,
the Company may (i) refuse to accept any Outstanding Note and return all
tendered Outstanding Notes to exchange Holders, (ii) extend the Exchange Offer
and retain all Outstanding Notes tendered prior to the expiration of the
Exchange Offer, subject to the rights of holders to withdraw such Outstanding
Notes (see "-- Withdrawal of Tenders"), or (iii) waive such unsatisfied
condition or conditions with respect to the Exchange Offer and accept all
properly tendered Outstanding Notes that have not been withdrawn or revoked. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to all holders of Outstanding Notes and will extend the Exchange
Offer for a period of five to 10 business days, depending upon the manner of
disclosure to holders, if the Exchange Offer would otherwise expire during such
five- to 10-day business day period.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its sole discretion. The
foregoing conditions must be either satisfied or waived prior to termination of
the Exchange Offer.
24
<PAGE>
EXCHANGE AGENT
U.S. Trust Company of California, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
BY MAIL: BY HAND OR OVERNIGHT DELIVERY:
<S> <C>
U.S. Trust Company of California, N.A. U.S. Trust Company of California, N.A.
P.O. Box 841, Peter Cooper Station 111 Broadway
New York, New York 10276-0841 New York, New York 10036-1906
Attention: Corporate Trust and Agency Attention: Corporate Trust and Agency
Services Services
</TABLE>
BY OVERNIGHT DELIVERY:
U.S. Trust Company of California, N.A.
770 Broadway, 13th Floor
New York, New York 10003
Attention: Corporate Trust and Agency Services
TELEPHONE:
800-225-2398
FACSIMILE TRANSMISSION:
212-420-6504
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone or in person by officers and regular employees of the
Company and its affiliates. No additional compensation will be paid to any such
officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or other soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company also may pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Outstanding Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees of the Company, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Outstanding Notes pursuant to the Exchange Offer. If, however, Exchange
Notes, or Outstanding Notes for principal amounts not tendered or accepted for
exchange, are to be delivered to or are to be issued in the name of, any person
other than the registered holder of the Outstanding Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Outstanding
Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other person) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
25
<PAGE>
ACCOUNTING TREATMENT
The Exchange Notes will be recorded in the Company's accounting records at
the same value as the Outstanding Notes are reflected in such records on the
date of the exchange because the exchange of the Outstanding Notes for the
Exchange Notes is the completion of the selling process contemplated in the
issuance of the Outstanding Notes. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
and the unamortized expenses related to the issuance of the Outstanding Notes
will be amortized over the term of the Exchange Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An exchange of Exchange Notes for Outstanding Notes pursuant to the Exchange
Offer should have no material federal income tax consequences because the terms
of the Exchange Notes are not materially different from the terms of the
Outstanding Notes. Thus, holders who exchange Outstanding Notes for Exchange
Notes should not recognize any income, gain or loss for federal income tax
purposes and the Exchange Notes should be treated as if they had been issued on
the date the Outstanding Notes were issued.
TERMINATION OF CERTAIN RIGHTS
Holders of the Outstanding Notes will not be entitled to certain special
rights under the Registration Rights Agreement, which rights will terminate when
the Exchange Offer is completed. Pursuant to the Registration Rights Agreement,
the Exchange Offer shall be deemed to be "completed" upon the occurrence of (i)
the filing and effectiveness under the Securities Act of a registration
statement relating to the Exchange Notes to be issued in the Exchange Offer,
(ii) the maintenance of such registration statement continuously effective for a
period of not less than 30 days after notice has been mailed to holders of
Outstanding Notes, and (iii) the delivery by the Company in exchange for all
Outstanding Notes that have been duly tendered and not validly withdrawn on or
prior to the Expiration Date of Exchange Notes transferable by each holder
thereof (other than a holder that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act, a broker-dealer tendering
Outstanding Notes acquired directly from the Company for its own account, a
holder who acquires the Exchange Notes outside the ordinary course of such
holder's business or a holder who is engaged in or who intends to engage in a
distribution of the Exchange Notes or who has arrangements or understanding with
any person to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes) without restrictions under the Securities Act. The rights
that will terminate include the right to require the Company (i) to file with
the Commission, and use its best efforts to cause to become effective under the
Securities Act, a registration statement with respect to the Exchange Notes and
(ii) other than in certain limited circumstances, to file with the Commission,
use its best efforts to cause to become effective under the Securities Act and
keep continuously effective for a period of up to three years a "shelf"
registration statement providing for the registration of, and the sale on a
continuous or delayed basis by the holders of, Outstanding Notes.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the five
years ended December 31, 1995 have been derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP. In April
1994, the Company merged with Care Enterprises, Inc. ("Care") in a stock
transaction accounted for as a pooling-of-interests. The consolidated financial
data include information with respect to Care for periods prior to consummation
of the merger of the Company and Care, restated as though the companies had been
merged since inception. The Company is a holding company with no material assets
or operations other than its investments in its subsidiaries. The Guarantees are
full and unconditional guarantees and each Guarantor is a wholly owned
subsidiary of the Company. The non-guarantor subsidiaries are insignificant
individually and in the aggregate as compared to the Company as a whole. In
addition, because the Guarantees are the joint and several obligations of each
of the Guarantors, and the Guarantors as a group constitute substantially all of
the Company's revenues and assets, management has determined that the separate
presentation of financial statements and financial data for each Guarantor would
not be material to investors.
The following unaudited selected consolidated financial data for the six
months ended June 30, 1995 and 1996 and as of June 30, 1996 have been derived
from the unaudited Consolidated Financial Statements of the Company and, in the
opinion of management, reflect and include all material adjustments necessary to
present fairly the Company's financial position, results of operations and cash
flows. The consolidated results of operations for the six months ended June 30,
1996 may not be indicative of the results that may be expected for the year
ending December 31, 1996 or any future period.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements and
the notes thereto included elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue........................ $ 247,427 $ 295,340 $ 336,954 $ 377,336 $ 416,084 $ 197,314 $ 267,595
Costs and expenses:
Operating expenses......................... 205,642 240,450 272,957 307,807 335,840 159,853 218,693
Corporate general and administrative....... 11,445 14,679 17,599 19,392 19,811 9,698 11,680
Rent expense............................... 10,553 13,707 13,544 15,555 16,767 8,358 11,690
Depreciation and amortization.............. 7,487 7,222 7,650 9,295 10,122 4,622 7,186
Interest expense........................... 8,855 5,575 5,941 7,844 9,676 3,835 8,346
Other special charges (1).................. -- -- -- 16,250 12,098 3,098 0
--------- --------- --------- --------- --------- ----------- ---------
Total costs and expenses................. 243,982 281,633 317,691 376,143 404,314 189,464 257,595
--------- --------- --------- --------- --------- ----------- ---------
Income before reorganization and other items,
provision for income taxes and extraordinary
items....................................... 3,445 13,707 19,263 1,193 11,770 7,850 10,000
Reorganization and other items (2)........... 1,720 1,543 -- -- -- 0 0
Income before provision for income taxes and
extraordinary items......................... 5,165 15,250 19,263 1,193 11,770 7,850 10,000
Provision for income taxes................... 940 4,831 7,473 1,993 7,316 2,983 4,198
--------- --------- --------- --------- --------- ----------- ---------
Income (loss) before extraordinary items..... 4,225 10,419 11,790 (800) 4,454 4,867 5,802
Extraordinary items (3)...................... -- (89) (48) -- (1,609) -- --
--------- --------- --------- --------- --------- ----------- ---------
Net income (loss)............................ $ 4,225 $ 10,330 $ 11,742 $ (800) $ 2,845 $ 4,867 $ 5,802
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Earnings (loss) per common share, fully
diluted..................................... $ 0.38 $ 0.75 $ 0.69 $ (0.05) $ 0.17 $ 0.29 $ 0.33
Dividends.................................... -- -- -- -- -- -- --
Ratio of earnings to fixed charges (4)....... 1.41x 2.48x 2.80x 1.09x 1.74x 2.14x 1.79x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1996
----------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(5)
--------- --------- --------- --------- --------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 7,859 $ 10,349 $ 26,324 $ 25,677 $ 104,238 $ 66,900 $ 17,996
Net property and equipment................... 105,737 104,731 131,542 134,955 127,207 132,595 132,595
Total assets................................. 163,619 164,403 242,300 250,896 342,971 399,937 351,033
Total long-term debt, including current
portion..................................... 75,389 53,638 103,245 101,941 183,986 235,045 186,141
Stockholders' equity......................... 25,069 55,152 67,015 72,967 80,389 81,484 80,631
</TABLE>
27
<PAGE>
- ---------------
(1) For 1994, other special charges include all fees, expenses and restructuring
costs related to the merger with Care ($14.7 million) and a charge related
to the closure of a facility damaged by the Northridge, California
earthquake in January of that year ($1.6 million). For 1995, other special
charges include charges related to the settlement of a class action lawsuit
($3.1 million) and the disposition of certain facilities ($9.0 million). See
the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
(2) During Care's reorganization period (prior to emergence from bankruptcy
proceedings on December 31, 1990), Care established a reserve for losses on
discontinuance of certain operations. These losses were originally included
as part of an overall provision/ (credit) for reorganization items. During
the years ended December 31, 1991 and 1992, the Company recognized gains
resulting from the reversal of reserves for losses on the discontinuance of
certain operations and the reversal of reserves for expenses and fees
resulting from Care's Chapter 11 proceedings. In 1992, the Company also
recognized a gain on the disposal of an in-patient facility.
(3) Extraordinary items for the years ended December 31, 1992, 1993 and 1995
consist of losses (net of taxes) on the extinguishment of debt.
(4) The ratio of earnings to fixed charges is calculated by dividing income
before income taxes plus fixed charges by fixed charges. Fixed charges
consist of interest expense, including amortization of financing costs, and
one-third of rental expense (which is that portion of rental expense deemed
to be representative of the interest component of rental expense). The ratio
of earnings before non-recurring items to fixed charges was 1.27x, 2.33x,
2.80x, 2.28x and 2.50x for the years ended December 31, 1991, 1992, 1993,
1994, and 1995, respectively, and 2.58x and 1.79x for the six months ended
June 30, 1995 and 1996, respectively.
(5) As adjusted to give effect of the consummation of the Redemption.
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
In February 1996, the Company acquired 18 in-patient facilities from Liberty
Healthcare Limited Partnership ("Liberty"), an enteral feeding business from
Liberty Assisted Living Centers Limited Partnership ("Liberty Assisted Living"),
and Executive Pharmacy Services, Inc. ("Executive Pharmacy") from persons
affiliated with such partnerships. This acquisition (the "Liberty Acquisition")
was financed primarily with the proceeds of the sale of the Senior Subordinated
Notes.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1995 represents the operations of the Company for
the year ended December 31, 1995 adjusted to reflect (i) the results of
operations for the businesses acquired in the Liberty Acquisition for the years
ended September 30, 1995 for Liberty and Liberty Assisted Living, and December
31, 1995 for Executive Pharmacy, (ii) insignificant acquisitions and
dispositions which consist of the acquisition of SCRS & Communicology, Inc.
("SCRS") on July 6, 1995, one in-patient facility on April 1, 1996 and
Assist-A-care, Inc. on January 2, 1996, the disposition of one in-patient
facility on October 1, 1995, the planned disposition of 13 nursing facilities
and the swap arrangement with Horizon/CMS Healthcare Corporation in November
1995 (as more fully described in the Company's Consolidated Financial
Statements), (iii) the issuance of that portion of the Senior Subordinated Notes
used to fund the Liberty Acquisition, and (iv) the offering of the Outstanding
Notes and the Redemption, as if all such transactions had occurred on January 1,
1995.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended June 30, 1996 represents the operations of the Company for
the six months ended June 30, 1996 adjusted to reflect (i) the results of
operations for the businesses acquired in the Liberty Acquisition for the month
of January 1996, (ii) insignificant acquisitions and dispositions which consist
of the acquisition of one in-patient facility on April 1, 1996 and the planned
disposition of 13 nursing facilities in 1996, and (iii) the Offering and the
Redemption, as if all such transactions had occurred on January 1, 1995.
In the opinion of management of the Company, all adjustments necessary to
present fairly the Unaudited Pro Forma Condensed Consolidated Statements of
Operations have been made based upon the terms and structure of these
transactions. The Unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of what actual results would have been
had these transactions occurred on January 1, 1995 nor do they purport to
indicate the results of future operations of the Company.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
should be read in conjunction with the accompanying notes and the historical
consolidated financial statements and notes thereto of the Company and Liberty
included elsewhere or incorporated by reference in this Prospectus.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
LIBERTY INSIGNIFICANT PRO FORMA BEFORE
REGENCY ACQUISITION ACQUISITIONS DISPOSITIONS ADJUSTMENTS(A) OFFERING
-------- ----------- ---------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenue......... $416,084 $80,825 $35,415 $(36,071) $(1,228)(1) $495,025
-------- ----------- ------- -------- ------- ---------
Costs and Expenses:
Operating and
administrative............. 372,418 75,249 35,098 (34,063) (1,228)(1) 446,031
(1,443)(2)
Depreciation and
amortization............... 10,122 956 325 (767) 2,103(3) 13,077
(556)(4)
601(7)
293(8)
Interest expense............ 9,676 168 365 (27) 3,448(5) 13,630
Class action lawsuit........ 3,098 -- -- -- -- 3,098
Disposition of assets
charge..................... 9,000 -- -- -- (9,000)(9) --
Incentive management fee.... -- 939 -- -- (939)(6) --
-------- ----------- ------- -------- ------- ---------
Total costs and
expenses................. 404,314 77,312 35,788 (34,857) (6,721) 475,836
-------- ----------- ------- -------- ------- ---------
Income before provision for
income taxes and
extraordinary item........... 11,770 3,513 (373) (1,214) 5,493 19,189
Income taxes.................. 7,316 -- 41 (2) 282(10) 7,637
-------- ----------- ------- -------- ------- ---------
Income (loss) before
extraordinary items.......... $ 4,454 $ 3,513 $ (414) $(1,212) $ 5,211 $ 11,552
-------- ----------- ------- -------- ------- ---------
-------- ----------- ------- -------- ------- ---------
Earnings per share before
extraordinary item:
Primary..................... $ 0.27
--------
--------
Fully diluted............... $ 0.27
--------
--------
Weighted average shares
outstanding:
Primary..................... 16,654
--------
--------
Fully diluted............... 16,654
--------
--------
<CAPTION>
OFFERING AND
REDEMPTION
ADJUSTMENTS(B) PRO FORMA
--------------- ---------
<S> <C> <C>
Net operating revenue......... $ -- $495,025
------- ---------
Costs and Expenses:
Operating and
administrative............. 446,031
Depreciation and
amortization............... 12(1) 13,089
Interest expense............ 2,946(2) 16,576
Class action lawsuit........ 3,098
Disposition of assets
charge..................... --
Incentive management fee.... --
------- ---------
Total costs and
expenses................. 2,958 478,794
------- ---------
Income before provision for
income taxes and
extraordinary item........... (2,958) 16,231
Income taxes.................. (1,183)(3) 6,454
------- ---------
Income (loss) before
extraordinary items.......... $(1,775) $ 9,777
------- ---------
------- ---------
Earnings per share before
extraordinary item:
Primary..................... $ 0.59
---------
---------
Fully diluted............... $ 0.59
---------
---------
Weighted average shares
outstanding:
Primary..................... 16,654
---------
---------
Fully diluted............... 16,654
---------
---------
</TABLE>
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
LIBERTY INSIGNIFICANT PRO FORMA BEFORE
REGENCY ACQUISITION ACQUISITIONS DISPOSITIONS ADJUSTMENTS(A) OFFERING
-------- ----------- ---------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenue......... $267,595 $ 6,675 $ 570 $(11,128) $ (102)(1) $263,610
-------- ----------- ------- -------- ------- ---------
Costs and Expenses:
Operating and
administrative............. 242,063 6,230 574 (10,100) (102)(1) 238,545
(120)(2)
Depreciation and
amortization............... 7,186 78 24 (305) 175(3) 7,114
(44)(4)
Interest expense............ 8,346 14 40 (14) -- 8,386
Incentive management fee.... -- 78 -- -- (78)(6) --
-------- ----------- ------- -------- ------- ---------
Total costs and
expenses................. 257,595 6,400 638 (10,419) (169) 254,045
-------- ----------- ------- -------- ------- ---------
Income before provision for
income taxes and
extraordinary item........... 10,000 275 (68) (709) 67 9,565
Income taxes.................. 4,198 -- 41 -- (223)(10) 4,016
-------- ----------- ------- -------- ------- ---------
Income (loss) before
extraordinary items.......... $ 5,802 $ 275 $ (109) $ (709) $ 290 $ 5,549
-------- ----------- ------- -------- ------- ---------
-------- ----------- ------- -------- ------- ---------
Earnings per share before
extraordinary item:
Primary..................... $ 0.35
--------
--------
Fully diluted............... $ 0.33
--------
--------
Weighted average shares
outstanding:
Primary..................... 16,617
--------
--------
Fully diluted............... 20,573
--------
--------
<CAPTION>
OFFERING AND
REDEMPTION
ADJUSTMENTS(B) PRO FORMA
--------------- ---------
<S> <C> <C>
Net operating revenue......... $ -- $263,610
------- ---------
Costs and Expenses:
Operating and
administrative............. -- 238,545
Depreciation and
amortization............... 6(1) 7,120
Interest expense............ 1,474(2) 9,860
Incentive management fee.... -- --
------- ---------
Total costs and
expenses................. 1,480 255,525
------- ---------
Income before provision for
income taxes and
extraordinary item........... (1,480) 8,085
Income taxes.................. (622)(3) 3,394
------- ---------
Income (loss) before
extraordinary items.......... $ (858) $ 4,691
------- ---------
------- ---------
Earnings per share before
extraordinary item:
Primary..................... $ 0.28
---------
---------
Fully diluted............... $ 0.28
---------
---------
Weighted average shares
outstanding:
Primary..................... 16,617
---------
---------
Fully diluted............... 16,617
---------
---------
</TABLE>
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Pro forma Adjustments
(1) Represents the elimination of intercompany transactions between
Executive Pharmacy and the facilities acquired from Liberty.
(2) A management fee paid by Liberty has been eliminated since such fee is
not payable following the Liberty Acquisition. The Company, however,
estimated additional operating and administrative costs to be incurred
subsequent to the Liberty Acquisition. The result is a net reduction of
expense of $1,443 for the year ended December 31, 1995 and $120 for the
six months ended June 30, 1996.
(3) In accordance with the purchase method of accounting, the assets
acquired and the liabilities assumed in the Liberty Acquisition are
recorded at fair value. The estimated fair value adjustments have been
determined based upon the most recent information available. The
resulting excess purchase price over fair value of net assets acquired is
being amortized over approximately 15 and 20 years for pharmacy
operations and in-patient care facility operations, respectively. Such
amortization is approximately $2,103 for the year ended December 31, 1995
and $175 for January, 1996.
(4) Historical depreciation expense for the businesses acquired in the
Liberty Acquisition for the year ended December 31, 1995 and for January
1996 is eliminated and replaced with depreciation expense based on the
recorded value of assets acquired.
(5) Represents pro forma interest expense on the Company's $110 million
Senior Subordinated Notes at a rate of 9 7/8% per annum prior to issuance
in October 1995, based on $46,550 utilized in the Liberty Acquisition and
the acquisition of Assist-A-Care, Inc.
(6) The management incentive fee paid by the Liberty Acquisition businesses
during 1995 is eliminated since such fee is not payable following Liberty
Acquisition.
(7) In accordance with the purchase method of accounting, the assets
acquired and liabilities assumed in the SCRS acquisition are recorded at
fair value. The resultant excess purchase price over fair value of net
assets acquired of approximately $11,345 is being amortized over 15
years. Pro forma amortization for the period prior to the acquisition
would be approximately $385. Noncompete covenants of approximately $1,930
are being amortized over five years. Pro forma amortization for the
period prior to the acquisition would be approximately $216.
(8) In accordance with the purchase method of accounting, the assets
acquired and liabilities assumed in the Assist-A-Care, Inc. acquisitions
are recorded at fair value. The estimated fair value adjustments have
been determined based upon the most recent information available. The
resultant excess purchase price over fair value of net assets acquired is
being amortized over 15 years. Such amortization would be approximately
$293 for the year ended December 31, 1995.
(9) The disposition of assets charge recorded in the Company's statement of
operations for the year ended December 31, 1995 is eliminated as it
represents a non-recurring charge that would not have been incurred in
1995 had the Company sold the 13 facilities to be disposed at the
beginning of 1995.
(10) Pro forma effective tax rate of 40% for the year ended December 31,
1995 and 42% for the six months ended June 30, 1996 is used for combined
federal and state taxes. Goodwill related to the SCRS acquisition is not
tax deductible. In addition, the recorded tax benefit related to the
disposition of assets charge was reversed.
(b) Offering Adjustments
(1) Amortization of debt issuance costs for the Convertible Debentures is
eliminated and replaced with amortization of debt issuance costs for the
Notes, as if the Notes were issued and the Convertible Debentures were
redeemed on
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
January 1, 1995. The debt issuance costs for the Notes were $1,563 and
will be amortized over seven years, resulting in an increase in
depreciation and amortization expense of approximately $12 and $6, for
the year ended December 31, 1995 and the six months ended June 30, 1996,
respectively, calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
------------------- ---------------------
<S> <C> <C>
Amortization of Notes issuance costs............................ $ 228 $ 114
Amortization of Convertible Debentures issuance costs........... (216) (108)
----- -----
$ 12 $ 6
----- -----
----- -----
</TABLE>
(2) Interest expense for the Convertible Debentures is eliminated and
replaced with interest expense for the Notes, as if the Notes were issued
and the Convertible Debentures were redeemed on January 1, 1995. The
12 1/4% interest rate for the Notes results in a pro forma interest
expense of approximately $2,946 and $1,474, for the year ended December
31, 1995 and the six months ended June 30, 1996, respectively, calculated
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Interest expense on the Notes...................................... $ 6,125 $ 3,063
Interest expense on the Convertible Debentures..................... (3,179) (1,589)
------- -------
$ 2,946 $ 1,474
------- -------
------- -------
</TABLE>
(3) Pro forma effective tax rate of 40% for the year ended December 31, 1995
and 42% for the six months ended June 30, 1996 is used for combined
federal and state taxes.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following table sets forth certain data for the Company on the dates and
for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
In-patient operations
Facilities......................................................... 95 93 94 93 112
Licensed beds...................................................... 9,325 9,134 9,178 9,134 11,541
Subacute beds...................................................... 443 879 1,040 1,028 1,108
Subacute units..................................................... 17 35 42 43 46
Contract rehabilitation therapy operations (1)
Non-affiliated facilities served................................... -- -- 79 -- 86
Company-operated facilities served................................. -- -- 27 -- 49
--------- --------- --------- --------- ---------
Total............................................................ -- -- 106 -- 135
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pharmacy operations
Non-affiliated facilities served................................... 3 5 5 5 76
Company-operated facilities served................................. 26 34 36 34 60
--------- --------- --------- --------- ---------
Total............................................................ 29 39 41 39 136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- -------------
(1) The Company did not provide contract rehabilitation therapy services until
the acquisition of SCRS in 1995.
The comparison of the Company's results of operations for the six months
ended June 30, 1996 to the six months ended June 30, 1995 and certain other
information relating to the Company's results of operations for the six months
ended June 30, 1996, liquidity and capital resources, seasonality, impact of
inflation and reimbursement for services is incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1996, a copy of which is being delivered to each person to whom this Prospectus
is being delivered.
IN-PATIENT OPERATIONS
The Company's in-patient operations derive its net operating revenue from
the performance of routine and ancillary services at the Company's facilities.
Revenue from routine services is comprised of charges for room and board and
basic nursing services for the care of patients, including those in the
Company's
subacute specialty units. Revenue from ancillary services is comprised of
charges for rehabilitative services, subacute specialty services and
pharmaceutical products and services provided to patients at the Company's
facilities. In-patient operations derive most of their ancillary services
revenue from Medicare- and HMO-eligible patients. The Company has classified
revenue from in-patient operations as either basic nursing care revenue or
subacute and rehabilitation revenue. Basic nursing care revenue includes charges
for room and board for non-Medicare and non-HMO patients. Subacute and
rehabilitation revenue includes room and board and basic nursing services for
Medicare and HMO patients and revenues from all ancillary services provided to
patients at the Company's facilities.
The Company's growth strategy includes the selective acquisition of both new
facilities as well as other service providers. The Company incurs certain costs
and experiences operating inefficiencies in connection with the acquisition of a
new facility following such acquisition, relating to the integration of such
facility's financial and administrative systems, physical plant and other
aspects of its operations into those of the Company. In addition, the
introduction of a substantial portion of the Company's contract rehabilitation
therapy, pharmacy and other ancillary services to a new facility may take as
long as 12 months to fully implement. There can be no assurance that each of the
service providers the Company may acquire will be profitable, or that the
acquisition of new facilities that result in significant integration costs and
inefficiencies will not adversely affect the Company's profitability. See
"Business -- Business Strategy -- Expanding Through Acquisitions."
34
<PAGE>
In April 1994, the Company merged (the "Merger") with Care, which more than
doubled the number of facilities and beds operated by the Company and made the
Company a leading provider of in-patient and specialty healthcare services in
California.
Effective July 1, 1994, the Company elected to dispose of two healthcare
facilities due to excess capacity in certain markets that resulted from the
Merger and to dispose of a residential facility operated by Care. The Company
established a $2.7 million reserve in 1994 related to these dispositions, which
consists of a write-down of the assets to estimated fair value, transaction
costs and a provision for anticipated operating losses to the time the
transactions were completed. These facilities were disposed of in 1995 and the
results of operations of these facilities since July 1, 1994 are not reflected
in the operations of the Company.
During 1995 the Company exchanged leasehold interests in three healthcare
facilities with 360 beds in New Mexico operated by the Company for leasehold
interests in four healthcare facilities with 461 beds in Ohio previously
operated by another company. In 1995, the Company also opened a newly
constructed facility and disposed of one additional facility.
In December 1995, the Company determined to dispose of 13 facilities located
in California as part of its strategic plan of diversifying from California. The
results of operations of these facilities will continue to be reflected in the
Company's financial statements until the disposition is completed. In March
1996, the Company sold one of these facilities.
Effective February 1, 1996, the Company acquired 18 healthcare facilities
with 2,375 beds in Tennessee and North Carolina in the Liberty Acquisition.
For further information concerning certain of these transactions, see "Pro
Forma Financial Information."
ANCILLARY BUSINESS OPERATIONS
In July 1995, the Company acquired SCRS & Communicology, Inc. ("SCRS"). SCRS
provides rehabilitation services to Company-operated and non-affiliated
healthcare facilities in 14 states in the West, Midwest and Southeast. From the
date of the acquisition through December 31, 1995, 79% of SCRS revenues were
derived from providing services to non-affiliated healthcare providers. Two
non-affiliated healthcare providers represented approximately 57% of SCRS total
revenues in the month prior to the acquisition and approximately 37% from July
to December 1995. For the six months ended June 30, 1996, 72% of SCRS revenues
were derived from services to non-affiliated healthcare providers (of which 26%
related to two such providers).
The Company's pharmacy operations provide prescription services and basic
pharmaceutical dispensing programs to Company-operated and non-affiliated
healthcare facilities. During 1995 and the first six months of 1996, 55% and
65%, respectively, of revenues from pharmacy operations were derived from
providing services to non-affiliated healthcare providers and patients at
Regency facilities billed directly to third-party payors. In January and
February of 1996, the Company acquired three additional pharmacy operations.
As of July 31, the Company operated 29 home healthcare locations that
provide skilled nursing, rehabilitation and other services in selected areas in
California and Ohio. The Company has positioned its home healthcare capabilities
to serve its facilities' home healthcare needs.
35
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amounts of certain elements of net
operating revenue and the percentage of total net operating revenue for the
periods presented (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Basic nursing care........................... $206,056 61% $221,807 59% $225,739 54%
Subacute and rehabilitation.................. 105,588 32 124,479 33 136,094 33
-------- ---- -------- ---- -------- ----
Total in-patient operations................ 311,644 93 346,286 92 361,833 87
Home healthcare operations................... 20,960 6 24,456 6 31,792 7
Contract rehabilitation therapy operations
for non-affiliates (1)...................... -- -- -- -- 12,242 3
Pharmacy operations for non-affiliates (2)... 2,953 1 4,697 1 7,157 2
Interest..................................... 1,397 -- 1,897 1 3,060 1
-------- ---- -------- ---- -------- ----
Total...................................... $336,954 100% $377,336 100% $416,084 100%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C> <C> <C>
Basic nursing care........................... $115,719 58% $137,257 51%
Subacute and rehabilitation.................. 62,751 32 84,410 32
-------- ---- -------- ----
Total in-patient operations................ 178,470 90 221,667 83
Home healthcare operations................... 14,443 7 17,548 6
Contract rehabilitation therapy operations
for non-affiliates (1)...................... -- -- 16,755 6
Pharmacy operations for non-affiliates (2)... 3,287 2 10,105 4
Interest..................................... 1,114 1 1,520 1
-------- ---- -------- ----
Total...................................... $197,314 100% $267,595 100%
-------- ---- -------- ----
-------- ---- -------- ----
</TABLE>
- ---------------
(1) Net of intercompany billings of $3.3 million for the year ended December
31, 1995, and $7.9 million for the six months ended June 30, 1996.
(2) Net of intercompany billings of $3.2 million, $5.1 million and $6.0 million
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$2.7 million and $5.4 million for the six months ended June 30, 1995 and
1996, respectively.
The following table presents the percentage of net operating revenue
represented by certain items reflected in the Company's Consolidated Statements
of Operations for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net operating revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
Costs and expenses:
Operating expenses............................................. 81.0 81.6 80.7 81.0 81.7
Corporate, general and administrative.......................... 5.2 5.1 4.8 4.9 4.4
Rent expense................................................... 4.0 4.1 4.0 4.2 4.4
Depreciation and amortization.................................. 2.3 2.5 2.4 2.3 2.7
Interest expense............................................... 1.8 2.1 2.3 2.0 3.1
Merger and restructuring expenses.............................. -- 3.9 -- -- --
Class action lawsuit settlement................................ -- -- 0.8 1.6 --
Disposition of assets charges.................................. -- 0.4 2.2 -- --
--------- --------- --------- --------- ---------
Total costs and expenses..................................... 94.3 99.7 97.2 96.0 96.3
--------- --------- --------- --------- ---------
Income before provision for income taxes and extraordinary
item............................................................ 5.7% 0.3% 2.8% 4.0% 3.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
NET OPERATING REVENUE
The Company's net operating revenue for the fiscal year ended December 31,
1995 ("Fiscal 1995") was $416.1 million compared to $377.3 million for the
fiscal year ended December 31, 1994 ("Fiscal 1994"), an increase of $38.8
million, or 10.3%.
Net operating revenue from in-patient operations increased $15.6 million, or
4.5%, due to increased levels of reimbursement and a shift in payor mix from
Medicaid to Medicare and managed care, partially offset by a slight decrease in
total patient days. The average increase in reimbursement rates for all payors
was 5.3% and was primarily due to providing services to higher acuity patients.
The Company experienced a 0.8% net decrease in total patient days in Fiscal 1995
from Fiscal 1994, consisting of a decrease of 20,880 and 30,167 from Medicaid
and private and other sources, respectively, and an increase of 5,726 and 22,007
from Medicare and managed care, respectively.
36
<PAGE>
Net operating revenue from home healthcare operations grew $7.3 million, or
30.0%, in Fiscal 1995 over Fiscal 1994, primarily reflecting additional patient
visits. Pharmacy operations revenues increased $2.5 million, or 52.4%, in Fiscal
1995 over Fiscal 1994, primarily as a result of increased pharmacy services
provided to patients serviced in the Company's facilities and billed directly to
the appropriate payors and not the facility. Net operating revenue from contract
rehabilitation therapy operations are a result of the purchase of SCRS in July
1995.
Interest income increased $1.2 million in Fiscal 1995 over Fiscal 1994 due
to the investment of proceeds from the issuance of the Senior Subordinated Notes
in an aggregate amount of $110.0 million in October 1995.
COSTS AND EXPENSES
Total costs and expenses for Fiscal 1995 increased $28.2 million, or 7.5%,
to $404.3 million (97.2% of net operating revenue) from $376.1 million (99.7% of
net operating revenue) for Fiscal 1994. This decrease in total costs and
expenses as a percentage of revenues was primarily a result of the merger and
restructuring expenses incurred in Fiscal 1994, partially offset by the class
action lawsuit settlement and the additional disposition of assets charge
recorded in Fiscal 1995. Excluding these non-recurring expenses, total costs and
expenses increased to $392.2 million (94.3% of net operating revenue) in Fiscal
1995 from $359.9 million (95.4% of net operating revenue) in Fiscal 1994,
primarily as a result of providing more services to patients.
Operating expenses as a percentage of net operating revenue decreased to
80.7% for Fiscal 1995 from 81.6% for Fiscal 1994. This decline was primarily
attributable to growth in the Company's higher margin businesses such as
subacute care, contract rehabilitation therapy, and pharmacy services in Fiscal
1995.
Corporate general and administrative expense increased $0.4 million, or
2.2%, from Fiscal 1994 to Fiscal 1995, while decreasing as a percentage of net
operating revenue to 4.8% for Fiscal 1995 from 5.1% for Fiscal 1994. The
decrease as a percentage of revenues was attributable to the Company's achieving
12 months of economies of scale in 1995 by eliminating duplicate costs after the
Merger in 1994.
Interest expense as a percentage of net operating revenue increased to 2.3%
for Fiscal 1995 from 2.1% for Fiscal 1994, primarily as a result of the issuance
of the Senior Subordinated Notes in October 1995.
As a result of the Merger, in Fiscal 1994, the Company accrued $14.7 million
($10.6 million net of taxes) of estimated fees and expenses related to the
transaction as required under the pooling-of-interests accounting method. No
comparable fees and expenses were incurred during Fiscal 1995.
In Fiscal 1995, the Company settled its class action lawsuit resulting in a
pre-tax charge of $3.1 million ($1.9 million net of taxes).
In Fiscal 1995, the Company completed the disposition of previously
identified facilities and determined to dispose of an additional 13 in-patient
facilities located in California, resulting in an additional pre-tax charge of
$9.0 million ($8.2 million net of taxes). In Fiscal 1994, the Company incurred a
loss of $1.6 million ($1.0 million net of taxes) resulting from closure of one
facility which was substantially damaged in the January 1994 Northridge,
California earthquake, and the abandonment of its leasehold interest.
In Fiscal 1995, the Company repaid all $30.0 million of its Senior Secured
Notes, resulting in costs and a prepayment penalty totalling $2.7 million ($1.7
million net of taxes), classified as an extraordinary item.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
NET OPERATING REVENUE
The Company's net operating revenue for Fiscal 1994 was $377.3 million
compared to $337.0 million for the fiscal year ended December 31, 1993 ("Fiscal
1993"), an increase of $40.4 million, or 12.0%. Approximately $22.6 million, or
55.9%, of this year-to-year revenue increase was attributable to the inclusion
of a full year of operating results related to the Company's acquisition of
Braswell Enterprises, Inc. ("Braswell") as of July 1, 1993, and two other
facilities that the Company acquired in 1993. Braswell operated seven facilities
in California with 777 licensed beds.
Net operating revenue from in-patient operations increased by $34.6 million,
or 11.1%, due to (i) increased patient days, primarily as a result of the
Braswell acquisition, (ii) increased reimbursement
37
<PAGE>
rates and (iii) expanded use of subacute and ancillary services. The Company
experienced a net increase of 152,128 patient days in Fiscal 1994, consisting of
45,725 patient days from Medicaid, 26,511 patient days from Medicare, 31,387
days from private sources and 48,505 days from other sources. Overall facility
utilization increased 5.5% in Fiscal 1994. Average reimbursement rates for
Medicaid, Medicare and private sources increased 3.4%, 2.6% and 2.3%,
respectively, in Fiscal 1994.
Net operating revenue from home healthcare services grew 16.7%, or $3.5
million, in Fiscal 1994 over the prior period, primarily reflecting additional
patient visits. Pharmacy revenues grew from $3.0 million in Fiscal 1993 to $4.7
million in Fiscal 1994, primarily as a result of an increased number of
facilities serviced by the Company's pharmacy operations.
COSTS AND EXPENSES
Total costs and expenses increased in Fiscal 1994 to $376.1 million (99.7%
of net operating revenue) from $317.7 million (94.3% of net operating revenue)
in Fiscal 1993. The increase primarily was a result of the Merger and
restructuring expenses and loss from earthquake damage incurred in 1994.
Excluding the non-recurring expenses related to the January 1994 Northridge,
California earthquake and the Merger in April 1994, total costs and expenses
increased to $359.9 million (95.4% of net operating revenue) in Fiscal 1994 from
$317.7 million (94.3% of net operating revenue) in Fiscal 1993. Approximately
$19.7 million of this increase in operating expenses reflected a full year of
operations related to the Braswell acquisition and the acquisition of two other
facilities in 1993, as compared to six months of such expenses in Fiscal 1993.
Operating expenses increased $34.8 million in Fiscal 1994 to $307.8 million
from $273.0 million in Fiscal 1993. This increase was primarily a result of
growth in the Company's businesses and increased costs during the transition
period following the Merger. As a percentage of net operating revenue, operating
expenses increased from 81.0% in Fiscal 1993 to 81.6% in Fiscal 1994, primarily
as a result of increased costs during the transition period of the Merger,
partially offset by the growth in the Company's higher margin businesses.
Corporate general and administrative expenses increased $1.8 million to
$19.4 million in Fiscal 1994 from $17.6 million in Fiscal 1993. This increase
was primarily the result of additional costs associated with the acquisition of
Braswell. As a percentage of net operating revenue, corporate general and
administrative expenses decreased from 5.2% in Fiscal 1993 to 5.1% in Fiscal
1994, primarily as a result of economies of scale realized after the Braswell
acquisition and the Merger.
Rent expenses increased by $2.0 million, reflecting additional payments
following the Braswell acquisition and the acquisition of two other facilities
in 1993.
Depreciation and amortization increased $1.6 million for Fiscal 1994,
reflecting the Braswell acquisition and the acquisition of two other facilities
in 1993. Interest expense increased by $1.9 million in Fiscal 1994, to 2.1% of
net operating revenue from 1.8% in Fiscal 1993. This increase was primarily
attributable to twelve months of interest expense on the Convertible Debentures
(issued in March 1993) and on the Senior Secured Notes (issued in December
1993).
In Fiscal 1994, the Company accrued $14.7 million ($10.6 million net of
taxes) of estimated fees and expenses related to the Merger, as required under
the pooling-of-interests accounting method. No comparable fees and expenses were
incurred during Fiscal 1993. The Company incurred a loss of $1.6 million ($1.0
million net of taxes) resulting from closure of one facility that was
substantially damaged in the January 1994 Northridge, California earthquake, and
the abandonment of its leasehold interest.
38
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
Healthcare is one of the largest industries in the United States. As a
result of the aging of the population and the increased availability and use of
high-technology treatments and tests (among other factors), increases in
healthcare expenditures, including hospital expenditures, historically have
outpaced inflation.
The post-acute care industry encompasses a broad range of healthcare
services, including intermediate and skilled nursing care, subacute care,
rehabilitation therapy, home healthcare and pharmacy services provided to
elderly and other patients with medically complex needs who can be cared for
outside of the acute care hospital environment. The Company believes that demand
for the services provided by the post-acute care sector will increase
substantially during the next decade primarily due to demographic trends,
advances in medical technology and emphasis on healthcare cost containment. In
addition, industry consolidation is expected to provide the Company with
opportunities for future growth and for expansion into related services, such as
retirement care and assisted living.
The elderly population is growing at a faster rate than the overall
population as a result of demographics and advances in medical technology.
According to the United States Census Bureau (the "Census Bureau"), the number
of individuals in the United States 65 years of age and older has grown from
approximately 25.6 million in 1980, or approximately 11.3% of the population, to
approximately 31.1 million in 1990, or approximately 12.5% of the population.
Census Bureau projections indicate that the number of individuals in this age
group is expected to increase to approximately 34.9 million, or approximately
12.7% of the population, by the year 2000. In addition, the number of
individuals 85 years of age and older is growing at an even faster rate; the
Census Bureau projects that the number of individuals in that age group will
increase from approximately 3.0 million in 1990 to approximately 4.3 million by
the year 2000.
The federal government and some private pay sources have implemented cost
containment procedures that have encouraged reduced lengths of stay in acute
care hospitals. In 1983, the federal government changed the reimbursement method
for acute care hospitals from a retrospective cost-based system to a prospective
reimbursement system based upon rates established for diagnosis-related groups.
Additionally, many private insurers have begun to limit acute care reimbursement
to predetermined "reasonable charges" and many health maintenance organizations
("HMOs") and preferred-provider organizations ("PPOs") are attempting to contain
costs by negotiating reduced rates for acute care hospital services. These
factors have resulted in reduced lengths of stay in acute care hospitals and
many patients being discharged despite a continuing need for skilled nursing
care. Accordingly, the Company believes that the healthcare industry will
experience increased demand for post-acute care. The Company is well positioned
to benefit from these developments due to its expanding capability to provide
post-acute (including subacute) specialty services.
Although the Company believes that the demand for the type of services it
provides will increase over the next decade, it anticipates competition for such
increased demand. In addition, the regulatory framework in which healthcare
providers will operate in the future, including the methods for reimbursement,
is uncertain and, depending on the nature of such regulation, the healthcare
industry may be subject to increased pressure to lower operating costs and may
face more stringent requirements regarding reimbursement. See "Risk Factors --
Competition; -- Risk of Adverse Effect of Healthcare Reform."
GENERAL
Regency is a post-acute care provider. As of July 31, 1996 the Company
operated 112 facilities in five states. The Company's in-patient facilities
provide a broad range of services including subacute care (in 46 facilities),
nursing care and ancillary services such as rehabilitation and pharmacy
services. The Company's subacute units provide services such as infusion
therapy, wound management, respiratory therapy, ventilator care, oncology
services and orthopedic care. The Company continues to expand its continuum of
care through its contract therapy, pharmacy and home healthcare operations. As
of July 31, 1996, the Company provided contract rehabilitation therapy services
in 14 states to 51 affiliated and 89 facilities not operated by
39
<PAGE>
the Company ("non-affiliated facilities") and pharmacy services in three states
to 61 affiliated and 75 non-affiliated facilities. The Company also provides
home healthcare services through 29 operating locations in California and Ohio.
In response to current healthcare reform efforts and ongoing changes in the
healthcare marketplace, the Company intends to continue to extend its post-acute
healthcare system in each region it serves. Post-acute care is the provision of
a continuum of care to patients outside the acute care hospital setting. Post-
acute care services include basic and intermediate skilled nursing, subacute
care, home care, inpatient and outpatient rehabilitation services and pharmacy
services. The Company's post-acute healthcare system is intended to provide
continuity of care for its patients and to enable payors to contract with one
source to provide all of a patient's needs following discharge from or outside
of the acute care hospital setting.
BUSINESS STRATEGY
The Company's strategy is to become an integrated provider of
cost-effective, outcome-oriented post-acute healthcare services in selected
geographic areas. The fundamental elements of the Company's strategy include:
- expanding the continuum of care and overall scope of services
provided by the Company;
- in-sourcing ancillary services such as pharmacy and
rehabilitation services;
- expanding the Company's marketing of ancillary services to
third-party facilities;
- acquiring new facilities and ancillary service providers in
markets where the Company currently operates as well as in
selected new markets;
- continuing its investment in management information systems;
and
- utilizing the principles of Total Quality Management.
Historically, the Company's operations have been concentrated in California,
which is characterized by a high penetration of managed healthcare. Operating in
this environment, the Company is focused on controlling operating costs while
delivering outcome-oriented healthcare. Accordingly, the Company believes it has
significant competitive advantages in the expanding national market for
post-acute managed healthcare.
EXPANDING THE CONTINUUM OF CARE. Expanding the continuum of care offered to
its patients is a significant element in the Company's growth strategy. By
increasing the scope of services it provides, the Company believes that it will
attract additional managed care payors and other insurers as participants in its
regional, post-acute healthcare systems. Given the on-going consolidation of the
healthcare industry, the Company believes that this strategy is necessary in
order to establish a significant market position in the geographic areas in
addition to California it has targeted for expansion. Moreover, expanding the
continuum of care should enable the Company to increase its higher-margin
ancillary services and to serve greater numbers of patients whose fees are not
paid by Medicare or Medicaid. Management believes that a significant portion of
this expansion of the continuum of care provided by the Company may be
accomplished through selective acquisitions. See "-- Expanding Through
Acquisition."
An important component of this strategy is the Company's continuing
development of subacute units. As of July 31, 1996, 46 of the Company's
facilities had subacute programs in place (as compared to 35 at the end of 1994)
and the Company actively seeks opportunities to enhance its subacute
capabilities. The Company expects to add five to ten subacute units per year in
1996 and 1997. In addition, the Company intends to continue to emphasize the
growth of its home healthcare division. The provision of home healthcare
services compliments the Company's facility-based services and substantially
broadens the continuum of care which it is able to provide. The Company believes
that its ability to package a broad array of services in this manner is
attractive to managed care payors.
Another important factor affecting the Company is the degree of managed care
penetration in the regions in which it operates. To increase the
cost-effectiveness of healthcare delivery, managed care payors
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have introduced new utilization review systems, have increased the use of
discounted and capitated fee arrangements and have attempted, where appropriate,
to direct patients to lower acuity alternatives along the continuum of patient
care. Accordingly, as managed care penetration increases, it is important for
in-patient providers such as the Company to enter into managed care contracts in
order to maintain and increase their patient base. In determining which
providers to contract with, payors consider, among other factors, the quality of
care provided, the range of services offered, geographic coverage and the cost-
effectiveness of the care provided. The Company believes that the development of
its post-acute healthcare systems in selected regions will enable it to compete
more effectively for managed care contracts with payors.
To implement its post-acute care strategy, the Company intends to (i)
continue developing subacute care units and capabilities; (ii) increase market
concentration for its healthcare services in targeted states and regions in
response to increasing payor consolidation; (iii) consider strategic alliances
with managed care payors, hospital groups, physicians and other healthcare
providers; (iv) explore acquisitions that could further expand the services
provided by the Company; and (v) upgrade its management information systems to
meet the future information needs that the managed care environment requires.
IN-SOURCING PATIENT SERVICES. The Company expects to continue to increase
its in-sourcing of such patient services as pharmacy and rehabilitation
services. The Company's existing facilities provide a ready market for such
patient services and could generate significant growth for the Company's
ancillary service businesses. The Company believes that continued expansion of
these services could enhance revenues and solidify its market position by
broadening the base of potential patients from which it is able to draw and by
creating stronger platforms from which it can offer additional services.
Moreover, these types of services should enhance the Company's profitability by
attracting greater numbers of patients who pay directly for services without the
benefit of governmental assistance programs, since the profitability of caring
for these private-pay patients generally is higher than for patients under
governmental assistance programs. Historically, the Company has realized higher
profit margins on the types of patient services it is targeting for in-sourcing.
The Company believes that the acquisition of SCRS in July 1995 will result
in the in-sourcing of a growing portion of the rehabilitation and therapeutic
services that are currently furnished on a contract basis by outside providers.
See "-- Business Units; Rehabilitation Services." In addition, the Company
anticipates expanding its pharmacy services from the 35 Company facilities in
California in which such services are currently available to almost all of the
Company's 79 California facilities and to other non-affiliated facilities. This
expansion began with the acquisition of Assist-A-Care, Inc., an institutional
pharmacy located in San Diego, California. The Company is pursuing the
development of a hub and satellite network within its pharmacy operations in
California to increase the number of facilities at which it provides pharmacy
services. In addition, the acquisition of Executive Pharmacy, an institutional
pharmacy with operations in Yadkinville, North Carolina and Knoxville,
Tennessee, provides for the in-sourcing of pharmacy services to the Company's
facilities in Tennessee and North Carolina and expands the Company's pharmacy
services provided to non-affiliated facilities. The Company believes that the
continued expansion of the pharmacy network outside of California and to
non-affiliated facilities will occur primarily through acquisitions.
MARKETING ANCILLARY SERVICES. In addition to expanding the range of
ancillary services provided directly to its patients, the Company intends to
expand the marketing of its ancillary services to non-affiliated facilities. The
development and marketing of ancillary services should enable the Company to
serve greater numbers of higher-revenue patients. Accordingly, the expansion of
ancillary services marketed to non-affiliated facilities is an important
component of the Company's goal of increasing the quality of its payor mix.
Moreover, the Company believes the selective acquisition and marketing of
ancillary services support the continued growth of the Company in targeted
market segments and locations and should produce synergies as the Company
expands both the number of facilities it operates and the continuum of care it
provides to its patients.
EXPANDING THROUGH ACQUISITION. Since its inception, the Company has grown
primarily through the selective acquisition of new facilities and ancillary
service providers. Certificate of need requirements significantly limit the
Company's ability to open new facilities or home healthcare agencies. Thus, the
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Company expects to continue to grow principally through such acquisitions and
the synergies these new facilities and ancillary services may provide. The
Company intends to focus its acquisition and expansion efforts in areas in which
the Company has already established a presence (including, without limitation,
in the Midwest and Southeast) and in areas which in the Company's view, have
provided an attractive opportunity for the expansion, geographic and otherwise,
of the continuum of care the Company offers to its patients. By expanding in
these areas, the Company intends to develop a significant market presence, which
will enable it to better exploit the opportunities for synergies provided by new
acquisitions and to enhance further the range of services provided to its
patients. In addition, such expansion may reduce over time the Company's
reliance on Medi-Cal. The Company will continue to assess the viability of
expansion into other areas when economically attractive acquisitions become
available. The Company actively seeks acquisition opportunities in the ordinary
course of business and from time to time enters into discussions and tenders
letters of interest and letters of intent with respect to possible acquisitions,
certain of which could be material. For example, the Company has tendered
certain letters of intent with respect to possible acquisitions, any one of
which if consummated would be material. Such letters of intent are subject to
numerous conditions, including negotiation of the final purchase price and other
material terms, the undertaking and completion of due diligence, negotiation and
execution of definitive documentation, and regulatory approval. The Company is
actively negotiating the terms of a letter of intent with respect to a potential
acquisition which, if consummated, would be material. There can be no assurance
that the Company would continue to pursue these, or any other acquisition
opportunities, or that in the event the Company continued to pursue these, or
any other acquisition opportunities, these or any other transactions would
ultimately be consummated.
IMPROVING MANAGEMENT INFORMATION SYSTEMS. The Company is actively
developing an integrated management information system ("MIS") to manage its
clinical and financial data. The Company intends to develop and implement an
information network among all of its facilities and locations. This integrated
network should assist the Company in assessing the costs of providing services
on a patient-specific basis. The Company expects that this revised cost focus
will further enable it to more accurately measure and predict the outcomes of
specific patient care treatments and to utilize such information to improve the
delivery of care. The Company believes this ability to measure and predict the
outcomes of specific patient care treatments is important in contracting with
managed care payors.
The Company also believes that the improvement in and increased spending on
a fully integrated MIS will result in a significant reduction in corporate
overhead as a result of the automation of many of the functions and processes
that were previously performed manually. The integrated network the Company is
developing will enable the Company to maintain better and more timely control of
the Company's revenue, cash management, accounts payable and receivables.
In concert with implementation of its new MIS, the Company has recently
embarked on a reengineering effort which should provide the Company with
significant cost savings from increased productivity from the corporate and
regional operations. The Company also believes that as it increases the size of
its operations through acquisitions and internal growth it will achieve
economies of scale.
UTILIZING TOTAL QUALITY MANAGEMENT. The Company believes that an essential
element of its business strategy is to focus on the quality of service provided,
which depends in large measure on the existence of a trained and educated work
force. The Company has since 1993 trained over 9,000 employees in the principles
of Total Quality Management ("TQM"). In addition, certain executive and
mid-level managers have been trained in the use of statistical process control
and data analysis in business decision-making.
The Company did not create additional layers of bureaucracy in order to
implement TQM, but instead developed and communicated to its employees the
simple message that the Company's vision, mission and culture are dedicated to
meeting and exceeding the expectations of its customers.
Because the Company believes that quality planning is an important component
of the strategic planning process and integral to the successful realization of
its strategic objectives, the Company's TQM approach is results-oriented. At all
levels of the Company, rewards are tied to specific agreed-upon result
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statements that directly support the Company's strategic objectives. Employee
performance is evaluated based upon achievement of stated quantitative goals. In
this way, the Company's focus is continually directed back to its strategic
objectives.
BUSINESS UNITS
The Company's business operations consist of four basic units: in-patient
facilities (including subacute specialty units), rehabilitation services,
pharmacy services and home healthcare.
IN-PATIENT FACILITIES. The Company has 106 in-patient facilities that are
licensed as skilled nursing facilities and provide skilled nursing care for
patients who do not require more extensive treatment at an acute care hospital.
Six of these facilities are also approved by the California Department of Health
Services to provide mental health services. The Company's in-patient facilities
provide 24-hour nursing care, room and board, social services and activity
programs, as well as special diets and other services that may be specified by a
patient's physician. Patients at these facilities often have been discharged
from acute care hospitals and require substantial healthcare attention. The
Company also operates five facilities for the developmentally disabled.
The Company believes that its leading California presence, coupled with the
expansion of its therapy, pharmacy, subacute and other post-acute capabilities,
will enhance the Company's ability to obtain contracts and referrals from
managed care companies. For the year ended December 31, 1995, and the six months
ended June 30, 1996, 5.4% and 5.5%, respectively, of the Company's revenue was
attributable to managed care, and the Company expects this percentage to
increase.
As of July 31, 1996, 22 of the Company's in-patient facilities have been
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), an independent organization that reviews facilities and accredits
those that achieve certain standards for quality control and assurance. The
Company has applied for accreditation at additional facilities.
As of July 31, 1996, 46 of the Company's healthcare facilities included
subacute specialty units that serve the needs of patients with medically complex
conditions and who require ongoing nursing and medical supervision and access to
specialized equipment and services, but who do not require many of the other
services provided by acute care hospitals. The Company's subacute specialty
units provide such ancillary services as respiratory therapy, ventilator care,
oncology services, infusion therapy, care to HIV patients and post-surgical
wound management. In addition, the Company provides specialized services at five
of its facilities to patients diagnosed with Alzheimer's disease. Services at
the Company's subacute specialty units are not limited to elderly patients.
Based upon its experience within the industry and its knowledge of acute care
hospital rates, as disclosed by such institutions, the Company believes that it
is able to provide subacute care at rates substantially below the rates
typically charged by acute care hospitals for comparable services. Subacute
specialty services typically generate higher average revenues per patient-day
than basic nursing services. The Company has added eleven subacute units since
January 1, 1995, and expects to add five to ten subacute units per year in each
of the next two years.
REHABILITATION SERVICES. As of July 31, 1996, 112 of the Company's
in-patient facilities provide special rehabilitation services, including
physical, speech, occupational and respiratory therapy. These services are
provided by several contract therapy providers, including SCRS.
The objective of these programs is to assist patients to achieve their
highest level of functional independence. Rehabilitation services are
instrumental in lowering the overall cost of care by reducing the length of a
patient's stay and improving a patient's quality of life. Specialized management
staff oversee these rehabilitation programs to ensure high-quality service
delivery, program compliance and achievement of maximum outcomes for the
patient.
SCRS provides rehabilitation services at certain of the Company's facilities
under contract arrangements. As of July 31, 1996, SCRS also provided special
rehabilitation services in 14 states at 85 non-affiliated healthcare facilities
and provided services to home healthcare patients under four contracts with non-
affiliated healthcare providers.
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SCRS has an information services division, "Pulse Point Technologies," that
developed a PC-based software package that collects patient outcome data
directly at a facility contemporaneously with the provision of rehabilitation
services. This data is used by SCRS for, among other things, billing purposes
and to generate management reports. The data may also be used by discharge
planners and administrators to track patient care and guide patient-care
decisions. Data can be compiled for approximately 5,000 patients per month. The
Company believes that in the future this type of software will be necessary to
compete effectively for managed care contracts.
PHARMACY SERVICES. In November 1991, Regency began operating its own
pharmacy. In early 1996, the Company acquired three additional pharmacy
operations in order to expand its service to Company-operated facilities and
non-affiliated facilities in California, Tennessee and North Carolina. As of
July 31, 1996, the Company's pharmacy operations provide prescription services
and basic pharmaceutical dispensing programs to 61 Company-operated facilities
with approximately 6,400 licensed beds and to 75 non-affiliated facilities with
approximately 6,700 licensed beds. In addition, the Company's pharmacy
operations provide certain specialty services such as infusion therapy, enteral
nutrition, wound care and urological and ostomy supply programs. The Company has
also developed certain specialty consulting and ancillary programs to assist
with compliance by each individual facility with state and federal regulations.
The Company is pursuing the development of a hub and satellite network of
pharmacy operations within California to increase the number of facilities at
which it provides pharmacy services.
HOME HEALTHCARE SERVICES. The Company currently provides home healthcare
services in selected areas in California and Ohio through two operating
divisions, Care Home Health and Care At Home. Care has provided home healthcare
services since 1983. Care Home Health primarily serves Medicare patients while
Care At Home provides services to private pay, managed care and Medicaid
patients. The services offered include skilled nursing, rehabilitation services,
infusion therapy, ventilator care and care for patients with AIDS.
As of July 31, 1996, the Company operated six Medicare-certified home
healthcare agencies with 29 branches, all of which are accredited by JCAHO. The
Company has positioned its home healthcare capabilities to serve its facilities'
home healthcare needs. This integrated approach enables the facilities and home
healthcare agencies to refer patients to each other as determined by patient
needs. This structure allows the Company to provide a broad continuum of care
with a focus on continuity for its patients.
MANNER OF OPERATION
IN-PATIENT OPERATIONS. Each in-patient facility operated by the Company is
supervised by a licensed administrator who is responsible for all aspects of
facility operations. Each facility administrator typically oversees a director
of nursing, a director of admissions and other department supervisors. The
director of nursing supervises a staff of registered nurses, licensed practical
nurses and nurses' aides. The director of admissions is responsible for
developing local marketing strategies and programs. To supervise the medical
management of patients, the Company also contracts with licensed physicians to
act as medical directors at each facility. The Company's corporate staff
provides support services such as quality improvement programs, management
information reporting, marketing assistance, management training, legal support,
human resources assistance, risk management, reimbursement expertise, data
processing, cash management assistance, accounting and other management support
services for each facility.
The Company has a professional services department that includes consultants
representing each professional discipline providing patient care. The department
coordinates the development and implementation of corporate and administrative
policies and procedures and writes most clinical manuals used in direct patient
care. To ensure regulatory compliance and high-quality clinical services, the
department is actively involved in location-specific and Company-wide quality
improvement activities and education through interdisciplinary consulting
services to all of the Company's operational areas.
CONTRACT REHABILITATION THERAPY OPERATIONS. The Company's contract
rehabilitation therapy operations are directed by the senior vice president of
rehabilitation and managed by two divisional executive vice presidents: one who
oversees field operations, clinical services, corporate support, finance and a
recruiting
44
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division, and one who oversees all sales, marketing and the Pulse Point
Technologies information service. Field operations are controlled by divisional
vice presidents who supervise state regional directors and a team of area
clinical managers who typically oversee three to seven facilities each.
PHARMACY OPERATIONS. The Company's pharmacy operations are managed by the
senior vice president of pharmacy operations, who is responsible for all aspects
of pharmacy operations. Each pharmacy is managed by a either a general manager
or pharmacy manager, who is a pharmacist, and supported by a business manager
who oversees the billing department staff, a professional staff of consulting
and dispensing pharmacists, nurses and dietitians, and a support staff of
technicians and delivery personnel. The division corporate staff includes a
regional controller, director of ancillary services and director of pharmacy
support services who provide financial accounting, Medicare Part B billing,
program implementation and other management support services to each pharmacy
manager.
HOME HEALTHCARE OPERATIONS. The Company's home healthcare operations are
divided geographically into four regions, each managed by a regional vice
president. The regional vice presidents report to the corporate vice president
of home healthcare and are supported by corporate and regional directors of
quality improvement, consumer education, finance and infusion. Each of the
Medicare-certified agencies is managed by a director of personnel services.
SOURCES OF PAYMENT
The Company receives payment for healthcare services from (i) the federally
assisted Medicaid program, (ii) the federal Medicare program, (iii) private
sources, including HMOs and commercial insurance, and (iv) other sources,
including special programs sponsored by local governments and the Veterans
Administration. Because private and Medicare reimbursement rates historically
have been higher than Medicaid reimbursement rates, the Company has targeted the
private-pay market and has worked to make available Medicare-eligible services
in its healthcare facilities. Changes in the mix of the Company's patient
population between Medicaid and a combination of Medicare, private and other
sources can significantly affect profitability. Governmental reimbursement
programs are subject to change, and such changes can affect profitability. See
"-- Regulation."
As of July 31, all but three of the Company's in-patient facilities are
certified for participation in Medicaid. Medicaid is a medical assistance
program for the indigent that is operated by state governments with financial
assistance (approximately 50% of the funds available) from the federal
government under a matching program. Medicaid is subject to federally imposed
requirements. Medi-Cal, California's version of Medicaid, currently provides for
reimbursement at established daily rates, as determined by the California
Department of Health Services, based on median costs of nursing facilities
(classified by number of licensed beds and geographic location). Medi-Cal
primarily pays for long-term custodial care for patients who qualify for welfare
benefits. In Ohio and West Virginia, Medicaid reimbursement is a prospective
cost-based system with an adjustment factor to account for patient acuity.
Medicaid reimbursement is primarily provided under a prospective cost-based
system in Tennessee and in North Carolina is provided under a system that has
both a cost reimbursement component, subject to limitations, as well as a
prospective cost-based component. Each of the Company's six home healthcare
agencies is eligible to participate in the Medicare program.
As of July 31, 1996, 100 of the Company's 112 in-patient facilities were
certified for participation in Medicare. Medicare is a health insurance program
operated by the federal government for the aged and certain chronically disabled
individuals. Medicare reimbursement rates for the Company's healthcare
facilities are regulated by the federal government and generally utilize a
cost-based reimbursement system, subject to geographic limits. Medicare pays
both the allowed direct costs and allowed overhead costs related to services
provided to patients covered by the Medicare program. Medicare specific rates
are dependent upon the cost and volume of the services provided as calculated on
the cost reports that each facility is required to submit annually to Medicare.
Reimbursement from Medicare is subject to retrospective adjustment to reconcile
payments made to a facility on an interim basis with subsequently determined
allowable costs. Overpayments may be recovered directly from the facility at the
time the adjustment is made or by reducing future payments to the facility or
other facilities operated by the Company.
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The Company's cost of care for its Medicare patients sometimes exceeds
reimbursement limits established by Medicare. The Company submits exception
requests for its excess costs annually. Exception requests for all cost report
periods through December 31, 1993 have been filed. The Company's final rates as
approved by HCFA represent, on average, approximately 84% of the requested rates
as submitted in the exception requests. Through December 31, 1993, the Company's
policy was to record as revenue the excess amounts represented by each exception
request when the cash was actually received. In 1994, the Company changed its
policy and began recognizing a portion of its estimated exception requests in
the year services are provided. During 1994 and 1995, the Company recognized 50%
($1.6 million) and 70% ($3.0 million) of the estimated exception requests,
respectively. For the six months ended June 30, 1996, the Company recognized 70%
($2.6 million) of the estimated exception requests. Amounts received in respect
of exception requests relating to periods prior to January 1, 1994 will continue
to be recorded on the cash basis. The Company believes that it will be able to
recover its excess costs under any pending exception requests or under any
exception requests that may be submitted in the future; however, there can be no
assurance that it will be able to do so.
The Company has a broad customer base. There are no customers or related
groups of customers that account for a significant portion of the Company's
revenue. The loss of a single customer or group of related customers would not
have a material adverse effect on the operations of the Company taken as a
whole. However, two non-affiliated healthcare providers represented 37% of
SCRS's total revenues during the period July through December 1995 and 26% of
SCRS's total revenues for the six months ended June 30, 1996.
Reimbursement rates for HMOs are negotiated by the Company and each
organization. Charges for other private-pay patients are established by the
Company from time to time and are determined by market conditions and costs.
Veterans Administration contracts are generally at negotiated daily rates. The
Company also receives reimbursement, generally at negotiated daily rates,
pursuant to five contracts with county governments relating to certain of the
Company's facilities that provide services to the mentally disordered. These
contracts may be terminated by either party upon 60 days', or less, prior
notice.
The following table sets forth the percentage of net operating revenue
provided by source of payor for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Medicaid................................................. 44.6% 42.7% 39.9% 40.2%
Medicare................................................. 29.9 31.3 31.9 30.4
Private.................................................. 16.9 15.2 13.6 11.9
Managed Care............................................. 3.6 4.6 5.4 5.5
Other.................................................... 5.0 6.2 9.2 12.0
----- ----- ----- -----
Total.................................................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As of May 31, 1996 the Company had in effect agreements with almost all
major HMOs operating in California to provide in-patient care and ancillary
services both to such HMOs' members serviced by the Company's in-patient
facilities and to members serviced by the Company's home healthcare operations.
Payment by HMOs for services provided by the Company is based on negotiated
contract rates that vary by HMO. Patient reimbursement is based upon the level
of patient acuity, irrespective of the actual services provided. Thus, if a
patient requires a greater level of healthcare services than that normally
provided a patient of the agreed acuity level, the Company will not be
reimbursed for such additional services.
CONTRACT REHABILITATION THERAPY SERVICES TO NON-AFFILIATES. Revenues from
contract rehabilitation services to non-affiliates are generally received
directly from the in-patient facility where the patient being treated resides,
which in turn are paid by Medicare or other payors. These revenues are included
in other sources of revenue. Revenue from contract rehabilitation therapy
services provided to Company-operated facilities are included in the Medicaid,
Medicare and private pay sources of revenues for each of the
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applicable facilities. Charges to non-affiliates, though not directly regulated,
are effectively limited by regulatory reimbursement policies imposed on the
in-patient facilities whose patients receive these therapy services, as well as
competitive market factors.
PHARMACY SERVICES TO NON-AFFILIATES. Revenue from the Company's pharmacy
services are derived from the provision of such services to patients at
in-patient facilities not operated by the Company and patients at
Company-operated facilities billed directly to third-party payors. The Company
enters into non-exclusive contracts with non-affiliated facilities, and
personnel at such facilities submit prescriptions to the Company on behalf of
patients at such facilities. The Company is in most cases paid directly by
Medicare, Medicaid or private pay sources, and not by the in-patient facility.
The amounts that can be charged for prescriptions are often limited by Medicaid
and Medicare regulations.
HOME HEALTHCARE OPERATIONS. Revenue from the Company's home healthcare
operations are received from a variety of payors, including the Medicare and
Medicaid programs, commercial insurance, health maintenance organizations,
private sources and special county/state programs. In January 1996, the
Company's four California home healthcare agencies entered the HCFA "Prospective
Pay" pilot program. This is a three-year program under which reimbursement for
two of such facilities will be determined on an "episode" basis instead of on a
fee for service (per visit basis). An "episode" is defined as a 120-day period
of home healthcare benefit, inclusive of all necessary services (including
ancillary services).
RELATED-PARTY TRANSACTIONS. Medicare regulations that apply to transactions
between related parties, such as between subsidiaries of the Company, determine
in part the amount of Medicare reimbursement the Company is entitled to receive
for contract rehabilitation therapy and pharmacy services that it provides to
Company-operated facilities. These regulations generally require that, among
other things, (i) the Company's rehabilitation therapy and pharmacy subsidiaries
must each be a bona fide separate organization; (ii) a substantial part of the
contract rehabilitation therapy services or pharmacy services, as the case may
be, of the relevant subsidiary must be transacted with non-affiliated entities,
and there must be an open, competitive market for the relevant services; (iii)
contract rehabilitation therapy services and pharmacy services, as the case may
be, are services that commonly are obtained by in-patient facilities from other
organizations and are not a basic element of patient care ordinarily furnished
directly to patients by such facilities; and (iv) the prices charged to the
Company's in-patient facilities by its contract rehabilitation therapy
operations subsidiary and pharmacy operations subsidiaries are consistent with
the charges for such services in the open market and no more than the prices
charged by its contract rehabilitation therapy operations subsidiary and
pharmacy operations subsidiaries under comparable circumstances to
non-affiliated in-patient facilities. The Company believes that each of the
foregoing requirements is currently being satisfied with respect to both its
contract rehabilitation therapy and pharmacy subsidiaries. Consequently, the
Company has claimed and received reimbursement under Medicare for contract
rehabilitation therapy services (since the acquisition of SCRS in July 1995) and
pharmacy services (beginning in January 1996) provided to patients in its own
facilities at a higher rate than if it did not satisfy these requirements. If
the Company is unable to satisfy these regulations in the future, the
reimbursement the Company receives for contract rehabilitation therapy and
pharmacy services provided to its own facilities would be materially adversely
affected. If, upon audit by relevant reimbursement agencies, such agencies find
that the requirements of any of these regulations has not been satisfied and if,
after appeal, such findings are sustained, the Company could be required to
refund some or all of the difference between its cost of providing these
services and the higher amount actually received. While the Company believes
that it has satisfied and will continue to satisfy these regulations, there can
be no assurance that its position would prevail if contested by relevant
reimbursement agencies.
MARKETING
The Company maintains a full-time marketing staff to promote revenue growth
for its in-patient facilities and its ancillary operations. Long-term strategies
and broader Company-wide marketing programs are developed by the corporate-level
marketing department. Primary marketing responsibility rests with the
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individual facility administrators and ancillary managers. The Company employs
nine regional marketing managers who work directly with local facility
administrators and facility-based marketing personnel to develop strategies and
marketing and sales plans to promote the Company's services.
The Company has developed various marketing training programs and manuals
for use by the local facility personnel and utilizes software programs,
statistical data and field interview responses to develop materials for
marketing efforts undertaken at the individual facilities. Recognizing that
healthcare decisions are made at the local market level by area physicians, case
managers, discharge planners, family members and patients, the Company attempts
to identify, develop and maintain relationships with the primary referral
sources in each of the areas it serves. The marketing department personnel also
research, analyze and advise the Company concerning opportunities in each of its
local market areas. As a result, the Company's marketing staff seeks to develop
programs to maximize occupancy and financial performance in each of the
Company's facilities.
REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services of care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of Company
facilities, eligibility for participation in federal and state programs,
permissible activities, costs of doing business or the levels of reimbursement
from governmental, private and other sources. Such changes have not had a
material adverse effect on the Company's business. However, there can be no
assurance that regulatory authorities will not adopt changes or interpretations
that could adversely affect the Company's businesses.
LICENSING. The Company's healthcare facilities and pharmacy services are
subject to licensing requirements by state and local authorities. The Company's
healthcare facilities are licensed by each state's licensing agency. In granting
licenses, a licensing agency considers, among other factors, the physical
condition of the facility, the qualifications of the administrative and nursing
staffs, the quality of care and compliance with applicable statutes and
regulations. The failure to maintain or renew any required regulatory approvals
or licenses could prevent the Company from offering its existing services or
from obtaining reimbursement. In addition, the requirement that new facilities
and home healthcare agencies obtain a certificate of need significantly limits
the Company's ability to grow through the opening of such facilities or
agencies.
As of July 31, 1996, 100 of the Company's 112 in-patient facilities were
certified for participation in Medicare and all but three of the Company's
facilities are certified for participation in Medicaid. All of the home
healthcare agencies operated by the Company are eligible to participate in the
Medicare program. The Company holds licenses to operate in-patient facilities in
California, West Virginia, Ohio, Tennessee and North Carolina. Ohio does not
require that a new license be issued on a yearly basis. The Company participates
in the Medicaid programs in California, West Virginia, Ohio, Tennessee and North
Carolina, and in Medicare programs in California, West Virginia and Ohio. In
addition, the Company is providing services to Medicare patients in Tennessee
and North Carolina and is in the process of obtaining approval to fully
participate in the Medicare programs in such states. The Company anticipates
that such approval will be obtained and that it will be reimbursed, on a
retroactive basis, for such Medicare services.
Most states in which SCRS operates permit a corporation to provide
rehabilitation services if the individual therapist is licensed. The Company's
rehabilitation services at facilities not operated by the Company are offered
under the individual license of Sherri L. Medina, the Company's Senior Vice
President, Rehabilitation Services and through the licenses of individual
therapists. In California and Indiana, services are provided either through Ms.
Medina's professional corporation or through a professional corporation of
another employee.
In certain states, statutes require that a state agency approve certain
acquisitions, the addition of beds and services and certain capital
expenditures. Such state approvals generally require implementation of an
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approved item within a specified time period. The failure to obtain state
approval can result in the inability to make the acquisition, to add the
service, to operate the facility or complete the addition or other change
requested, and can result in the imposition of sanctions or adverse
reimbursement action.
The Omnibus Budget Reconciliation Act of 1987 ("OBRA") was implemented
effective October 1, 1990. Among other things, OBRA eliminated the different
certification standards for "skilled" and "intermediate care" nursing facilities
under the Medicaid program in favor of a single "nursing facility" standard.
OBRA also mandated an increase in the level of services nursing facilities must
provide to participate in Medicare and Medicaid. This change, the cost of which
was partially offset by reimbursement rate increases for Medicaid and an
increase in the routine cost limits under Medicare, has not had a significant
impact on the Company.
Effective July 1, 1995, new regulations under OBRA dealing with enforcement
policies and procedures and a new survey process became operative. These
regulations provide for a variety of penalties for noncompliance with other
substantive regulations and minimum standards of care, including required
preparation and submission of plans of correction, new patient admission
moratoriums, denial of reimbursement, decertification of Medicare reimbursement
eligibility, delicensing, forced facility shutdown and loss of provider status.
While the Company believes that it is in substantial compliance with the current
requirements of OBRA, it is unable to predict how the enforcement regulations
will be implemented, or how future interpretations of current regulations or
future regulations promulgated under OBRA may affect it. In addition, there can
be no assurance that the Company's facilities and the provision of services and
supplies by the Company now or in the future will initially meet or continue to
meet the requirements for participation in Medicare or Medicaid programs.
The Company and its healthcare facilities are subject to routine
inspections, at any time, to monitor compliance with government regulations.
Based on such inspections, the Company receives, from time to time in the
ordinary course of its business, notices of failure to comply with various
requirements. The Company endeavors to take prompt corrective action and, in
most cases, the Company and the reviewing agency agree on remedial steps. The
reviewing agency may take action against a facility that is not in compliance
with these requirements, which can include the imposition of fines, temporary
suspension of admission of new patients to the facility, decertification from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revocation of the facility's license. In certain circumstances,
failure of compliance at one facility may affect the ability of the Company to
obtain or maintain licenses or approvals under Medicare and Medicaid programs at
other facilities.
REIMBURSEMENT. Governmental reimbursement programs are subject to statutory
and regulatory changes, administrative rulings and interpretations, government
funding restrictions and retroactive reimbursement adjustments, all of which
could materially increase or decrease the services covered or the rates paid to
the Company for its services. There have been, and the Company expects that
there will continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement for healthcare services. The Company cannot predict whether any of
these proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the Company. There can be no assurance that payments
under governmental programs will remain at levels comparable to present levels
or will be sufficient to cover the cost allocable to patients eligible for
reimbursement pursuant to such programs. In addition, governmental reimbursement
programs require strict compliance with both patient eligibility and acuity
requirements, and timely payment requests. The failure to adhere to these
requirements is a basis for denial of reimbursement or for a required refund,
with interest, of any sums paid by the program.
In addition, the Company's cash flow could be adversely affected by periodic
government program funding delays, shortfalls or other difficulties, such as
that which occurred in 1995 when California failed to adopt a new budget prior
to the end of the 1994-1995 fiscal year and, as a result, Medi-Cal delayed
reimbursement payments for several weeks. Medi-Cal has on a number of recent
occasions delayed payments and rate increases, including for several weeks in
each of 1990, 1991 and 1995.
The Company has been able to mitigate the effects of such payment delays by
monitoring the related activities of the California legislature, expediting
billings through its electronic billing arrangement and
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agreeing with creditors to extend the due date for payables. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." There can be no assurance, however, that the
Company will be able to mitigate the effects of any future funding delays. In
1995 the Company had an average of approximately $9.2 million per month in cash
receipts from the Medi-Cal program.
ANTIFRAUD AND SELF-REFERRAL REGULATIONS. Various federal and state laws
regulate the relationship between providers of healthcare services and
physicians or others able to refer medical services, including employment or
service contracts, leases and investment relationships. These laws include the
fraud and abuse provisions of Medicare, Medicaid and similar state statutes (the
"Fraud and Abuse Laws"), which prohibit the payment, receipt, solicitation or
offering of any direct or indirect remuneration intended to induce the referral
of Medicare and Medicaid patients or for the ordering or providing of Medicare
or Medicaid covered services, items or equipment. Violations of these provisions
may result in civil and criminal penalties and/or exclusion from participation
in the Medicare and Medicaid programs and from state programs containing similar
provisions relating to referrals of privately insured patients. The United
States Department of Health and Human Services ("HHS") has interpreted these
provisions broadly to include the payment of anything of value to influence the
referral of Medicare or Medicaid business. HHS has issued regulations which set
forth certain "safe harbors," representing business relationships and payments
that can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. The Company
considers all applicable laws in planning marketing activities and exercises
care in an effort to structure its arrangements with healthcare providers to
comply with these laws. However, because there is no procedure for obtaining
advisory opinions from government officials, the Company is unable to provide
assurances that all of its existing or future arrangements will withstand
scrutiny under the Fraud and Abuse Laws, safe harbor regulations or other state
or federal legislation or regulations, nor can it predict the effect of such
rules and regulations on these arrangements in particular or on the Company's
operations in general. The Company systematically reviews its operations on a
periodic basis and has adopted policies intended to ensure that it complies with
the Fraud and Abuse Laws.
ENVIRONMENTAL REGULATIONS. The Company's healthcare operations generate
medical waste that must be disposed of in compliance with federal, state and
local environmental laws and regulations. The Company's operations are also
subject to compliance with various other environmental laws and regulations.
Such compliance has not materially affected, and the Company anticipates that
such compliance will not materially affect, the Company's capital expenditures,
earnings or competitive position.
COMPETITION
The Company, and the healthcare industry in general, faces the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of services that may be reimbursed and reduce reimbursement
levels for covered services, national and state efforts to reform the United
States healthcare system may further affect reimbursement rates. Changes in
medical technology, existing and future legislation, regulations and
interpretations and competitive contracting for provider services by private and
government payors may require changes in the Company's facilities, equipment,
personnel, rates and/or services in the future.
The Company competes with a variety of other providers of healthcare
services, including rehabilitation hospitals, other skilled nursing facilities,
hospitals with long-term care capability, other home healthcare providers and
personal care or residential facilities. Competition has become more intense as
alternatives for nursing and rehabilitation patients have increased. Many
hospitals now have skilled nursing units and home healthcare agencies.
Community-based programs such as assisted living and congregate living centers
can also lower occupancy rates in the Company's facilities. Such residential
care facilities and home healthcare agencies provide for patients outside an
institutional setting, many of whom had previously
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received care in long-term care facilities. In addition, changes in regulatory
requirements may increase competition. For example, California has eliminated
the requirement to obtain a certificate of need before adding beds, which may
increase competition among long-term care operators. Approximately 66% of the
Company's licensed beds are located in California.
As of July 31, 1996, the Company operated 79 healthcare facilities with
approximately 7,600 licensed beds in California. The Company estimates that
there are approximately 1,200 long-term care facilities with approximately
120,000 licensed beds in California. The Company also operates 33 facilities
with approximately 3,900 licensed beds in Ohio, West Virginia, North Carolina
and Tennessee. The Company's competitive position varies from facility to
facility, from community to community and from state to state. Some of the
significant factors for individuals' selection of the Company's healthcare
facilities include quality of care, reputation, physical appearance, services
offered, family preferences, physical services and price. The Company's
facilities and home healthcare agencies generally operate in communities that
are also served by similar facilities operated by others. Some competing
facilities, pharmacies and home healthcare agencies provide services not offered
by the Company and some are operated by entities having greater financial and
other resources and longer operating histories than the Company. In addition,
some are operated by nonprofit organizations or government agencies supported by
endowments, charitable contributions, tax revenues, and other funding sources
not available to the Company. There can be no assurance that the Company will
not encounter increased competition in the future that would adversely affect
the Company's results of operations.
Services similar to those provided by SCRS are provided by other
rehabilitation services companies, many of whom are larger and have greater
resources than the Company. In addition, many of SCRS's existing customers,
including its largest customer, have begun to develop the capability of directly
providing such services at their own facilities rather than contracting with
other providers for such services.
EMPLOYEES
As of July 31, 1996, the Company had approximately 13,800 full-time and
part-time employees. Of these employees, approximately 12,000 were employed at
its in-patient facilities, approximately 1,500 at its home healthcare agencies,
and approximately 300 at its regional administrative and corporate offices.
Approximately 1,200 of the employees were covered by 14 collective bargaining
agreements. The Company believes that it maintains productive relations with its
employees in general and with its employees' collective bargaining units. The
Company is subject to both federal and state minimum wage and wage and hour laws
and maintains various employee benefit plans.
INSURANCE
The Company maintains general and professional liability insurance on a
claims-made basis for its operations in an amount it believes to be adequate,
subject to a $100,000 per occurrence self-insured retention, limited to an
aggregate stop loss of $500,000 per year. All-risk property insurance, including
earthquake and flood, is carried for all Company operations.
The Company self-insures its workers' compensation programs in California
and Ohio, for in-patient facilities, pharmacy operations, home healthcare
operations and its corporate office employees. For all other operations, the
Company purchases insurance for this risk. The Company is required to maintain
standby letters of credit with the state insurance departments for this purpose.
These letters of credit assure that benefits payable by the Company to its
covered employees (which estimated benefits are reflected as liabilities on the
Company's books and records) are paid when required. The Company has not
defaulted in its workers' compensation benefit payment obligations since the
Company began its self-insurance program in 1983.
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PROPERTIES
The following table sets forth information regarding the healthcare
facilities owned or leased by the Company as of July 31, 1996:
<TABLE>
<CAPTION>
FACILITIES BEDS
---------------------------------------------------- ------------------------
OWNED LEASED MANAGED TOTAL OWNED LEASED
----------- ----------- ------------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
California............................. 27 51 1 79 2,086 5,264
Ohio................................... 4 4 -- 8 402 461
North Carolina......................... 1 10 -- 11 86 1,278
Tennessee.............................. -- 8 -- 8 -- 1,097
West Virginia.......................... 5 1 -- 6 554 65
--- --- --- --- ----- -----
Total.............................. 37 74 1 112 3,128 8,165
--- --- --- --- ----- -----
--- --- --- --- ----- -----
<CAPTION>
MANAGED TOTAL
------------- ---------
<S> <C> <C>
California............................. 248 7,598
Ohio................................... -- 863
North Carolina......................... -- 1,364
Tennessee.............................. -- 1,097
West Virginia.......................... -- 619
--- ---------
Total.............................. 248 11,541
--- ---------
--- ---------
</TABLE>
The Company's home healthcare operations lease office space aggregating
approximately 49,000 square feet for its 29 home healthcare locations in
California and Ohio. The Company's pharmacy subsidiaries lease approximately
21,000 square feet for its five locations in California, North Carolina and
Tennessee. The Company's rehabilitation subsidiary, SCRS, leases an
approximately 8,000 square foot office in Aliso Viejo, California. The Company
also leases office space aggregating approximately 60,000 square feet for its
corporate and regional offices in California and West Virginia.
In the facilities that are leased, subleased or managed, the Company's
rights as lessee or sublessee could be subject to termination if the lessor or
sublessor of a facility fails to pay its rent, taxes, loan obligations that are
secured by the facility, if any, or other similar obligations. The Company has
not experienced any such lease terminations, although there can be no assurance
that the Company's rights to operate its leased or subleased facilities will not
be so affected in the future.
The Company's facilities are subject to various governmental zoning and use
restrictions. One of the Company's facilities that provides services for the
mentally disordered is currently operating pursuant to a deemed to be approved
conditional use permit. In July 1992, the facility filed an application for a
conditional use permit and is currently appealing the recent denial of said
application. A mediator has been appointed to monitor this matter. Although
there can be no assurance, the Company believes it will prevail with its appeal
and that the conditional use permit will be renewed.
Thirteen of the Company's buildings are encumbered by deeds of trusts or
mortgages.
LEGAL PROCEEDINGS
The Company is subject to claims and legal actions by patients and others in
the ordinary course of its business. The Company has insurance policies in
varying amounts covering most of the outstanding lawsuits. In the event a
judgment were awarded in excess of the insurance coverage or with respect to
claims not covered by insurance, the burden would fall on the Company. See "--
Insurance."
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DESCRIPTION OF THE EXCHANGE NOTES
The Company issued $50.0 million in aggregate principal amount of the
Outstanding Notes under the Indenture. The Exchange Notes will also be issued
under the Indenture, and the Indenture will be qualified under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act") upon the
effectiveness of the Registration Statement. The form and terms of the Exchange
Notes will be substantially identical to the Outstanding Notes, except that the
issuance of the Exchange Notes has been registered under the Securities Act and
thus the Exchange Notes will not bear legends restricting their transferability.
Upon the completion of the Exchange Offer, none of the Notes will be entitled to
registration rights under the Registration Rights Agreement. The Exchange Notes
will evidence the same indebtedness as the Outstanding Notes, will be entitled
to the benefits of the Indenture and will be treated as a single class under the
Indenture with any Outstanding Notes that remain outstanding after the Exchange
Offer.
The terms of the Notes include those set forth in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act in effect
on the date of the Indenture. The Notes are subject to all of such terms and
reference is made to the Indenture and the Trust Indenture Act for a statement
thereof. A copy of the Indenture is available upon request from the Company and
a copy has been filed with the Commission as an exhibit to the Registration
Statement. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Indenture. Capitalized terms used but
not defined in this section of the Prospectus shall have the meaning ascribed to
them in the Indenture.
GENERAL
The Notes are subordinated, unsecured, general obligations of the Company,
limited in aggregate principal amount to $50.0 million. The Notes are
subordinated in right of payment to certain other debt obligations of the
Company. The Notes are fully and unconditionally (to the extent set forth in the
Indenture), jointly and severally guaranteed on a subordinated basis by
substantially all of the Company's present and future Subsidiaries (as defined
herein) (each, a "Guarantor," and collectively the "Guarantors"). The term
"Subsidiaries" as used herein, however, does not include Unrestricted
Subsidiaries (as defined herein). The Guarantors are all wholly owned
subsidiaries of the Company, and the Company has no material assets or
operations other than its investment in its subsidiaries. The non-guarantor
subsidiaries are not significant either individually or in the aggregate as
compared to the Company on a consolidated basis. The Outstanding Notes were, and
the Exchange Notes will be, issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
The Notes will mature on July 15, 2003. The Notes bear interest at the rate
of 12 1/4% per annum from June 28, 1996 or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semi-annually on
January 15 and July 15 of each year, commencing January 15, 1997, to the persons
in whose names the Notes are registered at the close of business on the January
1 or July 1 immediately preceding such Interest Payment Date. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee presently located at 770 Broadway,
New York, New York 10003.
SUBORDINATION
The Notes and the Guarantees are general, unsecured obligations of the
Company and the Guarantors, respectively, subordinated in right of payment to
all Senior Debt of the Company and the Guarantors, as applicable. As of July 31,
1996, after giving effect to the issuance of the Notes and the Redemption, the
Company would have had outstanding an aggregate of $119.0 million of Senior
Debt, which includes
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reimbursement obligations in respect of $9.0 million of letters of credit
(related to the Company's self-insurance programs), and the Company had
availability of $41.0 million under the Credit Facility (all of which would be
Senior Debt). While the Indenture limits the ability of the Company to incur
additional indebtedness, there is no limitation on the amount of such additional
indebtedness that may be Senior Debt.
The Indenture provides that no payment (by set-off or otherwise) may be made
by or on behalf of the Company or a Guarantor, as applicable, on account of the
principal of, premium, if any, or interest on the Notes (including any
repurchases of Notes), or on account of the redemption provisions of the Notes,
for cash or property (other than Junior Securities), (i) upon the maturity of
any Senior Debt of the Company or such Guarantor by lapse of time, acceleration
(unless waived) or otherwise, unless and until all principal of, premium, if
any, and the interest on such Senior Debt are first paid in full in Cash or Cash
Equivalents (or such payment is duly provided for) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than Cash or
Cash Equivalents, or (ii) in the event of default in the payment of any
principal of, premium, if any, or interest on Senior Debt of the Company or such
Guarantor when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Senior Debt to declare such Senior Debt to be due
and payable (or, in the case of letters of credit, require cash
collateralization thereof) and (ii) written notice of such event of default
given to the Company by the Senior Debt Representative under a Credit Agreement,
or by the holders of an aggregate of at least $20.0 million principal amount
outstanding of any other Senior Debt or their representative (a "Payment
Notice"), then, unless and until such event of default has been cured or waived
or otherwise has ceased to exist, no payment (by set-off or otherwise) may be
made by or on behalf of the Company or any Guarantor which is an obligor under
such Senior Debt on account of the principal of, premium, if any, or interest on
the Notes (including any repurchases of any of the Notes, or on account of the
redemption provisions of the Notes), in any such case, other than payments made
with Junior Securities. Notwithstanding the foregoing, unless the Senior Debt in
respect of which such event of default exists has been declared due and payable
in its entirety within 179 days after the Payment Notice is delivered as set
forth above (the "Payment Blockage Period") (and such declaration has not been
rescinded or waived), at the end of the Payment Blockage Period, the Company and
the Guarantors shall be required to pay all sums not paid to the Holders of the
Notes during the Payment Blockage Period due to the foregoing prohibitions and
to resume all other payments as and when due on the Notes. Any number of Payment
Notices may be given; PROVIDED, HOWEVER, that (i) not more than one Payment
Notice shall be given within a period of any 360 consecutive days, and (ii) no
default that existed upon the date of such Payment Notice or the commencement of
such Payment Blockage Period (whether or not such event of default is on the
same issue of Senior Debt) shall be made the basis for the commencement of any
other Payment Blockage Period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Guarantor (other than Junior
Securities) shall be received by the Trustee, paying agent or the Holders at a
time when such payment or distribution is prohibited by the foregoing
provisions, such payment or distribution shall be held in trust for the benefit
of the holders of such Senior Debt, and shall be paid or delivered by the
Trustee or such Holders, as the case may be, to the holders of such Senior Debt
remaining unpaid or unprovided for or to their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Debt may have been issued,
ratably according to the aggregate principal amounts remaining unpaid on account
of such Senior Debt held or represented by each, for application to the payment
of all such Senior Debt remaining unpaid, to the extent necessary to pay or to
provide for the payment of all such Senior Debt in full in Cash or Cash
Equivalents or otherwise to the extent holders accept satisfaction of amounts
due by settlement in other than Cash or Cash Equivalents after giving effect to
any concurrent payment or distribution to the holders of such Senior Debt.
Upon any distribution of assets of the Company or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities: (i) the
holders of all Senior Debt of the Company or such
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<PAGE>
Guarantor, as applicable, will first be entitled to receive payment in full in
Cash or Cash Equivalents or otherwise to the extent holders accept satisfaction
of amounts due by settlement in other than Cash or Cash Equivalents (or have
such payment duly provided for) before the Holders are entitled to receive any
payment on account of the principal of, premium, if any, and interest on the
Notes (other than Junior Securities) and (ii) any payment or distribution of
assets of the Company or such Guarantor of any kind or character from any
source, whether in cash, property or securities (other than Junior Securities)
to which the Holders or the Trustee on behalf of the Holders would be entitled
(by set-off or otherwise), except for the subordination provisions contained in
the Indenture, will be paid by the liquidating trustee or agent or other person
making such a payment or distribution directly to the holders of such Senior
Debt or their representative to the extent necessary to make payment in full (or
have such payment duly provided for) on all such Senior Debt remaining unpaid,
after giving effect to any concurrent payment or distribution to the holders of
such Senior Debt.
No provision contained in the Indenture or the Notes affects the obligation
of the Company and the Guarantors, which is absolute and unconditional, to pay,
when due, principal of, premium and interest on the Notes. The subordination
provisions of the Indenture and the Notes do not prevent the occurrence of any
Default or Event of Default under the Indenture or limit the rights of the
Trustee or any Holder, subject to the four preceding paragraphs, to pursue any
other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors or the Company or a
marshalling of assets or liabilities of the Company, holders of the Notes may
receive ratably less than other creditors.
The Company conducts its operations through its Subsidiaries. Accordingly,
the Company's ability to meet its cash obligations is dependent upon the ability
of its Subsidiaries to make cash distributions to the Company. Furthermore, any
right of the Company to receive the assets of any of its Subsidiaries upon any
such Subsidiary's liquidation or reorganization (and the consequent right of the
Holders of the Notes to participate in the distribution of the proceeds of those
assets) effectively will be subordinated by operation of law to the claims of
such Subsidiary's creditors (including trade creditors) and holders of its
preferred stock, if any, except to the extent that the Company is itself
recognized as a creditor or preferred stockholder of such Subsidiary, in which
case the claims of the Company would still be subordinated to any indebtedness
or preferred stock of such Subsidiary senior in right of payment to that held by
the Company.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Notes prior to July 15,
2000, except as set forth herein. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after July 15, 2000, upon not
less than 30 days nor more than 60 days' notice to each holder of Notes, at the
following redemption prices (expressed as percentages of the principal amount)
if redeemed during the 12-month period commencing July 15, of the years
indicated below, in each case (subject to the right of Holders of record on a
Record Date to receive interest due on an Interest Payment Date that is on or
prior to such Redemption Date) together with accrued and unpaid interest thereon
to the Redemption Date:
YEAR PERCENTAGE
------------------------- ------------
2000..................... 106.125%
2001..................... 103.063%
2002 and thereafter...... 100.000%
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
The Notes do not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must
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state, among other things, that on and after the date of redemption, upon
surrender of such Note, a new Note or Notes in a principal amount equal to the
unredeemed portion thereof will be issued. On and after the date of redemption,
interest will cease to accrue on the Notes or portions thereof called for
redemption.
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control (as
defined below) has occurred, each holder of Notes will have the right, at such
holder's option, pursuant to an irrevocable and unconditional offer by the
Company (the "Change of Control Offer"), to require the Company to repurchase
all or any part of such holder's Notes (PROVIDED, that the principal amount of
such Notes must be $1,000 or an integral multiple thereof) on a date determined
by the Company (the "Change of Control Purchase Date") that is no later than 45
Business Days after the occurrence of such Change of Control, at a cash price
(the "Change of Control Purchase Price") equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the Change of
Control Purchase Date. The Change of Control Offer shall be made within 15
Business Days following a Change of Control and shall remain open for 20
Business Days following its commencement (the "Change of Control Offer Period").
Upon expiration of the Change of Control Offer Period, the Company shall
purchase all Notes properly tendered in response to the Change of Control Offer.
As used herein, a "Change of Control" means (i) any sale, merger or
consolidation with or into any person or any transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company, on a consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable) other than an Excluded
Person is or becomes the "beneficial owner," directly or indirectly, of more
than 50% of the total voting power in the aggregate normally entitled to vote in
the election of directors, managers, or trustees, as applicable, of the
transferee or surviving entity, (ii) any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) other than an Excluded Person is or becomes the "beneficial
owner," directly or indirectly, of more than 50% of the total voting power in
the aggregate of all classes of Capital Stock of the Company then outstanding
normally entitled to vote in elections of directors, or (iii) during any period
of 12 consecutive months after the Issue Date, individuals who at the beginning
of any such 12-month period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, and (ii) deposit with the Paying Agent Cash sufficient
to pay the Change of Control Purchase Price (together with accrued and unpaid
interest, if any) of all Notes so tendered. Promptly following the Change of
Control Purchase Date the Company will deliver to the Trustee Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Change of Control
Purchase Price (together with accrued and unpaid interest, if any), and the
Trustee will promptly authenticate and mail or deliver to such Holders a new
Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The terms of the Credit Facility effectively will prohibit, and the Senior
Subordinated Notes Indenture may prohibit, the Company from repurchasing the
Notes upon the occurrence of a Change of Control. There
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can be no assurance that the Company will have the financial resources to
repurchase the Notes in the event of a Change of Control, particularly if such
Change of Control requires the Company to refinance, or results in the
acceleration of, other indebtedness.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred, in which case a holder's ability
to obtain the benefit of a Change of Control Offer may be impaired. In addition,
no assurances can be given that the Company will be able to acquire Notes
tendered upon the occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable federal and state
securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth below in this covenant, the
Company and the Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur, become
directly or indirectly liable with respect to (including as a result of an
Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness). Notwithstanding the foregoing:
(a) if (i) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a PRO FORMA
basis to, such incurrence of Indebtedness or Disqualified Capital Stock and
(ii) on the date of such incurrence, the Consolidated Interest Coverage
Ratio of the Company for the Reference Period immediately preceding the
Incurrence Date, after giving effect on a PRO FORMA basis to such incurrence
of such Indebtedness or Disqualified Capital Stock and, to the extent set
forth in the definition of Consolidated Interest Coverage Ratio, the use of
proceeds thereof, would be at least (x) 2.0 to 1 if such incurrence or
issuance occurs on or before September 30, 1997, or (y) 2.25 to 1 if such
incurrence or issuance occurs at any time thereafter, then the Company and
the Guarantors may incur such Indebtedness or Disqualified Capital Stock;
(b) the Company and the Guarantors may incur Indebtedness evidenced by
the Notes and represented by the Indenture up to the amounts specified
therein as of the date thereof;
(c) the Company and the Guarantors may incur Indebtedness pursuant to
the Credit Agreement up to an aggregate amount outstanding (including any
Indebtedness issued to refinance, refund or replace such Indebtedness in
whole or in part) at any time of $50.0 million, minus the amount of any such
Indebtedness retired with Net Cash Proceeds from any Asset Sale or assumed
by a transferee in an Asset Sale;
(d) the Company and the Guarantors, as applicable, may incur Refinancing
Indebtedness with respect to any Indebtedness or Disqualified Capital Stock,
as applicable, (i) described in clauses (a), (b), (c) and (e) of this
covenant, or (ii) which is outstanding on the Issue Date;
(e) the Company and the Guarantors may incur Purchase Money Indebtedness
in an aggregate amount at any time outstanding not to exceed $10.0 million;
(f) the Company and the Guarantors may incur Indebtedness (in addition
to Indebtedness permitted by any other clause of this paragraph) in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace, or refund such Indebtedness in whole or in part) of
up to $5.0 million, minus the amount of any such Indebtedness retired with
Net Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale;
(g) the Company may incur Indebtedness to any Guarantor, and any
Guarantor may incur Indebtedness to any other Guarantor or to the Company;
PROVIDED, that, in the case of Indebtedness of the Company, such obligations
shall be unsecured and subordinated in case of an Event of Default in all
respects to the Company's obligations pursuant to the Notes;
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(h) the Company and its Guarantors may incur Indebtedness (i) solely in
respect of letters of credit issued in the ordinary course of business
consistent with past practice to support the Company's or any Guarantor's
insurance or self-insurance obligations (including letters of credit to
secure workers' compensation and other similar insurance coverages) or (ii)
to secure Indebtedness otherwise permitted as set forth above; provided,
however, that the incurrence of any obligation pursuant to clause (ii) above
does not result in the incurrence of any obligation to pay any additional
obligations; and
(i) the Company and the Guarantors may incur Indebtedness solely in
respect of Capitalized Lease Obligations in an aggregate amount (including
Capitalized Lease Obligations issued to refund, replace or refinance other
Capitalized Lease Obligations) not to exceed $7.0 million at any one time
outstanding.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Subsidiary of the Company or is merged with or into or consolidated
with the Company or a Subsidiary of the Company shall be deemed to have been
incurred at the time such Person becomes such a Subsidiary of the Company or is
merged with or into or consolidated with the Company or a Subsidiary of the
Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, make any
Restricted Payment if, after giving effect to such Restricted Payment on a PRO
FORMA basis, (1) a Default or an Event of Default shall have occurred and be
continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Interest Coverage Ratio in
paragraph (a) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," or (3) the aggregate amount of all
Restricted Payments made by the Company and its Subsidiaries, including after
giving effect to such proposed Restricted Payment, from and after the Issue
Date, would exceed the sum of (a) 50% of the aggregate Consolidated Net Income
of the Company and its Consolidated Subsidiaries for the period (taken as one
accounting period), commencing on January 1, 1996, to and including the last day
of the fiscal quarter ended immediately prior to the date of each such
calculation (or, in the event Consolidated Net Income for such period is a
deficit, then minus 100% of such deficit), plus (b) the aggregate Net Cash
Proceeds received by the Company from the sale of its Qualified Capital Stock
(other than (i) to a Subsidiary of the Company, (ii) to the extent applied in
connection with a Qualified Exchange and (iii) to the extent applied in
connection with a transaction described in clause (y) of the next paragraph),
after the Issue Date, plus (c) $5.0 million.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (v) any payment by the Company to its employees or
directors pursuant to the Company's Long Term Incentive Plan, Director Stock
Plan or any other stock plan for the benefit of the Company's employees and
approved by the Company's Board of Directors and by its stockholders in an
aggregate amount to all employees not to exceed $1.0 million per fiscal year,
(w) a Qualified Exchange, (x) the payment of any dividend on Qualified Capital
Stock within 60 days after the date of its declaration if such dividend could
have been made on the date of such declaration in compliance with the foregoing
provisions, or (y) any redemption, repurchase, retirement or other acquisition
of any Capital Stock or Subordinated Indebtedness of the Company not covered by
clause (w) of this paragraph in exchange for, or out of the Net Cash Proceeds
of, the substantially concurrent (i.e., within 60 days) sale (other than to a
Subsidiary of the Company) of Qualified Capital Stock of the Company; PROVIDED
that the amount of any such Net Cash Proceeds that is utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (3)(b) of the preceding paragraph. The full amount of any Restricted
Payment made pursuant to the foregoing clauses (v) and (x) (but not pursuant to
clauses (w) and (y)) of the immediately preceding sentence, however, will be
deducted in the calculation of the aggregate amount of Restricted Payments
available to be made referred to in clause (3) of the immediately preceding
paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, create,
assume or suffer to exist any consensual restriction on the ability of any
Subsidiary of the Company to pay dividends or make other distributions to or on
behalf of, or to pay any obligation to or on behalf of, or otherwise to transfer
assets or property to, or make or pay loans or
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advances to or on behalf of, the Company or any Subsidiary of the Company,
except (a) restrictions imposed by the Notes or the Indenture, (b) restrictions
imposed by applicable law, (c) existing restrictions under or in respect of
Indebtedness outstanding on the Issue Date or under or in respect of any
Acquired Indebtedness not incurred in violation of the Indenture or any
agreement relating to any property, asset, or business acquired by the Company
or any of its Subsidiaries, which restrictions, in each case, existed at the
time of acquisition, were not put in place in connection with or in anticipation
of such acquisition and are not applicable to any person, other than the person
acquired, or to any property, asset or business, other than the property, assets
and business so acquired, (d) any such restriction or requirement imposed by or
in respect of Indebtedness incurred under paragraph (c) of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," provided such restriction or requirement is no more restrictive than
that imposed by a Credit Agreement in effect as of the Issue Date, (e)
restrictions with respect solely to a Subsidiary of the Company imposed pursuant
to a binding agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of such Subsidiary,
provided such restrictions apply solely to the Capital Stock or assets of such
Subsidiary which are being sold, and (f) in connection with and pursuant to
permitted Refinancings, replacements of restrictions imposed pursuant to clauses
(c) of this paragraph that are not more restrictive than those being replaced
and do not apply to any other person or assets than those that would have been
covered by the restrictions in the Indebtedness so refinanced. Notwithstanding
the foregoing, neither (a) customary provisions restricting subletting or
assignment of any lease entered into in the ordinary course of business,
consistent with industry practice, nor (b) Liens permitted under the terms of
the Indenture on assets securing Senior Debt incurred in accordance with the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" shall in and of themselves be considered a restriction on the
ability of the applicable Subsidiary to transfer such agreement or assets, as
the case may be.
LIENS
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, directly or indirectly, incur, or
suffer to exist any Lien on any of their respective assets, now owned or
hereinafter acquired, securing any Indebtedness that is PARI PASSU with or
subordinated in right of payment to the Notes, except Permitted Liens, unless
the Notes are secured with such other Indebtedness; PROVIDED that, if such
Indebtedness is by its terms expressly subordinated to the Notes, the Lien
securing such subordinated or junior Indebtedness shall be subordinated and
junior to the Lien securing the Notes with the same relative priority as such
subordinated or junior Indebtedness shall have with respect to the Notes.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company and the Guarantors will not, and
will not permit any of their Subsidiaries to, in one or a series of related
transactions, convey, sell, transfer, assign or otherwise dispose of, directly
or indirectly, any of their property, business or assets, including by merger or
consolidation (in the case of a Guarantor or a Subsidiary of the Company), and
including any sale or other transfer or issuance of any Capital Stock of any
Subsidiary of the Company, whether by the Company or a Subsidiary of either or
through the issuance, sale or transfer of Capital Stock by a Subsidiary of the
Company (an "Asset Sale"), unless (1)(a) within 395 days after the date of such
Asset Sale, an amount equal to the Net Cash Proceeds therefrom (the "Asset Sale
Offer Amount") are applied to the optional redemption of the Notes in accordance
with the terms of the Indenture or to the repurchase of the Notes pursuant to an
irrevocable, unconditional cash offer (the "Asset Sale Offer") to repurchase
Notes at a purchase price of 100% of principal amount (the "Asset Sale Offer
Price"), plus accrued interest to the date of payment (the "Purchase Date") and
which Asset Sale Offer shall commence within 365 days of such Asset Sale, or (b)
within 360 days following such Asset Sale, the Asset Sale Offer Amount is (i)
invested in assets and property (other than notes, bonds, obligations and
securities) which in the good faith and reasonable judgment of the Board will
immediately constitute or be a part of a Related Business of the Company or such
Subsidiary (if it continues to be a Subsidiary) immediately following such
transaction, (ii) used to retire Senior Debt and to permanently reduce the
amount of such Indebtedness outstanding on the Issue Date or permitted pursuant
to paragraph (c) or (f) (and, as applicable, the corresponding reference thereto
in paragraph (d)) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" (including that in the case of a
revolver or similar arrangement that makes credit available, such commitment is
so permanently reduced by such amount), or (iii) used to repurchase Senior
Subordinated Notes, (2) at least
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75% of the consideration for such Asset Sale consists of Cash or Cash
Equivalents; PROVIDED, that any Asset Sale or related series of Asset Sales
involving securities, property or assets with an aggregate fair market value of
less than $3.0 million per Asset Sale or series of related Asset Sales, but in
any case not to exceed $10.0 million in the aggregate for all transactions in
any consecutive 12-month period, shall be exempt from the provisions of this
clause (2) (but any consideration received from any such Asset Sales shall be
deemed to be Net Cash Proceeds for purposes of this paragraph when reduced to
Cash or Cash Equivalents), (3) no Default or Event of Default shall have
occurred and be continuing at the time of, or would occur after giving effect,
on a PRO FORMA basis, to, such Asset Sale, and (4) the Board of Directors of the
Company determines in good faith that the Company or such Subsidiary, as
applicable, receives fair market value as a result of such Asset Sale. The
Indenture will provide that an Asset Sale Offer may be deferred until the
accumulated Net Cash Proceeds from Asset Sales not applied to the uses set forth
in (1)(b) above exceeds $5.0 million and that each Asset Sale Offer shall remain
open for 20 Business Days following its commencement (the "Asset Sale Offer
Period"). Upon expiration of the Asset Sale Offer Period, the Company shall
apply the Asset Sale Offer Amount plus an amount equal to accrued interest to
the purchase of all Notes properly tendered (on a PRO RATA basis if the Asset
Sale Offer Amount is insufficient to purchase all Notes so tendered) at the
Asset Sale Offer Price (together with accrued interest).
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company, the Guarantors and their Subsidiaries may, in the
ordinary course of business, convey, sell, lease, transfer, assign or
otherwise dispose of inventory acquired and held for resale in the ordinary
course of business;
(ii) the Company, the Guarantors and their Subsidiaries may convey,
sell, lease, transfer, assign or otherwise dispose of assets pursuant to and
in accordance with the limitation on mergers, sales or consolidations
provisions in the Indenture;
(iii) the Company and the Guarantors may convey, sell, lease, transfer,
assign or otherwise dispose of assets to the Company or any of the
Guarantors; and
(iv) the foregoing covenant shall not apply to any sale or series of
related sales of assets or properties of the Company and the Guarantors
having an aggregate Fair Market Value of less than $1.0 million in any
fiscal year.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable federal
and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of the Guarantors
nor any of their Subsidiaries will be permitted after the Issue Date to enter
into any contract, agreement, arrangement or transaction with any Affiliate (an
"Affiliate Transaction"), or any series of related Affiliate Transactions (other
than Exempted Affiliate Transactions), unless such Affiliate Transaction is made
in good faith, the terms of such Affiliate Transaction are fair and reasonable
to the Company or such Subsidiary, as the case may be, and are at least as
favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, in a comparable transaction made on an
arm's-length basis with persons who are not Affiliates.
Without limiting the foregoing, any Affiliate Transaction or series of
related Affiliate Transactions (other than Exempted Affiliate Transactions) (1)
involving consideration to either party in excess of $5.0 million, must be
evidenced by an Officers' Certificate addressed and delivered to the Trustee
stating that the terms of such Affiliate Transaction are fair and reasonable to
the Company and no less favorable to the Company than could have been obtained
in an arm's-length transaction with a non-Affiliate, and (2) involving
consideration to either party in excess of $10.0 million must be evidenced by an
Officers' Certificate in accordance with the foregoing clause (1) and, prior to
the consummation thereof, a written favorable opinion as to the fairness of such
transaction to the Company from a financial point of view from an independent
investment banking firm of national reputation.
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LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless (i) either (a) the Company
is the continuing entity or (b) the resulting, surviving or transferee entity is
a corporation organized under the laws of the United States, any state thereof
or the District of Columbia and expressly assumes by supplemental indenture all
of the obligations of the Company in connection with the Notes and the
Indenture; (ii) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a PRO FORMA basis to such transaction; (iii)
immediately after giving effect to such transaction on a PRO FORMA basis, the
Consolidated Net Worth of the consolidated surviving or transferee entity is at
least equal to the Consolidated Net Worth of the Company immediately prior to
such transaction; and (iv) immediately after giving effect to such transaction
on a PRO FORMA basis, the consolidated resulting, surviving or transferee entity
would immediately thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in paragraph (a) of
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named therein as the
Company, and when a successor corporation duly assumes all of the obligations of
the Company pursuant to the Indenture and the Notes, the Company shall be
released from the obligations under the Notes and the Indenture except with
respect to any obligations that arise from, or are related to, such transaction.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company is a Related Business.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture provides that the Company and the Guarantors will not issue or
sell, and will not permit any of their Subsidiaries to issue or sell, any shares
of Capital Stock of any Subsidiary of the Company to any Person other than the
Company or a wholly owned Subsidiary of the Company, except for shares of common
stock with no preferences or special rights or privileges and with no redemption
or prepayment provisions.
FUTURE SUBSIDIARY GUARANTORS
The Indenture provides that substantially all present (as specified in the
Indenture) and future Subsidiaries of the Company jointly and severally will
guarantee irrevocably and unconditionally all principal, premium, if any, and
interest on the Notes on a subordinated basis. The term Subsidiary does not
include Unrestricted Subsidiaries.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation as an investment company.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee within 15 days after it is or would have been
required to file such with the Commission, annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the Commission, if the Company were subject to
the requirements of Section 13 or 15(d) of the Exchange Act, including, with
respect to annual information only, a report thereon by the Company's certified
independent public accountants as such would be required in such reports to the
Commission, and, in each case, together with management's discussion and
analysis of financial condition and results of operations which would be so
required. In addition, whether or not required by the rules and regulations of
the Commission, the Company
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will file a copy of all such information and reports with the Commission for
public availability (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal of, or premium,
if any, on the Notes when and as the same becomes due and payable at maturity,
upon redemption, by acceleration or otherwise, including, without limitation,
payment of the Change of Control Purchase Price or the Asset Sale Offer Price,
or otherwise, (iii) the failure by the Company or any Guarantor to observe or
perform any other covenant or agreement contained in the Notes or the Indenture
and, subject to certain exceptions, the continuance of such failure for a period
of 30 days after written notice is given to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate principal
amount of the Notes outstanding, (iv) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any of its Significant
Subsidiaries, (v) a default in any Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess of $5.0 million (a)
resulting from the failure to pay principal at maturity or (b) as a result of
which the maturity of such Indebtedness has been accelerated prior to its stated
maturity, and (vi) final unsatisfied judgments not covered by insurance
aggregating in excess of $5.0 million, at any one time rendered against the
Company or any of its Subsidiaries and not stayed, bonded or discharged within
60 days. The Indenture provides that if a Default occurs and is continuing,
generally the Trustee must, within 90 days after the occurrence of such default,
give to the Holders and each Senior Debt Representative notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Significant Subsidiary), then in every such case, unless the principal of all of
the Notes shall have already become due and payable, either the Trustee or the
Holders of 25% in aggregate principal amount of the Notes then outstanding, by
notice in writing to the Company (and to the Trustee if given by Holders), may
declare all principal and accrued interest thereon to be due and payable
immediately. If an Event of Default specified in clause (iv), above, relating to
the Company or any Significant Subsidiary occurs, all principal and accrued
interest thereon will be immediately due and payable on all outstanding Notes
without any declaration or other act on the part of Trustee or the Holders. The
Holders of a majority in aggregate principal amount of Notes generally are
authorized to rescind such acceleration if all existing Events of Default (other
than the non-payment of the principal of, premium, if any, and interest on the
Notes which have become due solely by such acceleration) have been cured or
waived, except a default with respect to any provision which cannot be modified
or amended by majority approval.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
with respect to any provision requiring supermajority approval to amend, which
default may only be waived by a supermajority, and except a default in the
payment of principal of, premium on, or interest on any Note not yet cured or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Notes, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
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Company shall be deemed to have paid and discharged the entire Indebtedness
represented, and the Indenture shall cease to be of further effect as to all
outstanding Notes and Guarantees, except as to (i) rights of Holders to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due from the trust funds; (ii) the Company's
obligations with respect to such Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes, and the
maintenance of an office or agency for payment and money for security payments
held in trust; (iii) the rights, powers, trust, duties, and immunities of the
Trustee, and the Company's and the Guarantor's obligations in connection
therewith; and (iv) the Legal Defeasance and Covenant Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and the Guarantors released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described in the
Indenture under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, U.S. legal tender, non-callable government securities
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the holders of
Notes must have a valid, perfected, exclusive security interest in such trust;
(ii) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
Trustee confirming that (A) the Company has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the holders of such Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that the holders of such Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company shall have delivered to the Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of such Notes over any other creditors of the Company or with the intent
of defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that the
conditions precedent provided for in, in the case of the Officers' Certificate,
(i) through (vi) and, in the case of the opinion of counsel, clauses (i) (with
respect to the validity and perfection of the security interest), (ii) (if
applicable), (iii) and (v) of this paragraph have been complied with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, or any Guarantor
and the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
outstanding, the Company, or any Guarantor and the Trustee are permitted to
amend or supplement the Indenture or any supplemental indenture or modify the
rights of the Holders; except that any amendments or supplements to the
provisions relating to the "Repurchase of Notes at the Option of the Holder Upon
a
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Change of Control" covenant shall require the consent of not less than 66 2/3%
of the aggregate principal amount of Notes at the time outstanding; PROVIDED,
FURTHER, that any amendments or supplements to the provisions relating to
"Subordination" shall require the written consent of all holders of Senior Debt;
and PROVIDED, FURTHER, that no such modification may, without the consent of
each Holder affected thereby: (i) change the Stated Maturity on any Note, or
reduce the principal amount thereof or the rate (or extend the time for payment)
of interest thereon or any premium payable upon the redemption thereof, or
change the place of payment where, or the coin or currency in which, any Note or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce the Asset Sale Offer Price or alter the redemption provisions in a manner
adverse to the Holders, (ii) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture, or
(iii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
Notes by reason of his, her or its status as such stockholder, employee, officer
or director.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company
or is merged or consolidated into or with the Company or one of its
Subsidiaries.
"ACQUISITION" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"AFFILIATE" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, PROVIDED that a beneficial owner of 10% or more of the total
voting power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument, multiplied by (b) the amount of each such respective
principal (or redemption) payment, by (ii) the sum of all such principal (or
redemption) payments.
"BENEFICIAL OWNER" for purposes of the definition of Change of Control has
the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as
in effect on the Issue Date), whether or not applicable, except that a "person"
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"CAPITALIZED LEASE OBLIGATION" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations shall
be the capitalized amount of such obligations, as determined in accordance with
GAAP.
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"CAPITAL STOCK" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"CASH EQUIVALENT" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) or (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation of
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500.0 million and commercial paper issued by any other issuer
which is rated at least A-1 or the equivalent thereof by Standard & Poor's
Corporation or at least P-1 or the equivalent thereof by Moody's Investors
Service, Inc. and in each case maturing within one year after the date of
acquisition.
"CONSOLIDATED EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of (i) consolidated provision for income
tax, (ii) consolidated depreciation and amortization expense, PROVIDED that
consolidated depreciation and amortization of a Subsidiary that is less than
wholly owned shall only be added to the extent of the equity interest of the
Company in such Subsidiary, and (iii) Consolidated Interest Expense.
"CONSOLIDATED INTEREST COVERAGE RATIO" of any person on any date of
determination (the "Transaction Date") means the ratio, on a PRO FORMA basis, of
(a) the aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts, whether positive or
negative, attributable to operations and businesses permanently discontinued or
disposed of) for the Reference Period to (b) the aggregate Consolidated Interest
Expense of such person (exclusive of amounts attributable to operations and
businesses permanently discontinued or disposed of, but only to the extent that
the obligations giving rise to such Consolidated Interest Expense would no
longer be obligations contributing to such person's Consolidated Interest
Expense subsequent to the Transaction Date) during the Reference Period;
PROVIDED, that for purposes of such calculation, (i) Acquisitions which occurred
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date shall be assumed to have occurred on the first day
of the Reference Period, (ii) transactions giving rise to the need to calculate
the Consolidated Interest Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period, (iii) the incurrence of any Indebtedness
or issuance of any Disqualified Capital Stock during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date (and
the application of the proceeds therefrom to the extent used to refinance or
retire other Indebtedness) shall be assumed to have occurred on the first day of
such Reference Period, and (iv) the Consolidated Interest Expense of such person
attributable to interest on any Indebtedness or dividends on any Disqualified
Capital Stock bearing a floating interest (or dividend) rate shall be computed
on a PRO FORMA basis as if the average rate in effect from the beginning of the
Reference Period to the Transaction Date had been the applicable rate for the
entire period, unless such Person or any of its Subsidiaries is a party to an
Interest Swap and Hedging Obligation (which shall remain in effect for the
12-month period immediately following the Transaction Date) that has the effect
of fixing the interest rate on the date of computation, in which case such rate
(whether higher or lower) shall be used.
"CONSOLIDATED INTEREST EXPENSE" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and noncash interest payments or accruals on any Indebtedness, (ii) the
interest portion of all deferred payment obligations, and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptances
and letters of credit financing and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period, and (b) the
amount of dividends accrued or payable by such person or any of its Consolidated
Subsidiaries in respect of Preferred Stock (other than by Subsidiaries of such
person to such person or such person's wholly owned Subsidiaries). For purposes
of this definition, (x) interest on a Capitalized Lease Obligation shall be
deemed to accrue at an interest rate reasonably determined by the Company to be
the rate of interest implicit in such Capitalized Lease Obligation in accordance
with GAAP, (y) interest expense
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attributable to any Indebtedness represented by the guaranty by such person or a
Subsidiary of such person of an obligation of another person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed, and (z)
dividends in respect of Preferred Stock shall be deemed to be an amount equal to
the actual dividends paid divided by one minus the applicable actual combined
federal, state, local and foreign income tax rate of the Company and its
Consolidated Subsidiaries (expressed as a decimal).
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains, losses or other items which
are either extraordinary (as determined in accordance with GAAP) or are either
unusual or nonrecurring (including any gain or loss from the sale or other
disposition of assets outside the ordinary course of business or from the
issuance or sale of any capital stock), (b) the net income, if positive, of any
person, other than a wholly owned Consolidated Subsidiary, in which such person
or any of its Consolidated Subsidiaries has an interest, except to the extent of
the amount of any dividends or distributions actually paid in cash to such
person or a wholly owned Consolidated Subsidiary of such person during such
period, but in any case not in excess of such person's PRO RATA share of such
person's net income for such period, (c) the net income or loss of any person
acquired in a pooling-of-interests transaction for any period prior to the date
of such acquisition, (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries in the event and solely to the extent that the
declaration or payment of dividends or similar distributions is not at the time
permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary.
"CONSOLIDATED NET WORTH" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such person or a Consolidated Subsidiary of such person
subsequent to the Issue Date, and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in persons that are not Subsidiaries.
"CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"CREDIT AGREEMENT" means the one or more credit agreements entered into by
and among the Company, certain of its Subsidiaries, and certain financial
institutions, which provide for a term loan, revolving credit facility and/or
letter of credit facility, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or holders, and,
subject to the proviso to the next succeeding sentence, irrespective of any
changes in the terms and conditions thereof. Without limiting the generality of
the foregoing, the term "Credit Agreement" shall include the Credit Facility and
any amendment, amendment and restatement, renewal, extension, restructuring,
supplement or modification to the Credit Facility or any other credit agreement
and all refundings, refinancings and replacements of any such credit agreement,
including any agreement (i) extending the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, so long as borrowers and issuers include one or more of
the Company and its Subsidiaries and their respective successors and assigns,
(iii) increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder, PROVIDED that on the date such Indebtedness is incurred
it would not be prohibited by paragraph (c) of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," or (iv)
otherwise altering the terms and conditions thereof in a manner not prohibited
by the terms hereof.
"DISQUALIFIED CAPITAL STOCK" means (a) except as set forth in (b), with
respect to any person, Capital Stock of such person that, by its terms or by the
terms of any security into which it is then convertible,
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exercisable or exchangeable, is, or upon the happening of an event or the
passage of time would be, required to be redeemed or repurchased (including at
the option of the holder thereof) by such person or any of its Subsidiaries, in
whole or in part, on or prior to the Stated Maturity of the Notes and (b) with
respect to any Subsidiary of such person (including with respect to any
Subsidiary of the Company), any Capital Stock other than any common stock with
no preference, privileges, or redemption or repayment provisions.
"EXCLUDED PERSON" means, in the case of the Company, the Smith Management
Group, comprised of Energy Management Corporation, Woodstead Associates, L.P.,
The Durian Trust, SEGA Associates, Smith Management Company, Randall D. Smith,
John W. Adams, Jeffrey A. Smith and Gary M. Smith.
"EXEMPTED AFFILIATE TRANSACTION" means (a) customary employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) dividends permitted under
the terms of the covenant discussed above under "Limitation on Restricted
Payments" and payable, in form and amount, on a pro rata basis to all holders of
Common Stock of the Company, and (c) transactions solely between the Company and
any of its wholly owned Subsidiaries or solely among wholly owned Subsidiaries
of the Company.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"INDEBTEDNESS" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of any such person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
(other than accounts payable or other obligations to trade creditors which have
remained unpaid for greater than 90 days past their original due date) those
incurred in the ordinary course of its business that would constitute ordinarily
a trade payable to trade creditors, (iv) evidenced by bankers' acceptances or
similar instruments issued or accepted by banks, (v) for the payment of money
relating to a Capitalized Lease Obligation, or (vi) evidenced by a letter of
credit or a reimbursement obligation of such person with respect to any letter
of credit; (b) all net obligations of such person under Interest Swap and
Hedging Obligations; and (c) all liabilities and obligations of others of the
kind described in the preceding clauses (a) or (b) that such person has
guaranteed or that is otherwise its legal liability or which are secured by any
assets or property of such person and all immediately enforceable obligations to
purchase, redeem or acquire any Capital Stock.
"INVESTMENT" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person or any agreement to make any such acquisition; (b) the making by such
person of any deposit with, or advance, loan or other extension of credit to,
such other person (including the purchase of property from another person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (c) other than guarantees of Indebtedness of the
Company or any Guarantor to the extent permitted by the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," the
entering into by such person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of such
other person; (d) the making of any capital contribution by such person to such
other person; and (e) the designation by the Board of Directors of the Company
of any person to be an Unrestricted Subsidiary. The Company shall be deemed to
make an Investment in an amount equal to the fair market value of the net assets
of any subsidiary (or, if neither the Company nor any of its Subsidiaries has
theretofore made an Investment in such subsidiary, in an amount equal to the
Investments being made), at the time that such subsidiary is designated an
Unrestricted Subsidiary, and any property transferred to an Unrestricted
Subsidiary from the Company or a Subsidiary shall be deemed an Investment valued
at its fair market value at the time of such transfer.
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"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"JUNIOR SECURITY" means any Qualified Capital Stock and any Indebtedness of
the Company or a Guarantor, as applicable, that is a general, unsecured
obligation subordinated in right of payment to Senior Debt at least to the same
extent as the Notes or the Guarantee, as applicable, and has no scheduled
installment of principal due, by redemption, sinking fund payment or otherwise,
on or prior to the Stated Maturity of the Notes.
"NET CASH PROCEEDS" means the aggregate amount of Cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its respective Subsidiaries in connection with such Asset
Sale.
"PERMITTED LIEN" means any of the following:
(a) Liens existing on the Issue Date;
(b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, materialmen,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business provided that (i) the underlying obligations are
not overdue for a period of more than 30 days, or (ii) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on the books of the Company in
accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do
not in any case materially detract from the value of the property, subject
thereto (as such property is used by the Company or any of its Subsidiaries)
or interfere with the ordinary conduct of the business of the Company or any
of its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, only
to the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto;
(g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(h) Liens securing Indebtedness of a Person existing at the time such
Person becomes a Subsidiary or is merged with or into the Company or a
Subsidiary or Liens securing Indebtedness incurred in connection with an
Acquisition, provided in each case that such Liens were in existence prior
to the date of such acquisition, merger or consolidation, were not incurred
in anticipation thereof, and do not extend to any other assets;
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(i) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to
the Holders of the Notes than the terms of the Liens securing such
refinanced Indebtedness;
(j) Liens arising from Purchase Money Indebtedness permitted to be
incurred under the Indenture provided such Liens relate only to the property
which is subject to such Purchase Money Indebtedness; and
(k) Liens securing Indebtedness permitted to be incurred under
subdivisions (c), (h) and (i) under the heading "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock."
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or the
Guarantors to the extent that (i) such Indebtedness is incurred in connection
with the acquisition of specified assets and property (the "Subject Assets") for
the business of the Company or the Guarantors, including Indebtedness which
existed at the time of the acquisition of such Subject Asset and was assumed in
connection therewith; and (ii) liens securing such Indebtedness are limited to
the Subject Asset.
"QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
issued on or after the Issue Date with the Net Cash Proceeds received by the
Company from the substantially concurrent (i.e., within 60 days) sale of
Qualified Capital Stock or any exchange of Qualified Capital Stock for any
Capital Stock or Indebtedness issued on or after the Issue Date.
"REFERENCE PERIOD" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so refinanced and (ii) if such Indebtedness being
refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
PROVIDED, that (A) such Refinancing Indebtedness of any Subsidiary of the
Company shall only be used to refinance outstanding Indebtedness or Disqualified
Capital Stock of any Subsidiary, (B) Refinancing Indebtedness shall (x) not have
an Average Life shorter than the Indebtedness to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior, if
applicable, to the rights of Holders of the Notes than was the Indebtedness or
Disqualified Capital Stock to be refinanced, in the event such Indebtedness or
Disqualified Capital Stock is subordinated, and (C) such Refinancing
Indebtedness shall have no installment of principal (or redemption payment)
scheduled to come due earlier than the scheduled maturity of any installment of
principal of the Indebtedness or Disqualified Capital Stock to be so refinanced
which was scheduled to come due prior to the Stated Maturity.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the date of the Indenture, by and among the Company and the other
parties named on the signature pages thereof, as such agreement may be amended,
modified or supplemented from time to time.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses. Without limiting the generality of
the
69
<PAGE>
foregoing, Related Business shall include the operation of in-patient and
specialty healthcare services, skilled nursing care, subacute care,
rehabilitation programs, pharmaceutical services, retirement care and assisted
living, home healthcare and other ancillary services.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than Investments in (i) Cash Equivalents, (ii) a
Subsidiary (other than an Unrestricted Subsidiary), or (iii) any Person that as
a consequence of such Investment becomes a Subsidiary; PROVIDED, HOWEVER, that a
merger of another person with or into the Company or a Guarantor shall not be
deemed to be a Restricted Investment so long as the surviving entity is the
Company or a direct wholly owned Guarantor.
"RESTRICTED PAYMENT" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock of
such person or any parent or Subsidiary of such person, (b) any payment on
account of the purchase, redemption or other acquisition or retirement for value
of Capital Stock of such person or any parent or Subsidiary of such person, (c)
other than with the proceeds from the substantially concurrent (i.e., within 60
days) sale of, or in exchange for, Refinancing Indebtedness, any purchase,
redemption, or other acquisition or retirement for value of, any payment in
respect of any amendment of the terms of or any defeasance of, any Subordinated
Indebtedness other than any of the Notes, directly or indirectly, by such person
or a parent or Subsidiary of such person prior to the scheduled maturity, any
scheduled repayment of principal, or scheduled sinking fund payment, as the case
may be, of such Indebtedness and (d) any Restricted Investment by such person;
PROVIDED, HOWEVER, that the term "Restricted Payment" does not include (i) any
dividend, distribution or other payment on or with respect to, or on account of
the purchase, redemption or other acquisition or retirement for value of,
Capital Stock of an issuer to the extent payable solely in shares of Qualified
Capital Stock of such issuer; or (ii) any dividend, distribution or other
payment to the Company, or to any of its wholly owned Guarantors, by the Company
or any of its Subsidiaries.
"SENIOR DEBT" of the Company or any Guarantor means (i) Indebtedness of the
Company and the Guarantors under the Senior Subordinated Notes, (ii)
Indebtedness of the Company or such Guarantor arising under the Credit
Agreement, and (iii) any other Indebtedness that, by the terms of the instrument
creating or evidencing such Indebtedness, is expressly designated Senior Debt
and made senior in right of payment to the Notes or the applicable Guarantee;
with respect to any Indebtedness arising under the Credit Agreement, all such
Indebtedness includes any and all interest (including interest accruing or
payable after the filing of any petition under the Bankruptcy Code (11 U.S.C.
Section 101 et seq.), fees, costs (including attorneys' fees and costs),
expenses, indemnities, and any and all other amounts payable under or in
relation to such Indebtedness, however or whenever arising. To the extent any
payment of Senior Debt (whether by or on behalf of the Company or as proceeds of
security or enforcement of any right of set-off or otherwise) is declared to be
fraudulent, preferential, or is otherwise required to be paid to a trustee,
receiver or other similar party under any bankruptcy, insolvency, receivership,
or similar law, then if such payment is recovered by, or paid over to, such
party, the Senior Debt or part thereof originally satisfied thereby shall be
deemed to be reinstated and outstanding as if such payment had not occurred. All
Senior Debt shall be and remain Senior Debt for all purposes of the Indenture,
whether or not subordinated in a bankruptcy or similar proceeding.
Notwithstanding the foregoing, however, in no event shall Senior Debt include
(a) Indebtedness to any Subsidiary of the Company or any officer, director or
employee of the Company or any Subsidiary of the Company, (b) Indebtedness
incurred in violation of the terms of the Indenture, (c) Indebtedness to trade
creditors, (d) Disqualified Capital Stock, (e) Capitalized Lease Obligations,
and (f) any liability for taxes owed or owing by the Company or such Guarantor.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article I, Rule 1-02-w of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"STATED MATURITY," when used with respect to any Note, means July 15, 2003.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or a Guarantor
that is subordinated in right of payment to the Notes or the Guarantee of such
Guarantor, as applicable, in any respect.
70
<PAGE>
"SUBSIDIARY," with respect to any person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such person, by such
person and one or more Subsidiaries of such person or by one or more
Subsidiaries of such person, (ii) any other person (other than a corporation) in
which such person, one or more Subsidiaries of such person, or such person and
one or more Subsidiaries of such person, directly or indirectly, at the date of
determination thereof has at least majority ownership interest, or (iii) a
partnership in which such person or a Subsidiary of such person is, at the time,
a general partner and in which such person, directly or indirectly, at the date
of determination thereof has at least a majority ownership interest.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be a
Subsidiary of the Company or of any Subsidiary of the Company.
"UNRESTRICTED SUBSIDIARY" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); PROVIDED, that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving PRO FORMA effect to such designation would there exist a Default or Event
of Default and (iii) immediately after giving PRO FORMA effect thereto, the
Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." The Board of Directors
of the Company may designate any Unrestricted Subsidiary to be a Subsidiary,
provided, that (i) no Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to such
designation, on a PRO FORMA basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock." Each such designation shall be evidenced by filing with the
Trustee a certified copy of the resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions.
71
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
In December 1995, the Company entered into a Credit Agreement with
NationsBank of Texas, N.A. (the "Bank"), as agent, and certain other lenders
that established a revolving credit and letter of credit facility (the "Credit
Facility"). The Credit Facility provides for the borrowing by the Company of up
to $50.0 million, of which up to $25.0 million may be in the form of letters of
credit issued for the benefit of the Company.
As of July 31, 1996, the Bank had issued an aggregate of $9.0 million of
outstanding standby letters of credit to support the Company's self-insured
workers' compensation programs, and the Company had no other outstanding
borrowings under the Credit Facility.
Borrowings under the Credit Facility bear interest, at the Company's
election, at either the "Base Rate" plus up to 0.25% or the London Interbank
Offered Rate (subject to certain adjustments) plus between 0.875% to 1.75% (in
each case depending on the Company's leverage ratio). The "Base Rate" is the
higher of the Bank's prime rate or 0.5% above the "federal funds effective rate"
(as defined in the Credit Facility). The Company also pays the Bank a fee of
between 0.20% and 0.375% (depending on the Company's leverage ratio) on the
daily average unutilized portion of the Credit Facility.
The Credit Facility has scheduled commitment reductions of $12.5 million on
each of January 2, 1999 and 2000, and expires on January 2, 2001. Amounts
outstanding under the Credit Facility are collateralized by accounts receivable,
all of the shares of each of the Company's subsidiaries and certain other
assets.
The Credit Facility is guaranteed in full by each of the Company's active
U.S. subsidiaries and is secured by a security interest in substantially all
accounts and notes receivable of the Company and each of the guarantors and the
pledge of the stock of all subsidiaries. The Credit Facility includes various
affirmative and negative covenants, including restrictions on incurring certain
additional indebtedness, making certain acquisitions, creating or permitting to
exist certain liens, as well as limitations on dividends, loans, repurchases of
stock or subordinated debt and asset sales. The Credit Facility also includes
various financial covenants, including minimum fixed charge coverage ratios, a
maximum funded debt ratio, a maximum senior debt ratio and a minimum
consolidated net worth. Events of default under the Credit Facility include the
failure to pay interest or principal when due, the breach of any representation
or warranty, the default in payment of any other indebtedness, or any other
default which permits acceleration of such indebtedness, and breach of any
financial or negative covenant contained in the credit agreement, the occurrence
of a material adverse change, certain events of bankruptcy or insolvency, the
entry of a judgment against the Company or any subsidiary which is not bonded or
stayed within a specified period of time, change in control and noncompliance
with certain healthcare license and regulatory matters.
Indebtedness of the Company under the Credit Facility, including
reimbursement obligations in respect of outstanding letters of credit, interest
(including post-petition interest), fees, charges, expenses and indemnification
obligations, constitute "Senior Debt" under the Indenture.
SENIOR SUBORDINATED NOTES
In October 1995, the Company issued $110.0 million of Senior Subordinated
Notes. Interest on the Senior Subordinated Notes is payable semiannually on
April 15 and October 15 of each year, and no principal payments are due prior to
maturity. The Senior Subordinated Notes may be prepaid at any time on or after
October 15, 1999 at approximately 104.9% of principal (declining to
approximately 102.5% of principal on October 15, 2000 and to 100% of principal
on October 15, 2001), plus accrued and unpaid interest.
The Senior Subordinated Notes were issued pursuant to, and are governed by,
the terms of an indenture dated as of October 12, 1995 with U.S. Trust Company
of California, N.A., as trustee (the "Senior Subordinated Notes Indenture"). The
Senior Subordinated Notes Indenture includes certain affirmative and negative
covenants, including restrictions on the incurrence of additional indebtedness,
the incurrence of indebtedness senior to the Senior Subordinated Notes and the
redemption or repurchase of indebtedness
72
<PAGE>
subordinated to the Senior Subordinated Notes (including the Notes). However,
such covenants do not restrict the Company from issuing the Notes. The Senior
Subordinated Notes Indenture sets forth a number of events of default, including
a failure to pay interest when due and not cured within 30 days, a failure to
pay principal at maturity or at such prior time as the principal may be payable,
a failure to comply with or perform any other covenant set forth in the Senior
Subordinated Notes Indenture and (subject to certain exceptions) not cured
within 30 days after written notice, a default with respect to any indebtedness
of the Company or any of its subsidiaries with an aggregate principal amount in
excess of $5.0 million, and if the Company has entered against it final
unsatisfied judgments not covered by insurance aggregating in excess of $5.0
million at any one time and not stayed, bonded or discharged within 60 days.
The Senior Subordinated Notes are subordinated to all "Senior Debt" (as
defined in the Senior Subordinated Notes Indenture) without limitation as to the
amount thereof. No payments of principal or interest may be made on the Senior
Subordinated Notes upon the maturity of any Senior Debt and until all principal
of, premium, if any, and interest on such Senior Debt is first paid, or, subject
to certain limitations, upon and during the continuance of any event of default
with respect to any Senior Debt that permits the holders thereof to declare such
Senior Debt due and payable. However, the Senior Subordinated Notes are senior
to the Convertible Notes, and the Senior Subordinated Notes qualify as "Senior
Debt" under the Indenture and thus will also be senior to the Notes. See
"Description of the Exchange Notes -- Subordination."
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for such broker-dealer's own
account pursuant to the Exchange Offer must acknowledge that such broker-dealer
will deliver a prospectus in connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired as a
result of market-making activities for other trading activities.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells
Exchange Notes that were received by such broker-dealer for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that a broker-dealer will deliver, and
by delivering, a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of December 31, 1994
and 1995 and for each of the three years in the period ended December 31, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. The financial statements of Liberty Healthcare
Limited Partnership as of September 30, 1994 and 1995 and for each of the two
years in the period ended September 30, 1995 included in this Prospectus have
been audited by Goodman & Company, L.L.P., independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm in giving said report.
73
<PAGE>
LEGAL MATTERS
The validity of the issuance of the securities offered hereby have been
passed upon for the Company by Sidley & Austin, Los Angeles, California.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), under File No. 1-11144 are
incorporated in this Prospectus by reference and are made a part hereof: (i)
Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the
"Regency Form 10-K"); (ii) Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1996 and June 30, 1996; (iii) Current Report on Form
8-K reporting an event dated February 1, 1996, as amended by Amendment No. 1 to
Current Report on Form 8-K/A, dated April 12, 1996; and (iv) the portions of the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1994 that have been incorporated by reference into the Regency Form 10-K.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Exchange Notes
described herein shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which is also incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon oral or written
request, a copy of any or all of the documents incorporated herein by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Written or telephone requests
should be directed to Regency Health Services, Inc., 2742 Dow Avenue, Tustin,
California 92780, Attention: Investor Relations (telephone number: (714)
544-4443).
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995............................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995........................................................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995........................................................................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995........................................................................ F-7
Notes to Consolidated Financial Statements............................................................... F-9
LIBERTY HEALTHCARE LIMITED PARTNERSHIP:
Report of Independent Auditors........................................................................... F-24
Balance Sheets as of September 30, 1995 and 1994......................................................... F-25
Statements of Partners' Capital for the years ended September 30, 1995 and 1994.......................... F-26
Statements of Income for the years ended September 30, 1995 and 1994..................................... F-27
Statements of Cash Flows for the years ended September 30, 1995 and 1994................................. F-28
Notes to Financial Statements............................................................................ F-29
Balance Sheets as of December 31, 1995 (unaudited) and September 30, 1995................................ F-32
Statements of Partners' Capital for the three months ended December 31, 1995 and 1994 (unaudited)........ F-33
Statements of Income for the three months ended December 31, 1995 and 1994 (unaudited)................... F-34
Statements of Cash Flows for the three months ended December 31, 1995 and 1994 (unaudited)............... F-35
Notes to Financial Statements (unaudited)................................................................ F-36
</TABLE>
Note: The unaudited consolidated balance sheet as of June 30, 1996, unaudited
consolidated statements of operations for the six months ended June 30,
1995 and 1996, and unaudited consolidated statements of cash flows for
the six months ended June 30, 1995 and 1996 of Regency Health Services,
Inc. are incorporated by reference from its Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996, a copy of which is being
delivered to each person to whom this Prospectus is being delivered.
Regency Health Services, Inc. is a holding company with no assets or
operations other than its investments in its wholly owned subsidiaries.
Each of these subsidiaries is a Guarantor and has guarantied the
obligations of the Company with respect to the Notes and under the
Indenture on a full, unconditional and joint and several basis.
Accordingly, no separate financial statements of the Guarantors are
included herein.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Regency Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of REGENCY
HEALTH SERVICES, INC. (a Delaware corporation) and subsidiaries as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Regency Health Services,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 29, 1996
F-2
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 25,677 $ 104,238
Restricted cash......................................................................... 9,244 --
Accounts receivable, net of allowances of $4,189 and
$3,757 at December 31, 1994 and 1995, respectively..................................... 46,964 54,050
Notes and other receivables............................................................. 2,444 2,182
Deferred income taxes................................................................... 6,373 5,447
Assets held for sale.................................................................... -- 8,970
Other current assets.................................................................... 6,380 6,396
---------- ----------
Total current assets.............................................................. 97,082 181,283
---------- ----------
PROPERTY AND EQUIPMENT:
Land.................................................................................... 25,549 21,249
Buildings and improvements.............................................................. 98,156 96,396
Leasehold interests -- other............................................................ 18,156 17,556
Leasehold interests -- related party.................................................... 2,075 2,075
Equipment............................................................................... 22,164 24,610
---------- ----------
166,100 161,886
Less -- accumulated depreciation and amortization....................................... (31,145) (34,679)
---------- ----------
134,955 127,207
---------- ----------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $951 at December 31, 1994 and 1995...... 5,377 5,163
Goodwill, net of accumulated amortization of $163 and $563 at December 31, 1994 and
1995, respectively..................................................................... 964 13,621
Other assets, net of accumulated amortization of $1,328 and $2,206 at December 31, 1994
and 1995, respectively................................................................. 12,518 15,697
---------- ----------
Total other assets................................................................ 18,859 34,481
---------- ----------
$ 250,896 $ 342,971
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... $ 787 $ 4,371
Accounts payable........................................................................ 19,432 22,285
Accrued expenses........................................................................ 5,385 5,946
Accrued compensation.................................................................... 15,094 18,051
Accrued workers' compensation........................................................... 7,137 5,377
Deferred revenue........................................................................ 3,606 1,743
Accrued merger and restructuring expenses............................................... 4,452 --
Accrued interest........................................................................ 2,833 4,231
---------- ----------
Total current liabilities......................................................... 58,726 62,004
LONG-TERM DEBT, NET OF CURRENT PORTION.................................................. 101,154 179,615
OTHER LIABILITIES AND NONCURRENT RESERVES............................................... 11,661 13,017
DEFERRED INCOME TAXES................................................................... 6,388 7,946
---------- ----------
Total liabilities................................................................. 177,929 262,582
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000 shares; 16,402, and 16,670 shares
issued and outstanding at December 31, 1994 and 1995, respectively..................... 164 167
Additional paid-in capital.............................................................. 52,105 56,679
Retained earnings....................................................................... 20,698 23,543
---------- ----------
Total stockholders' equity........................................................ 72,967 80,389
---------- ----------
$ 250,896 $ 342,971
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET OPERATING REVENUE........................................................ $ 336,954 $ 377,336 $ 416,084
---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses......................................................... 272,957 307,807 335,840
Corporate general and administrative....................................... 17,599 19,392 19,811
Rent expense............................................................... 13,544 15,555 16,767
Depreciation and amortization.............................................. 7,650 9,295 10,122
Interest expense........................................................... 5,941 7,844 9,676
Merger and restructuring expenses.......................................... -- 14,650 --
Class action lawsuit settlement............................................ -- -- 3,098
Disposition of assets charges.............................................. -- 1,600 9,000
---------- ---------- ----------
Total costs and expenses................................................. 317,691 376,143 404,314
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM.............. 19,263 1,193 11,770
PROVISION FOR INCOME TAXES................................................... 7,473 1,993 7,316
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM...................................... 11,790 (800) 4,454
EXTRAORDINARY ITEM -- Loss on extinguishment of debt, net of applicable
income taxes of $32 and $1,072 in 1993 and 1995, respectively............... (48) -- (1,609)
---------- ---------- ----------
NET INCOME (LOSS)............................................................ $ 11,742 $ (800) $ 2,845
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE -- PRIMARY:
Income (loss) before extraordinary item...................................... $ .72 $ (.05) $ .27
Extraordinary item........................................................... -- -- (.10)
---------- ---------- ----------
Net income (loss) per share.................................................. $ .72 $ (.05) $ .17
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares of common stock and equivalents...................... 16,305 16,545 16,654
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE -- FULLY DILUTED:.............................
Income (loss) before extraordinary item...................................... $ .69 $ (.05) $ .27
Extraordinary item........................................................... -- -- (.10)
---------- ---------- ----------
Net income (loss) per share.................................................. $ .69 $ (.05) $ .17
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares of common stock and equivalents...................... 19,419 16,545 16,654
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992.................................. 16,190 $ 162 $ 45,234 $ 9,756 $ 55,152
Exercise of stock options................................. 30 -- 121 -- 121
Net income................................................ -- -- -- 11,742 11,742
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1993.................................. 16,220 162 45,355 21,498 67,015
Exercise of stock options................................. 95 1 475 -- 476
Conversion of Convertible Subordinated Debentures......... 87 1 1,031 -- 1,032
Charge in lieu of income taxes (1994)..................... -- -- 2,636 -- 2,636
Retroactive charge in lieu of income taxes (1993)......... -- -- 2,608 -- 2,608
Net loss.................................................. -- -- -- (800) (800)
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1994.................................. 16,402 164 52,105 20,698 72,967
Exercise of stock options................................. 211 2 1,254 -- 1,256
Exercise of share appreciation rights..................... 55 1 614 -- 615
Conversion of Convertible Subordinated Debentures......... 2 -- 20 -- 20
Charge in lieu of income taxes............................ -- -- 2,686 -- 2,686
Net income................................................ -- -- -- 2,845 2,845
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1995.................................. 16,670 $ 167 $ 56,679 $ 23,543 $ 80,389
--------- ----- ----------- --------- ---------
--------- ----- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 11,742 $ (800) $ 2,845
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 7,650 9,295 10,122
Deferred income taxes and charge in lieu of taxes......................... 969 408 4,506
Accrued merger and restructuring expenses................................. -- 4,452 --
Disposition of assets charges............................................. -- 1,600 9,000
Other, net................................................................ (597) (94) 649
Change in cash from changes in assets and liabilities, excluding effects
of acquisitions and dispositions:
Restricted cash......................................................... -- -- 9,244
Accounts receivable..................................................... (10,995) (2,995) (2,088)
Other current assets.................................................... (124) (1,582) 185
Current and other liabilities........................................... 4,010 814 (4,003)
---------- ---------- ----------
Net cash provided by operating activities............................... 12,655 11,098 30,460
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from mortgage notes receivable..................................... 308 410 349
Proceeds from dissolution of pharmacy partnership........................... -- 2,239 --
Acquisitions................................................................ -- -- (13,225)
Purchases of property and equipment......................................... (12,723) (12,576) (14,223)
Issuance of notes receivable................................................ (2,300) (126) (227)
Proceeds from sales of assets............................................... 44 -- --
Exercise of options to purchase facilities.................................. (1,542) -- --
(Additions) deletions to other assets, net.................................. (14,869) (2,459) (1,051)
---------- ---------- ----------
Net cash used in investing activities....................................... (31,082) (12,512) (28,377)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.................................................. (45,114) (2,705) (31,940)
Proceeds from issuance of long-term debt.................................... 31,182 2,996 462
Proceeds from issuance of Senior Subordinated Notes......................... -- -- 106,700
Proceeds from issuance of Convertible Subordinated Debentures............... 47,800 -- --
Proceeds from exercise of warrants and options.............................. 121 476 1,256
---------- ---------- ----------
Net cash provided by financing activities................................. 33,989 767 76,478
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 15,562 (647) 78,561
CASH AND CASH EQUIVALENTS ACQUIRED............................................ 413 -- --
CASH AND CASH EQUIVALENTS, beginning of period................................ 10,349 26,324 25,677
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period...................................... $ 26,324 $ 25,677 $ 104,238
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest...................................... $ 3,949 $ 6,788 $ 8,334
---------- ---------- ----------
---------- ---------- ----------
Cash paid during the year for income taxes.................................. $ 3,513 $ 2,651 $ 2,152
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1993:
(a) The Company acquired all of the issued and outstanding stock of Braswell
Enterprises, Inc. for $14,075,000.
In connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Assets acquired.............................................. $17,338,000
Debt issued as consideration................................. 4,375,000
Braswell deferred payment issued as consideration............ 2,200,000
----------
Liabilities assumed.......................................... $10,763,000
----------
----------
</TABLE>
(b) Fees of $2,200,000 related to the Convertible Subordinated Debentures
were capitalized and included in other assets.
(c) Fees of $1,849,000 related to the Senior Secured Notes were capitalized
and included in other assets.
During the year ended December 31, 1994:
$1,076,000 of the Company's Convertible Subordinated Debentures were
converted into 86,946 shares of common stock. Unamortized debenture fees
of $44,000 were offset against additional paid-in capital.
During the year ended December 31, 1995:
$20,000 of the Company's Convertible Subordinated Debentures were
converted into 1,616 shares of common stock.
The Company issued a promissory note of $3,400,000 in connection with the
acquisition of SCRS and Communicology, Inc.
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER AND BASIS OF PRESENTATION
On April 4, 1994, Regency Health Services, Inc. ("Regency" or the "Company")
and Care Enterprises, Inc. ("Care") completed the merger (the "Merger").
Pursuant to the Agreement and Plan of Merger, dated as of December 20, 1993, as
amended, Care Merger Sub, Inc., a wholly owned subsidiary of Regency, was merged
with and into Care, and Care became a wholly owned subsidiary of Regency. Each
share of common stock of Care was converted into 0.71 of a share of common stock
of Regency. Approximately 9,400,000 shares of common stock were issued in this
transaction. At the time of the Merger, Regency operated 43 in-patient
facilities with 4,215 licensed beds and Care operated 51 in-patient facilities
with 5,040 licensed beds.
The Merger qualified as a pooling-of-interests transaction under generally
accepted accounting principles. The pooling-of-interests method of accounting is
intended to present as a single interest two or more common stockholder
interests that were previously independent. The pooling-of-interests method of
accounting assumes that the combining companies have been merged from inception.
Consequently, the historical financial statements for periods prior to the
consummation of the combination are restated as though the companies had been
merged since inception. The calculation of income per share for each period
presented reflects the issuance of 0.71 of a share of Regency Common Stock for
each share of common and common equivalent share of Care Common Stock. The
restated financial statements are adjusted to conform the accounting policies of
the separate companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS As of December 31, 1995, the Company operated 94
healthcare facilities with 9,180 licensed beds that provide nursing,
rehabilitative, subacute and other specialized medical services primarily in
California and in Ohio and West Virginia. Through its wholly owned home
healthcare subsidiaries, the Company provides patients with technical medical
support at home such as infusion therapy, ventilator care and respite services.
The Company also provides ancillary services such as rehabilitation programs and
pharmaceutical services at certain of its healthcare facilities as well as at
non-affiliated facilities.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and all of its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS For financial reporting purposes, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents.
At December 31, 1994 and 1995, the Company held personal funds in trust for
patients approximating $780,000 and $690,000, respectively, which are not
reflected on the accompanying balance sheets.
RESTRICTED CASH Restricted cash of $9,244,000 at December 31, 1994
represents cash placed with a bank to collateralize a letter of credit issued in
conjunction with the Company's self-insured workers' compensation programs.
ACCOUNTS RECEIVABLE Accounts receivable are recorded at the net realizable
value expected to be received from federal and state assistance programs or from
private sources including managed care organizations and third-party insurers.
Receivables from government agencies represent the only concentrated group of
credit risk for the Company. Management does not believe that there are any
credit risks associated with these government agencies other than possible
funding delays. Non-government agency receivables consist of receivables from
various payors that are subject to differing economic conditions and do not
represent any concentrated credit risks to the Company. Furthermore, management
continually monitors and adjusts its reserves and allowances associated with
these receivables.
F-9
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT At the time of Care's emergence from bankruptcy on
December 31, 1990, property and equipment owned by Care and certain leasehold
interests were adjusted to current fair market value. All other property and
equipment is recorded at cost. The assets are depreciated over their estimated
useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................... 7-40 years
Life of
Leasehold interests and improvements.......................... leases
Equipment..................................................... 5-10 years
</TABLE>
Betterments, renewals, and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and any gain or loss on disposition is recognized in income.
ASSETS HELD FOR SALE During 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption
of SFAS No. 121 did not have a material effect on the Company's financial
statements. Assets held for sale represent the assets of 13 facilities which are
intended to be sold within the next year (see Note 13). Such amounts are carried
at estimated fair value less selling costs.
GOODWILL The excess of the purchase price over the value of the net assets
of the businesses acquired by the Company is amortized using the straight-line
method over periods ranging from 15 to 22 years. The Company periodically
evaluates the carrying value of goodwill in relation to the operating
performance and future undiscounted cash flows of the underlying business to
assess recoverability. Adjustments would be made if the sum of expected future
net cash flows is less than book value of goodwill and other depreciable or
amortizable assets.
ASSET IMPAIRMENT The carrying values of long-lived assets are reviewed if
the facts and circumstances suggest that an item may be impaired. If this review
indicates that a long-lived asset will not be recoverable, as determined based
on the future undiscounted cash flows of the asset, the Company's carrying value
of the long-lived asset is reduced to fair value.
OTHER LONG-TERM ASSETS Costs incurred to obtain long-term financing are
amortized using the effective interest method. Costs to initiate and implement
subacute specialty units are amortized on a straight-line basis over 36 months.
DEFERRED REVENUE Deferred revenue consists of patient billings recorded in
advance of services rendered.
WORKERS' COMPENSATION The Company maintains self-insurance programs for
workers' compensation for its in-patient facilities in California and Ohio,
pharmacy operations, home healthcare operations and its corporate office
employees. For all other operations, the Company purchases insurance for this
risk. The self-insurance liability under these programs is based on claims filed
and actuarial estimates of claims incurred but not reported. Differences between
the amounts accrued and subsequent settlements are recorded in operations in the
year of settlement.
NET OPERATING REVENUE Revenues are derived from the operation of healthcare
facilities, which are subject to state regulation. Approximately 74.5%, 73.9%,
and 71.9%, percent of revenues were derived from services provided under federal
(Medicare) and state (Medicaid) medical assistance programs for the years ended
December 31, 1993, 1994 and 1995, respectively. Revenues from Medicaid are
recorded at the prescribed contract rate. Revenues from Medicare are recorded
based on an estimate of the Company's reimbursable cost. Limitations on Medicare
and Medicaid reimbursement for healthcare services are continually proposed.
Changes in applicable laws and regulations could have an adverse effect on the
levels of reimbursement from governmental, private, and other sources. These
revenues are based, in part, on cost
F-10
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reimbursement principles and are subject to audit. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent settlements
are recorded in operations in the year of settlement.
Additionally, the Company's cost of care for its Medicare patients sometimes
exceeds regional reimbursement limits established by Medicare. The Company has
submitted exception requests for 103 cost reports, covering all cost report
periods through December 31, 1993. To date, final action has been taken by the
Health Care Financing Administration ("HCFA") on 72 exception requests. The
Company's final rates as approved by HCFA represent approximately 84% of the
requested rates as submitted in the exception requests. Through December 31,
1993, the Company had not recorded as revenue the excess amounts represented
through the exception request until the cash was actually received. During 1994,
the Company recognized 50% of the 1994 estimated exception requests anticipated
to be filed, which represented revenues of approximately $1,550,000. Commencing
January 1, 1995, the Company recognized 70% of the 1995 estimated exception
requests anticipated to be filed, which represents revenues of approximately
$3,001,000. Management believes that the Company will be able to recover its
excess costs under any pending exception requests or under any exception
requests that may be submitted in the future, however there can be no assurance
that it will be able to do so.
STOCK BASED COMPENSATION The Company will adopt the disclosure provisions
of SFAS No. 123 "Accounting for Stock-Based Compensation" effective January 1,
1996, which will impact future disclosures of the Company.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES During 1995, the Company
changed its classification of general and administrative expenses. Previously,
the Company classified all corporate overhead, regional costs related to the
supervision of operations, the administrative costs at the Company's facilities,
pharmacies, and home care operations as "Administrative and General" expenses.
The Company now classifies corporate overhead and the regional costs related to
the supervision of operations as "Corporate General and Administrative"
expenses. All other costs which relate to the daily operations have been
classified as "Operating" expenses for the periods presented. These costs in
1993 and 1994 have been reclassified to conform to the 1995 presentation.
FINANCIAL STATEMENT PRESENTATION Certain amounts in the 1993 and 1994
financial statements have been reclassified to conform to the 1995 presentation.
F-11
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Senior Subordinated Notes, interest at 9.875 percent, due October 2002. Interest is
payable semi-annually on October 15 and April 15, commencing April 15, 1996; redeemable
beginning October 15, 1999............................................................... $ -- $ 110,000
Convertible Subordinated Debentures, interest at 6.5 percent, due March 2003. Interest is
payable semi-annually on July 15 and January 15, commencing July 15, 1993; redeemable at
par beginning March 23, 1996............................................................. 48,924 48,904
Senior Secured Notes, interest at 8.1 percent, interest payable semi-annually on January
15 and July 15, commencing January 1994.................................................. 30,000 --
Industrial development bonds ("IDBs"), interest at rates from 8.5 to 10.25 percent, due
through August 2012 in varying amounts................................................... 10,814 9,800
Note payable, collateralized by a deed of trust, interest at 8.75 percent; interest and
principal payments of $36 commencing October 1993, to be made monthly through September
2033..................................................................................... 5,127 4,714
Note payable, secured, interest at 9.0 percent, interest and principal payments of $35
payable monthly, balance due November 2013............................................... 4,308 4,308
Note payable, interest at 6.0 percent. Interest is payable quarterly commencing October 1,
1995; fully repaid in January 1996....................................................... -- 3,400
Other unsecured indebtedness, interest rates up to 13.0 percent, payable in varying
installments through August 2017......................................................... 430 1,014
Other secured long-term debt.............................................................. 2,338 1,846
---------- ----------
101,941 183,986
Less current portion...................................................................... 787 4,371
---------- ----------
$ 101,154 $ 179,615
---------- ----------
---------- ----------
</TABLE>
On December 28, 1995 the Company entered into a revolving credit loan
agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a
group of banks, which provides up to $50,000,000 in a revolving line of credit
and letters of credit. No borrowings were drawn on the Credit Agreement at
December 31, 1995 and in early 1996, $15,002,000 of standby letters of credit
were issued in connection with the Company's self-insured workers' compensation
programs out of a total available of $25,000,000. Borrowings bear interest at
either the Base Rate plus up to 0.25% or the Adjusted Eurodollar Rate plus
0.875% to 1.75%, depending on the Company's Consolidated Adjusted Leverage
Ratio, all as defined in the Credit Agreement. The Credit Agreement has
scheduled commitment reduction of $12,500,000 each on January 2, 1999 and 2000
and expires on January 2, 2001, and is collateralized by accounts receivable and
certain other current assets of the Company and its subsidiaries. The Credit
Agreement, among other things, (a) requires the Company to maintain certain
financial ratios, and (b) restricts the Company's ability to incur debt and
liens, make investments, pay dividends, purchase treasury stock, prepay or
modify certain debt of the Company, liquidate or dispose of assets, merge with
another corporation, and create or acquire subsidiaries.
On October 12, 1995, the Company issued 9-7/8% Senior Subordinated Notes
("Notes") in an aggregate amount of $110 million. Net proceeds received by the
Company totalled approximately $106.7 million of which approximately $31.5
million was used to repay the principal and a prepayment penalty on the
Company's 8.10% Senior Secured Notes (which resulted in a loss on extinguishment
of debt of approximately $2.7 million) and $47.4 million was used for
acquisitions subsequent to December 31, 1995 (see Note 15). The Notes contain
certain covenants, including limitations on the ability of the Company to,
F-12
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
among other things, (a) incur additional indebtedness and issue preferred stock,
(b) sell equity interests in subsidiaries, (c) make certain restricted payments
(as defined), (d) create liens, and (e) engage in mergers, consolidations or the
transfer of substantially all of the assets of the Company to another party.
In March 1993, the Company issued $50,000,000 aggregate principal amount of
its Convertible Subordinated Debentures ("Debenture") resulting in net proceeds
to the Company of approximately $47,800,000. During the years ended December 31,
1994 and 1995, $1,076,000 and $20,000 of the Company's Debentures were converted
into 86,946 and 1,616 shares of common stock, respectively. The remaining
Debentures, which amount to $48,904,000 at December 31, 1995, are convertible
into 3,951,838 shares of common stock at a conversion price of $12.375 per
share.
Each of the mortgage notes and IDBs is secured by a first deed of trust on
the related facility. The IDBs require the maintenance of debt service reserve
funds and all of the IDBs contain affirmative and negative covenants and
reporting requirements. The Company was in compliance with these covenants as of
December 31, 1995.
Principal maturities on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1996.............................................................................. $ 4,371
1997.............................................................................. 805
1998.............................................................................. 386
1999.............................................................................. 331
2000.............................................................................. 330
Thereafter........................................................................ 177,763
----------
Total............................................................................. $ 183,986
----------
----------
</TABLE>
4. INCOME TAXES
The Company and its subsidiaries file consolidated federal and state income
tax returns and account for income taxes under the provisions of SFAS No. 109.
As a result of the Care bankruptcy proceedings, a "change in ownership"
occurred. Prior to the Merger, the Company had substantial net operating loss
carryforwards for tax purposes ("Tax NOL") and income tax credit carryforwards.
In March 1994, the Internal Revenue Service ("IRS") issued final regulations
relative to Tax NOL utilization when a "change in ownership" occurs in
bankruptcy proceedings. These regulations reduced the aggregate Tax NOL
available to the Company but did not limit its annual use.
As a result of the Merger, another "change in ownership" occurred and the
Company's Tax NOL and credit carryforward utilization became subject to a
combined annual limitation of approximately $7.9 million (on a pre-tax basis) in
periods after the Merger.
After considering the audit adjustments resulting from the IRS examination
for the years 1987 through 1990, the Company has a federal Tax NOL of
$10,800,000 and income tax credit carryforwards of $4,883,000 available for use
at December 31, 1995. As a result of Fresh Start Reporting, the tax benefits
realized from the pre-bankruptcy Tax NOL and income tax credit carryforwards are
recorded as an increase in additional paid-in capital and are not recorded in
the statement of operations.
F-13
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal................................................................. $ 4,995 $ 597 $ 722
State................................................................... 1,365 988 1,016
--------- --------- ---------
6,360 1,585 1,738
--------- --------- ---------
Deferred provision:
Federal................................................................. 913 (1,971) 2,459
State................................................................... 200 (257) 433
--------- --------- ---------
1,113 (2,228) 2,892
--------- --------- ---------
Charge in lieu of income taxes............................................ -- 2,636 2,686
--------- --------- ---------
$ 7,473 $ 1,993 $ 7,316
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the federal statutory income tax rate with the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate........................................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit....................................... 5.0 6.0 6.0
Disposition of assets charges.................................................... -- -- 19.6
Other non-deductible items....................................................... -- 21.4 --
Non-deductible merger related expenses........................................... -- 101.4 --
Goodwill amortization............................................................ -- 4.4 1.7
Non taxable items................................................................ (0.1) -- --
Other, net....................................................................... (0.9) -- 0.8
--- --------- ---
38.0% 167.2% 62.1%
--- --------- ---
--- --------- ---
</TABLE>
F-14
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences in the recognition of
certain expenses for financial and tax reporting purposes. The following is a
summary of these differences and the tax effect of each (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts............................................... $ 1,291 $ 1,054
Net operating loss carryforward............................................... 6,558 3,789
Loss contingencies and legal settlements...................................... 912 734
Workers' compensation claims.................................................. 4,346 4,827
Share appreciation rights..................................................... 996 --
Disposition of assets charges................................................. -- 2,844
Accrued interest.............................................................. -- 598
Other reserves................................................................ 1,931 1,035
Credit carryforwards.......................................................... 4,165 4,883
Other......................................................................... 2,489 613
Valuation allowance........................................................... (10,341) (10,100)
---------- ----------
Total deferred income tax assets................................................ 12,347 10,277
---------- ----------
Deferred income tax liabilities:
Depreciation.................................................................. (11,206) (9,109)
Other......................................................................... (1,156) (3,667)
---------- ----------
Total deferred income tax liabilities........................................... (12,362) (12,776)
---------- ----------
Net deferred income tax liability............................................... $ (15) $ (2,499)
---------- ----------
---------- ----------
</TABLE>
The valuation allowance primarily relates to the net operating loss and
income tax credit carryforwards of the Company for periods prior to its
emergence from bankruptcy. If and when such carryforwards are realized, the
offset will be to additional paid-in capital not to the provision for income
taxes.
5. DEFERRED RENT
Several of the Company's facilities and a home healthcare office are leased
under long-term operating leases that specify scheduled rent increases over the
lease terms. Deferred rent of approximately $1,019,000 and $932,000, at December
31, 1994 and 1995, respectively, has been established to recognize the
difference between the rent expense paid and the straight-line recognition of
minimum rental expense.
6. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Company is contingently liable under letters of credit principally
related to deposit requirements on its self-insured workers' compensation plans.
State regulations require the maintenance of deposits at specified percentages
of estimated future claim payments that can be satisfied through a combination
of cash deposits, surety bonds and letters of credit. The total amount of
letters of credit outstanding at December 31, 1994 and 1995, were $17,344,000,
and $16,050,000, respectively. At December 31, 1994, $9,244,000 of the letters
of credit were collateralized by cash and $8,000,000 were collateralized by
accounts receivable. At December 31, 1995, the letters of credit were
collateralized by cash. The cash collateral was subsequently released in
connection with the Company's Credit Agreement discussed in Note 3.
LEASES
The Company leases certain facilities and offices under cancelable and
noncancelable agreements expiring at various dates through 2047. The leases are
generally triple-net leases and provide for the Company's payment of property
taxes, insurance, and repairs. Certain leases contain renewal options and
F-15
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rent escalation clauses. Rent escalation clauses require either fixed increases
or increases tied to the Consumer Price Index ("CPI"). Eight leases include
purchase options at fixed or market prices at various dates.
Future minimum lease payments for operating leases at December 31, 1995 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1996.............................................................................. $ 14,962
1997.............................................................................. 14,611
1998.............................................................................. 13,516
1999.............................................................................. 13,018
2000.............................................................................. 12,553
Thereafter........................................................................ 81,939
----------
$ 150,599
----------
----------
</TABLE>
GUARANTEE OF LEASES
The Company is contingently liable for certain operating leases assumed by
the purchasers of the Company's leasehold interests in facilities. With the
exception of a single facility re-entered on October 1, 1994, following the
filing of bankruptcy by the Company's sublessee, which has been operated by the
Company since November 1, 1994, the Company is not aware of any failure on the
part of these purchasers to meet the terms of their obligations, and does not
anticipate any expenditures to be incurred in connection with its guarantees. If
a default were to occur, the Company generally would be able to assume
operations of the facility and use the net revenues thereof to defray the
Company's expenditures on these guarantees.
The following is a schedule of future minimum lease payments at December 31,
1995 for the operating leases for which the Company is contingently liable (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1996.............................................................................. $ 4,365
1997.............................................................................. 3,028
1998.............................................................................. 1,134
1999.............................................................................. 1,130
2000.............................................................................. 1,129
Thereafter........................................................................ 4,866
----------
$ 15,652
----------
----------
</TABLE>
LITIGATION
In 1995, a class action lawsuit, which had been filed against the Company in
July 1994, was settled for $9,000,000. The Company's portion of this settlement,
together with related legal fees and other costs, resulted in a pre-tax charge
of $3,098,000, which is included in the consolidated statement of operations for
the year ended December 31, 1995.
Additionally, the Company is subject to claims and legal actions by patients
and others in the ordinary course of its business. The Company has insurance
policies related to patient care claims and legal actions. In the event
judgments were awarded for non-patient care legal actions or in excess of the
insurance coverage for patient care legal actions, the burden would fall on the
Company. The Company does not expect that the ultimate outcome of an unfavorable
judgment in any pending legal matters would result in a material adverse effect
on the Company's consolidated financial position or results of operations.
F-16
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYMENT AGREEMENTS
At December 31, 1995, the Company had employment agreements with its
president, and certain executive and senior vice presidents, which provide for
annual base salaries in the aggregate of $1,330,000. The agreements expire at
various dates through 1998.
INSURANCE
The Company maintains general and professional liability insurance on a
claims made basis, subject to a $100,000 self-insurance retention. In addition,
all-risk property insurance, including earthquake and flood, is maintained for
all Company locations.
The Company estimates its liability under the above described programs,
including potential legal fees and settlement amounts, with respect to incurred
but not reported claims on a monthly basis, based upon its historical
experience.
7. RELATED PARTY TRANSACTIONS
In February 1988, the Company entered into a 20-year lease with three
five-year option periods for its Heritage (Torrance) facility that is owned by a
director of the Company. The lease provides for monthly payments, currently
$35,000, which are adjusted annually based on the CPI. Lease expense for the
years ended December 31, 1993, 1994 and 1995, was approximately $400,000,
$409,000, and $415,000, respectively.
In June 1990, the Company entered into a ten year lease with four five-year
option periods for its Glendora facility that is directly owned by one director
and indirectly owned by another director. The lease provides for equal monthly
payments for three years, after which the monthly payment is adjusted annually
based on increases in the CPI. Lease expense for the years ended December 31,
1993, 1994 and 1995, was approximately $420,000, $420,000, and $437,000,
respectively.
The Company leases from Newport Harbor Investments Limited, Inc. ("Newport
Harbor"), a corporation wholly owned by a director of the Company, two
in-patient facilities located in Beaumont and Riverside, California. The leases
provide for monthly rent payments of $7,083 and $5,142, respectively, subject to
periodic adjustments based on certain increases in the CPI or Medi-Cal
reimbursement rates. The Riverside facility lease contains an option to purchase
the facility for $675,000, subject to adjustment based on increases in the CPI
from March 1992. In 1992, the Company paid Newport Harbor $120,000 as
consideration for the extension of the purchase option on the Riverside facility
for a five-year period through March 1997 which amount will be applied to the
purchase price if the option is exercised. Lease expense paid by the Company for
the years ended December 31, 1993, 1994 and 1995, was approximately $138,000,
$147,000 and $147,000, respectively.
The Company had a 26% interest in a pharmacy partnership formed in April
1992, which provides products and services to several in-patient facilities
operated by the Company. For the years ended December 31, 1993 and 1994 these
purchases totaled approximately $5,900,000, and $7,525,000, respectively. In
August 1994, the Company sold its interest in the pharmacy partnership to the
other partner. The Company received its net equity in the partnership plus
$200,000 for goodwill. The total cash received by the Company was $2,239,000.
8. INCOME (LOSS) PER SHARE
For the years ended December 31, 1993, 1994 and 1995, primary income (loss)
per share was calculated based on the weighted average number of common and
common equivalent shares outstanding during the periods of 16,305,000,
16,545,000 and 16,654,000, respectively. For the year ended December 31, 1993,
fully diluted income per share was computed as described above and includes the
issuance of common shares upon assumed conversion of the Convertible
Subordinated Debentures. Additionally, interest and amortization of underwriting
costs related to such Debentures were added, net of tax, to net income for the
purpose of calculating fully diluted income per share. Such amounts for the year
ended December 31, 1993 were
F-17
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,603,000. Fully diluted income (loss) per share for the years ended December
31, 1994 and 1995 was the same as primary income (loss) per share because the
effect of the assumed conversion of the Convertible Subordinated Debentures was
not dilutive. The weighted average number of common and common stock equivalent
shares outstanding during the years ended December 31, 1993, 1994 and 1995, for
the calculation of fully diluted income (loss) per share was 19,419,000,
16,545,000 and 16,654,000, respectively.
The 1993 and 1994 income per share calculation does not include the shares
reserved for issuance in connection with the Company's Share Appreciation Rights
Plan, which provides for settlement of the rights in cash or stock. Through
December 31, 1994, all Share Appreciation Rights that had been settled were
settled for cash. During 1995, the Board of Directors settled all remaining
outstanding rights and issued shares which are included in the weighted average
share calculation for 1995. (See Note 10.)
9. STOCK OPTIONS AND WARRANTS
Pursuant to the Merger, Care became a wholly owned subsidiary of Regency.
Stockholders of Care received 0.71 of a share of Regency common stock for each
share of Care common stock outstanding. Pursuant to the Merger, Regency's stock
option plan was amended to increase the number of shares of Regency common stock
available for grant to 1,937,991 shares. This amount does not include the
assumption of the Care stock option plan or share appreciation rights plan. The
following is a summary of the Regency stock option plan for the combined
companies, as adjusted by the Exchange Ratio due to the Merger, and to reflect
options granted, exercised or cancelled subsequent to the Merger:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning of period..................... 636,436 635,058 1,725,436
Granted........................................................ 76,415 1,425,015 220,641
Exercised...................................................... (29,552) (82,736) (210,004)
Cancelled...................................................... (48,241) (251,901) (599,859)
-------------- --------------- ---------------
Options outstanding at end of period........................... 635,058 1,725,436 1,136,214
-------------- --------------- ---------------
-------------- --------------- ---------------
Options exercisable at end of period........................... 331,875 683,563 479,284
-------------- --------------- ---------------
-------------- --------------- ---------------
Option price range of outstanding options...................... $ 2.44-$10.50 $ 2.44-$15.38 $ 2.44-$15.38
-------------- --------------- ---------------
-------------- --------------- ---------------
Option price range of granted options.......................... $ 4.05-$10.50 $ 10.94-$15.38 $ 10.13-$12.88
-------------- --------------- ---------------
-------------- --------------- ---------------
Option price range of exercised options........................ $ 2.44-$6.98 $ 2.44-$9.38 $ 2.44-$9.38
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
At December 31, 1995, 2,035,388 shares of common stock have been reserved
for issuance under the Company's stock option plans. Effective January 2, 1996,
the Company issued options to acquire an additional 550,000 shares of common
stock which vest over 10 years, subject to acceleration based upon the Company
achieving certain financial goals.
The Company has a Director Stock Plan whereby each non-employee director of
the Company receives on July 1 of each year 2,000 restricted shares of Company
Common Stock and options to purchase an additional 6,000 shares of Company
Common Stock. The period of restriction for each award of shares of restricted
stock expires on the last to occur of: the end of the six month period following
the grant date; participant's direct or indirect pecuniary ownership of shares
not subject to restrictions for at least 12 months, provided that the
restrictions shall lapse with respect to one restricted share granted for every
two shares of unrestricted shares; and participants attendance at 75% of the
scheduled board meetings during the 12 month period immediately preceding the
grant date. Any shares which remain restricted when a director's service on the
Company's Board terminates, will be forfeited. The stock options are granted at
fair market value on the date of grant and the participants are entitled to
exercise such options beginning six months and one day after grant and ending
ten years after grant. During the years ended December 31, 1993,
F-18
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1994 and 1995, the Company awarded 10,000, 12,000 and 14,000 shares of
restricted stock, respectively, and during the year ended December 31, 1994,
6,000 shares of restricted stock were forfeited and restrictions on 10,000
shares lapsed. At December 31, 1995 restrictions remained on 20,000 shares of
stock. In January 1996, the period of restriction lapsed on 9,000 shares.
The following is a summary of options granted pursuant to Regency's Director
Stock Plan (such amounts do not include restricted stock awards):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Options outstanding at beginning of the year...................... -- 24,000 48,000
Granted........................................................... 30,000 36,000 42,000
Exercised......................................................... -- (12,000) --
Cancelled......................................................... (6,000) -- --
-------------- -------------- --------------
Options outstanding at end of the year............................ 24,000 48,000 90,000
-------------- -------------- --------------
-------------- -------------- --------------
Options exercisable at end of the year............................ -- 18,000 48,000
-------------- -------------- --------------
-------------- -------------- --------------
Option price range of outstanding options......................... -- $ 6.87-$15.00 $ 6.87-$15.00
-------------- -------------- --------------
-------------- -------------- --------------
Option price range of granted options............................. $ 6.87-$10.44 $ 15.00 $ 10.50
-------------- -------------- --------------
-------------- -------------- --------------
Option price range of exercised options........................... -- $ 6.87-$10.38 --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
At December 31, 1995, 188,000 shares of Common Stock were reserved for
issuance under Regency's Director Stock Plan.
10. SHARE APPRECIATION RIGHTS PLAN
In January 1991, Care's Board of Directors adopted a Share Appreciation
Rights Plan (the "SAR Plan"), which provided for the award of up to 710,000
units to certain key executives. The SAR Plan was amended by the Care Board of
Directors and stockholders in May 1992, and assumed by Regency at the time of
the Merger.
The SAR Plan provides that upon award, 25% of the units vest on each of the
first four anniversaries of the award date and vested units must be exercised
before the fifth anniversary of the award. All outstanding units fully vested on
January 1, 1995. Upon exercise, the awardee is entitled to receive the
difference between the base value and the market value on the date the units are
exercised, in cash or stock, at the Company's option.
The following is a summary of the SAR Plan (as adjusted by the Exchange
Ratio due to the Merger):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Units outstanding at beginning of the year...................................... 255,600 236,430 236,430
Granted......................................................................... -- -- --
Settled......................................................................... (9,585) -- (236,430)
Cancelled....................................................................... (9,585) -- --
--------- --------- ----------
Units outstanding at end of the year............................................ 236,430 236,430 --
--------- --------- ----------
--------- --------- ----------
Units exercisable at end of the year............................................ 118,214 177,322 --
--------- --------- ----------
--------- --------- ----------
Unit price of outstanding units................................................. $ 1.41 $ 1.41 --
--------- --------- ----------
--------- --------- ----------
Unit price of settled units..................................................... $ 1.41 -- $ 1.41
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-19
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Merger, benefits associated with the SAR Plan were calculated
based upon the trading price of Care's common stock. Regency assumed the SAR
Plan at the Merger date and adjusted both the number of units and the unit price
based upon the Exchange Ratio. Following the date of the Merger, benefits
associated with the SAR Plan were calculated based upon the trading price of
Regency's common stock. For the year ended December 31, 1993, the Company
accrued $2,108,000 in benefits associated with the SAR Plan. Due to the decline
in the Company's stock price from the preceding year, for the year ended
December 31, 1994, the Company reduced its SAR accrual by $395,000. During 1995,
the Company discontinued the SAR Plan and settled all outstanding units for
$1,628,000 cash and 55,310 shares. This resulted in a charge to income of
$534,000 during 1995.
11. RETIREMENT SAVINGS PLAN
Effective January 1, 1995, the Company merged the Regency and Care
retirement savings plans described below.
Regency sponsored an employee retirement savings plan under Section 401(k)
of the Internal Revenue Code. All employees who were regularly scheduled to work
20 hours or more per week, and completed 90 days of service were eligible to
participate. Participants could contribute, on a pre-tax basis, up to 15% of
their earnings to the plan (subject to certain limitations). Employer
contributions to the plan were discretionary. The Company contributed $48,000 to
the plan for the year ended December 31, 1994. No contributions were made in
prior years.
Care sponsored an employee retirement savings plan, which is a qualified
cash or deferred arrangement under Section 401(k) of the Internal Revenue Code.
All employees with at least one year of employment who attained the age of 21
were eligible to participate. Participants could contribute, on a pre-tax basis,
up to 15% of their earnings to the plan (subject to certain limitations), for
which the Company matched 15% of the first 3% of contributions made for persons
with less than three years of service and 25% of the first 5% for all others.
The Company's contributions were subject to a four-year vesting period. Matching
contributions made by the Company for the years ended December 31, 1993, 1994
and 1995 were approximately $186,000, $231,000, and $471,000, respectively.
F-20
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. MERGER AND RESTRUCTURING EXPENSES
All fees and expenses related to the Merger and to the consolidation and
restructuring of the combining companies during the year ended December 31,
1994, were expensed as required under the pooling-of-interests accounting
method. The following is a summary of the merger and restructuring expenses,
separated into cash and non-cash items (in thousands):
<TABLE>
<CAPTION>
CASH NON-CASH TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Severance.............................................................. $ 4,394 $ -- $ 4,394
Management information, accounting, and operational integration........ 2,373 -- 2,373
Investment banking fees................................................ 1,400 -- 1,400
Value of assets written off............................................ -- 777 777
Legal fees............................................................. 612 -- 612
Mailing and printing costs............................................. 501 -- 501
Merger bonuses......................................................... 500 -- 500
Accounting fees........................................................ 440 -- 440
Former Care director and officer liability insurance................... 550 -- 550
Miscellaneous.......................................................... 453 -- 453
--------- ----------- ---------
11,223 777 12,000
--------- ----------- ---------
Duplicate facility disposals:
Operating losses..................................................... 581 -- 581
Value of assets written off.......................................... -- 1,569 1,569
Loss on disposals.................................................... 500 -- 500
--------- ----------- ---------
1,081 1,569 2,650
--------- ----------- ---------
Total.................................................................. $ 12,304 $ 2,346 $ 14,650
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
As of December 31, 1994, the remaining accrual relating to merger and
restructuring expenses was $4,452,000 including cash and non-cash items of
$2,800,000 and $1,700,000, respectively. The remaining accrual consisted of a
provision for duplicate facility disposals of $2.3 million, severance costs of
$1.5 million, investment banking fees of $126,000, and other costs totaling
$545,000, and was utilized during 1995. (See Note 13.)
13. ACQUISITION AND DISPOSITION OF ASSETS CHARGES
On July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. The acquisition was accounted for under the purchase method of accounting.
SCRS provides contract rehabilitation services to Company-operated and
third-party healthcare facilities.
As part of the strategic plan of diversifying from California, the Company
has determined to dispose of 13 facilities located in California. The
disposition is expected to be completed during 1996. Earnings before income
taxes for these facilities was $380,000, $423,000 and $1,351,000 for 1993, 1994
and 1995, respectively. In addition, during 1995 the Company completed the
disposition of duplicate facilities identified during 1994 as part of the merger
and restructuring costs, the Simi Valley in-patient facility damaged in the
Southern California (Northridge) earthquake and one other facility, and
exchanged leasehold interests in three in-patient centers in New Mexico for
leasehold interest in four in-patient centers in Ohio. These transactions
resulted in a net charge of $9,000,000 during 1995. This charge is based upon
management's best estimates of the amounts expected to be realized on the
disposition of those facilities with carrying amounts in excess of estimated
fair value less selling costs. The amounts the Company will ultimately realize
could differ materially in the near term from the amounts assumed in arriving at
the charge.
F-21
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
---------------- ----------
<S> <C> <C>
Cash and cash equivalents................................................. $ 104,238 $ 104,238
Long-term debt, including current portion................................. 183,986 186,537
</TABLE>
The carrying amount approximates fair value for cash and cash equivalents
because of the short maturity of these instruments. The fair value for the
Company's long-term debt was estimated based on the quoted market prices for the
same or similar issues or on the present value of future cash flows using
current rates the Company could obtain on debt with similar characteristics and
maturities. The Company has determined that it is not practicable to estimate
the fair value of mortgage notes receivable because of the costs involved in
developing this information.
15. SUBSEQUENT EVENTS
Effective February 1, 1996, the Company acquired 18 in-patient facilities in
Tennessee and North Carolina with 2,375 beds through an asset purchase for $41.5
million cash from Liberty Healthcare Limited Partnership ("Liberty"). The
Company also acquired Executive Pharmacy for $1.2 million cash and an enteral
feeding business for $1.5 million cash from persons affiliated with Liberty.
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, Inc., a pharmacy located in San Diego, California. The
purchase price was $5.8 million, comprised of $3.2 million cash and a $2.6
million note.
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
On April 4, 1994, Regency and Care completed the Merger, which was accounted
for using the pooling of interests method of accounting. The following financial
information was prepared assuming the Merger was consummated at the beginning of
1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenue..................................... $ 93,563 $ 94,520 $ 93,440 $ 95,813 $ 377,336
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Net income (loss)......................................... $ 2,017 $ (6,530) $ 561 $ 3,152 $ (800)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Net income (loss) per share -- primary.................... $ .12 $ (.40) $ .03 $ .19 $ (.05)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Net income (loss) per share -- fully diluted.............. $ .12 $ (.40) $ .03 $ .18 $ (.05)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
On January 17, 1994, Regency closed its Simi Valley in-patient facility as a
result of damage sustained in the Southern California (Northridge) earthquake.
No patients or employees were injured. In connection with the closure of the
Simi Valley facility the Company recorded a $1,600,000 loss during the year
ended December 31, 1994. This amount represents the excess of net book value
over estimated recoverable value related to the abandonment of the Simi Valley
facility leasehold interests and building improvements.
Additionally, as required under the pooling of interests method of
accounting, the Company recorded an $11,150,000 expense in the June 30, 1994
quarter, and an additional $3,500,000 expense in the September 30, 1994 quarter
relating to fees and expenses related to the Merger and the consolidation and
restructuring of the combined companies.
During the quarter ended June 30, 1994, the Company determined to dispose of
three in-patient facilities due to excess capacity created by the Merger, and
established a reserve of $2,650,000 (included in
F-22
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the $11,150,000 expense referred to above) related to the proposed dispositions.
Accordingly, the operations of these facilities are not included in the
statement of operations from July 1, 1994 through December 31, 1994. Two of
these facilities were disposed of effective February 1, 1995.
For the quarter ended September 30, 1994, net operating revenue, loss before
extraordinary items, and net loss for the aforementioned three facilities were
$1,845,000, $(122,000) and $(122,000), respectively.
For the quarter ended December 31, 1994, net operating revenue, loss before
extraordinary items, and net loss for the aforementioned three facilities were
$1,970,000, $(210,000) and $(210,000), respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenue.................................. $ 97,548 $ 99,766 $ 107,491 $ 111,279 $ 416,084
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Income (loss) before extraordinary item................ $ 3,087 $ 1,780 $ 4,042 $ (4,455) $ 4,454
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Net income (loss)...................................... $ 3,087 $ 1,780 $ 4,042 $ (6,064) $ 2,845
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Income (loss) per share -- Primary:
Income before extraordinary item..................... $ .19 $ .11 $ .24 $ (.27) $ .27
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Net income (loss).................................... $ .19 $ .11 $ .24 $ (.36) $ .17
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Income (loss) per share -- Fully Diluted
Income before extraordinary item..................... $ .18 $ .11 $ .22 $ (.27) $ .27
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Net income (loss).................................... $ .18 $ .11 $ .22 $ (.36) $ .17
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
</TABLE>
Effective July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. The acquisition was accounted for under the purchase method of accounting.
SCRS provides rehabilitation services to Company-operated and third-party
healthcare facilities.
In May 1995, a class action lawsuit which had been filed against the Company
in July 1994, was settled for $9,000,000. The Company's portion of this
settlement, together with related legal fees and other costs, resulted in a
pre-tax charge of $3,098,000, which is included in the consolidated statement of
operations for the quarter ended June 30, 1995.
In October 1995, the Company repaid its $30 million, 8.10% Senior Secured
Notes resulting in costs and prepayment penalties of $2,681,000 ($1,609,000 net
of tax), classified as an extraordinary item in the quarter ended December 31,
1995.
In December 1995, the Company recorded a $9,000,000 charge, primarily
related to the disposition of certain facilities (See Note 13).
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Liberty Healthcare Limited Partnership
Naples, Florida
We have audited the accompanying balance sheets of Liberty Healthcare
Limited Partnership as of September 30, 1995 and 1994, and the related
statements of income, partners' capital, and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Liberty Healthcare Limited
Partnership as of September 30, 1995 and 1994, and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
GOODMAN & COMPANY, L.L.P.
One Commercial Place
Norfolk, Virginia
November 16, 1995, except as to the
information presented in
Note 9, for which the date
is January 16, 1996
F-24
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 606,597 $ 319,659
Accounts receivable:
Patient services, net of allowances for uncollectibles of $169,021 -- 1995;
$129,510 -- 1994.............................................................. 5,699,584 5,831,209
Related parties................................................................ 236,356 457,466
Other.......................................................................... 167,276 173,195
Escrow funds held by lessors..................................................... 239,931 156,239
Patient trust funds -- cash invested............................................. 514,039 496,702
Prepaid expenses and other current assets........................................ 1,180,191 1,497,724
------------- -------------
Total current assets......................................................... 8,643,974 8,932,194
------------- -------------
Property and equipment:
Leasehold interests.............................................................. 4,643,763 4,643,763
Furniture and equipment.......................................................... 4,522,004 4,196,665
Leasehold improvements........................................................... 507,302 459,029
Construction in progress......................................................... 68,205 --
------------- -------------
9,741,274 9,299,457
Less -- accumulated depreciation and amortization................................ 4,336,360 3,449,664
------------- -------------
5,404,914 5,849,793
------------- -------------
Other assets:
Loan costs, net.................................................................. 41,924 75,464
Syndication costs, net........................................................... 77,503 79,728
Organization costs, net.......................................................... -- 8,068
Security deposits................................................................ 138,630 138,173
------------- -------------
$ 258,057 $ 301,433
------------- -------------
$ 14,306,945 $ 15,083,420
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade.......................................................................... $ 6,225,555 $ 5,635,350
Related parties................................................................ 308,251 155,979
Current portion of deferred credit............................................... 200,000 200,000
Patient trust funds.............................................................. 514,039 496,702
Accrued expenses:
Payroll........................................................................ 1,687,958 1,606,852
Vacation pay and other employee benefits....................................... 757,267 764,018
Other.......................................................................... 209,220 250,096
------------- -------------
Total current liabilities.................................................... 9,902,290 9,108,997
------------- -------------
Long-term debt and other non-current liabilities:
Long-term debt................................................................... 293,000 1,002,000
Deferred credit -- housekeeping and laundry services............................. 200,000 400,000
------------- -------------
493,000 1,402,000
------------- -------------
Partners' capital.................................................................. 3,911,655 4,572,423
------------- -------------
$ 14,306,945 $ 15,083,420
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Balance at beginning of year........................................................ $ 4,572,423 $ 3,700,982
Exercise of Class B limited partnership options..................................... -- 100
Net income.......................................................................... 3,091,957 3,211,073
Distributions....................................................................... (3,752,725) (2,339,732)
------------- -------------
Balance at end of year.............................................................. $ 3,911,655 $ 4,572,423
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Operating revenues................................................................. $ 73,872,448 $ 69,245,164
------------- -------------
Expenses:..........................................................................
Operating expenses............................................................... 68,799,786 63,976,386
Depreciation and amortization.................................................... 930,529 891,337
Interest......................................................................... 111,430 70,121
------------- -------------
69,841,745 64,937,844
------------- -------------
Income from operations before incentive management fee............................. 4,030,703 4,307,320
Incentive management fee........................................................... 938,746 1,096,247
------------- -------------
Net income......................................................................... $ 3,091,957 $ 3,211,073
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 3,091,957 $ 3,211,073
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization................................................... 930,529 891,337
Amortization of deferred credit................................................. (200,000) (200,000)
Bad debt expense................................................................ 126,765 131,360
Changes in:
Accounts receivable........................................................... 231,889 1,298,974
Escrow funds held by lessors.................................................. (83,692) (32,982)
Prepaid expenses and other current assets..................................... 317,533 (347,172)
Accounts payable.............................................................. 742,477 (222,164)
Accrued expenses.............................................................. 33,479 (353,161)
------------- -------------
Net cash provided by operating activities................................... 5,190,937 4,377,265
------------- -------------
Cash flows from investing activities:
Additions to property and equipment............................................... (441,817) (162,947)
(Increase) decrease in security deposits.......................................... (457) 14,722
------------- -------------
Net cash used by investing activities....................................... (442,274) (148,225)
------------- -------------
Cash flows from financing activities:
Loan costs incurred............................................................... -- (100,618)
Repayment of long-term borrowings and other financing............................. (709,000) (583,000)
Distributions to partners......................................................... (3,752,725) (2,339,732)
------------- -------------
Net cash used by financing activities....................................... (4,461,725) (3,023,350)
------------- -------------
Net increase in cash................................................................ 286,938 1,205,690
Cash (overdraft) at beginning of year............................................... 319,659 (886,031)
------------- -------------
Net cash at end of year............................................................. $ 606,597 $ 319,659
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................................ $ 111,430 $ 70,121
------------- -------------
------------- -------------
Supplemental disclosure of noncash financing activities:
During the year ended September 30, 1994, a Class B limited partnership interest
was issued pursuant to an outstanding option agreement.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS
The Partnership, which was organized in 1990 as a North Carolina Limited
Partnership, is a for-profit long-term health care provider. On July 3, 1990,
the Partnership acquired leasehold interests in 18 long-term care facilities
with skilled, intermediate, personal care, and home for the aged beds in North
Carolina and Tennessee.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME
Patient service revenues are reported at the estimated net realizable
amounts from residents, third-party payors, and others for services rendered.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
CREDIT RISK
Financial instruments which potentially subject the Partnership to
concentration of credit risk consist principally of temporary cash investments
and accounts receivable. As of September 30, 1995 and 1994, the Partnership had
predominantly all of its cash on deposit with a high credit quality financial
institution. A concentration of credit risk with respect to accounts receivable
exists at September 30, 1995 and 1994 as described in Note 5.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts expense is recognized through the use of an allowance for doubtful
accounts as determined by management's review of accounts receivable.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the related assets
as follows:
Leasehold interests -- remaining lease terms, including options --
10 to 22 years
Furniture and equipment -- 5 to 12 years
Leasehold improvements -- 12 to 25 years
LOAN COSTS
Costs of obtaining long-term financing are capitalized and amortized by the
straight-line method over the term of the related loan.
SYNDICATION COSTS
Syndication costs are amortized by the straight-line method over a period of
40 years.
ORGANIZATION COSTS
Organization costs are amortized by the straight-line method over a period
of 5 years.
INCOME TAXES
The partnership is not subject to income taxes. The partners are required to
report their distributive share of partnership income or loss on their
respective income tax returns.
F-29
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- LONG-TERM DEBT
Long-term debt consists of a $3,000,000 working capital loan with interest
payable monthly at prime plus 1%. The loan is for a term of 36 months from
December 21, 1993 with funds available to the Partnership reduced to $2,250,000
on December 21, 1994 and to $1,500,000 on December 21, 1995. The Partnership had
drawn $293,000 and $1,002,000 on this loan at September 30, 1995 and 1994,
respectively.
The loan is collateralized by a first priority security interest on the
leasehold interests in the 18 long-term care facilities and by all of the
Partnership's accounts receivable. The loan is also collateralized by the
personal guarantees of Messrs. George P. Wagner, Jr. and David Matthews (the
majority stockholders of the corporate general partner of the Partnership).
Distributions to partners are prohibited if they would prevent the Partnership
from meeting its obligations under the loan. The loan also contains financial
covenants relating to fixed charge coverage and debt to equity.
NOTE 4 -- DEFERRED CREDIT -- HOUSEKEEPING AND LAUNDRY SERVICES
Effective October 1, 1990, the Partnership entered into a cancellable
agreement to acquire housekeeping and laundry services for a period of seven
years at a minimum annual cost of $2,953,340. In connection therewith, the
Partnership sold certain laundry equipment and related facility improvements for
$1,400,000. In the event the housekeeping and laundry services contract is
terminated prior to the end of the seven year term, the Partnership is required
to repurchase the laundry equipment and related facility improvements at a
prorated amount of the $1,400,000 sales price based on the unexpired term of the
seven year contract. The sale was reflected in the financial statements as a
financing transaction and the $1,400,000 as a deferred credit being amortized
over the seven year term of the contract.
NOTE 5 -- REVENUES FROM FEDERAL AND STATE MEDICAL ASSISTANCE PROGRAMS
Revenues derived from federal and state medical assistance programs,
principally Medicaid and Medicare, represented approximately 92% and 91% of
total operating revenues for the years ended September 30, 1995 and 1994,
respectively. Approximately $5,370,000 and $5,610,000 remained uncollected at
September 30, 1995 and 1994, respectively, representing 88% and 87% of total
accounts receivable. The Partnership is highly dependent on such revenues.
NOTE 6 -- RELATED PARTY TRANSACTIONS
The Partnership has entered into a contract with Liberty Healthcare
Management Corporation, a corporation controlled by Messrs. Wagner and Matthews,
to provide management services to the Partnership. The contract provides for a
basic fee of 3.3% of gross revenues, which amounted to $2,437,791 and $2,285,090
for the years ended September 30, 1995 and 1994, respectively, plus an incentive
management fee based on earnings of the Partnership over amounts previously
forecasted in the Partnership's private placement offering. Incentive management
fees of $938,746 and $1,096,247 have been accrued for the years ended September
30, 1995 and 1994, respectively.
The Partnership was due $236,356 and $457,466 from various related parties
at September 30, 1995 and 1994, respectively. The Partnership owed $308,251 and
$155,979 to various related parties at September 30, 1995 and 1994,
respectively. Operating expenses of $1,505,942 and $935,432 were incurred with
related parties, principally for purchases of pharmaceutical supplies and
leasing of equipment as described in note 7.
F-30
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMITMENTS
The Partnership leases 18 long-term care facilities with noncancellable
terms expiring between 1995 and 2003. Future minimum rents payable under these
operating leases are as follows:
<TABLE>
<S> <C>
1996........................................... $7,252,769
1997........................................... 5,996,108
1998........................................... 4,917,480
1999........................................... 3,036,810
2000........................................... 2,518,195
Thereafter..................................... 2,143,056
----------
$25,864,418
----------
----------
</TABLE>
Certain of the leases contain provisions for contingent rentals based on
changes in the consumer price index and/or increases in certain revenues, and
for option periods ranging from 5 years to 23 years. Three of the leases contain
options to purchase the facilities pursuant to the lease terms.
On November 1, 1992, the Partnership began leasing certain equipment from
Mr. Matthews for a term of sixty months expiring in October, 1997 at a monthly
rate of $5,115. Future minimum rents payable under this operating lease are as
follows:
<TABLE>
<S> <C>
1996............................................... $ 61,380
1997............................................... 5,115
---------
$ 66,495
---------
---------
</TABLE>
NOTE 8 -- CONTINGENCIES
The Partnership is self-insured for the first $100,000 per occurrence of
workers' compensation claims. Claims in excess of the amount for which the
Partnership is self-insured are covered by stop loss insurance policies. At
September 30, 1995, the Partnership had funds in excess of anticipated claims on
deposit with its insurance carrier for payment of claims. An estimate of
anticipated claims for incidents incurred prior to September 30, 1995 has been
computed based on a third party administrator's analysis of pending claims and
prior years experience relating to final settlements.
At September 30, 1994, the Partnership owned a 70% limited partnership
interest in Liberty Assisted Living Centers of Tennessee Limited Partnership, a
Georgia limited partnership, to which it has agreed to make an initial capital
contribution of $3,500. Prior to commencement of operations, the partnership
interest was assigned to a related party who agreed to make the required capital
contributions.
NOTE 9 -- SUBSEQUENT EVENT
On January 16, 1996, the Partnership announced it had signed a definitive
agreement to sell its leasehold interest in its 18 long-term care facilities and
related facility improvements, personal property and goodwill to Regency Health
Services, Inc. for $41,500,000. The transaction is expected to close on February
1, 1996.
F-31
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash...................................................................................... $-- $ 607
Accounts receivable....................................................................... 8,576 5,699
Other current assets...................................................................... 2,257 2,338
------------ -------------
Total current assets.................................................................. 10,833 8,644
Property, plant, and equipment, net....................................................... 5,237 5,405
Other assets, net......................................................................... 296 258
------------ -------------
Total assets.......................................................................... $16,366 $14,307
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.......................................................................... $ 8,173 $ 6,534
Accrued compensation...................................................................... 1,985 2,445
Other current liabilities................................................................. 2,279 923
------------ -------------
Total current liabilities............................................................. 12,437 9,902
Long-term debt............................................................................ -- 293
Other liabilities and noncurrent reserves................................................. 150 200
------------ -------------
Total liabilities..................................................................... 12,587 10,395
Partners' capital......................................................................... 3,779 3,912
------------ -------------
Total liabilities and partners' capital............................................... $16,366 $14,307
------------ -------------
------------ -------------
</TABLE>
See note to financial statements.
F-32
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Balance at beginning of period................................................................. $ 3,912 $ 4,572
Net income..................................................................................... 736 891
Distributions.................................................................................. (869) (748)
--------- ---------
Balance at end of period....................................................................... $ 3,779 $ 4,715
--------- ---------
--------- ---------
</TABLE>
See note to financial statements.
F-33
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Operating revenues.......................................................................... $ 18,612 $ 18,105
--------- ---------
Expenses:
Operating expenses........................................................................ 17,407 16,687
Depreciation and amortization............................................................. 236 225
Interest.................................................................................. 21 20
--------- ---------
17,664 16,932
--------- ---------
Income from operations before incentive management fee...................................... 948 1,173
Incentive management fee.................................................................... 212 282
--------- ---------
Net income.................................................................................. $ 736 $ 891
--------- ---------
--------- ---------
</TABLE>
See note to financial statements.
F-34
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 736 $ 891
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 236 225
(Increase) decrease in assets:
Accounts receivable.................................................................... (2,876) (3,571)
Other current assets................................................................... 81 86
Increase (decrease) in liabilities:
Accounts payable....................................................................... 1,639 3,088
Accrued compensation and other liabilities............................................. 846 895
--------- ---------
Net cash provided by operating activities................................................ 662 1,614
--------- ---------
Cash flows from investing activities:
Additions to property and equipment........................................................ (68) (146)
Changes in other long-term assets.......................................................... (39) 12
--------- ---------
Net cash used by investing activities.................................................... (107) (134)
--------- ---------
Cash flows from financing activities:
Repayment of long-term borrowings and other financing...................................... (293) (1,052)
Distributions to partners.................................................................. (869) (748)
--------- ---------
Net cash used by financing activities.................................................... (1,162) (1,800)
--------- ---------
Net decrease in cash......................................................................... (607) (320)
Cash at beginning of period.................................................................. 607 489
--------- ---------
Cash at end of period........................................................................ $ -- $ 169
--------- ---------
--------- ---------
</TABLE>
See note to financial statements.
F-35
<PAGE>
LIBERTY HEALTHCARE LIMITED PARTNERSHIP
NOTE TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have not
been presented. The accompanying unaudited financial statements should be read
in conjunction with the audited financial statements and related notes included
elsewhere herein.
In the opinion of the management, all material adjustments necessary to
present fairly the Partnership's financial condition, results of operations, and
changes in financial position have been made. The results of operations for the
three months ended December 31, 1995 are not necessarily indicative of the
results of a full year.
F-36
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Section 145 of the Delaware General
Corporation Law (the "DGCL") provides that any person may be indemnified by a
Delaware corporation against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
her in connection with any threatened, pending or completed action, suit or
proceeding in which such person is made a party by reason of his or her being or
having been a director, officer, employee, or agent of the corporation. The DGCL
provides that indemnification pursuant to its provisions is not exclusive of
other rights of indemnification to which a person may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
The Restated Certificate of Incorporation of Registrant provides that
Registrant will, to the fullest extent permitted by the DGCL, as it may be
amended from time to time, (i) limit the liability of Registrant's directors to
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (a) for breach of the director's duty of
loyalty, (b) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, (c) pursuant to Section
174 of the DGCL, or (d) for any transaction from which the director derived an
improper personal benefit; and (ii) indemnify, defend and hold harmless any and
all of its existing and former directors, advisory directors, officers and
agents from and against any and all losses, claims, damages, expenses, fees or
liabilities, whether joint or several, incurred by each of them including but
not limited to all legal fees, judgments, penalties or amounts paid in defense,
settlement or compromise of any action or proceeding brought or threatened
against any of them on account of any act or omission while acting as a
director, advisory director, officer or agent of Registrant.
The Restated Bylaws of Registrant, as amended (the "Bylaws"), as well as
individual indemnification agreements entered into between Registrant and
certain of its present and former directors and executive officers, reflect the
indemnification provisions in Registrant's Restated Certificate of
Incorporation. The Bylaws and such agreements provide generally for limited
personal liability of directors and indemnification of directors, officers,
employees and other agents of Registrant in the event of third party actions,
actions by or in the right of Registrant and in the event of a successful
defense in the circumstances and to the extent specified below.
To be entitled to indemnification, a person must have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of Registrant and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. With respect to
a proceeding by or in the right of Registrant to procure a judgment in its
favor, no indemnification of a person will be made in respect of any claim,
issue or matter as to which such person has been adjudged liable to Registrant
unless and only to the extent that the Delaware Court of Chancery or the court
in which such proceeding was brought determines upon application that, despite
the adjudication of liability but in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court deems proper.
Any indemnification for other than a successful defense (unless ordered by a
court) will be made by Registrant only as authorized in the specific case upon a
determination that indemnification of the person is proper in the circumstances
because he or she has met the applicable good faith standard of conduct. Such
determination will be made (i) by the Board of Directors of Registrant by a
majority vote of a quorum consisting of directors who were not parties to such
proceeding, (ii) if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion or (iii) by the stockholders. Registrant's Bylaws provide for
the payment of expenses in advance of the final disposition of a proceeding upon
receipt of an undertaking to repay such amount if it is ultimately determined
that the person was not entitled to indemnification.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
4.11 Indenture, dated as of June 28, 1996, between Regency Health Services, Inc., as Issuer, the
Subsidiaries named therein, as Guarantors, and U.S. Trust Company of California, N.A. (1)
4.12 Form 12 1/4% Subordinated Note due 2003 of Regency Health Services, Inc. (included in Exhibit
4.11).
4.13 Registration Rights Agreement dated as of June 28, 1996 by and among Regency Health Services, Inc.,
as Issuer, the Guarantors named therein and Bear, Stearns & Co., Inc. and NationsBanc Capital
Markets, Inc., as Initial Purchasers. (1)
5.1 Opinion of Sidley & Austin.
12.1 Statement Re Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Goodman & Company, L.L.P.
23.3 Consent of Sidley & Austin (included in Exhibit 5.1).
24.1 Powers of Attorney to execute Registration Statement on Form S-4, dated August 21, 1996, executed
by Gregory S. Anderson.
24.2 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996, executed
by Tony Astorga.
24.3 Powers of Attorney to execute Registration Statement on Form S-4, dated August 21, 1996, executed
by Robert G. Coo.
24.4 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996, executed
by John F. Nickoll.
24.5 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996, executed
by Arthur Pasmas.
25.7 Statement on Form T-1, of the Eligibility of U.S. Trust Company of California, N.A., as Trustee
under the Indenture relating to 12 1/4% Subordinated Notes due 2003.
99.1 Quarterly Report of Regency Health Services, Inc, on Form 10-Q for the Fiscal Quarter ended June
30, 1996.
99.2 Letter of Transmittal for 12 1/4% Subordinated Notes due 2003.
</TABLE>
- ------------
(1) This exhibit is incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1996, in which
such exhibit had the same number as such exhibit herein.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(e) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated offering range may be reflected in the
form of prospectus filed with the
II-2
<PAGE>
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs in contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction all information concerning a transaction, and the
company acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
(7) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrants certify that they have reasonable grounds to believe that they meet
all of the requirements for filing on Form S-4 and have duly caused this
Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Tustin, State of California, on this
23rd day of August, 1995.
REGENCY HEALTH SERVICES, INC.
By: _______/s/_RICHARD K. MATROS______
Richard K. Matros,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- --------------------------------------------- ------------------
<C> <S> <C>
/s/ RICHARD K. MATROS President, Chief Executive Officer
------------------------------------- (principal executive officer) August 23, 1996
Richard K. Matros and Director
Executive Vice President and
/s/ BRUCE D. BROUSSARD Chief Financial Officer
------------------------------------- (principal financial officer and August 23, 1996
Bruce D. Broussard principal accounting officer)
------------------------------------- Director August , 1996
John W. Adams
/s/ GREGORY S. ANDERSON*
------------------------------------- Director August 23, 1996
Gregory S. Anderson
/s/ TONY ASTORGA*
------------------------------------- Director August 23, 1996
Tony Astorga
/s/ ROBERT G. COO*
------------------------------------- Director August 23, 1996
Robert G. Coo
/s/ JOHN F. NICKOLL*
------------------------------------- Director August 23, 1996
John F. Nickoll
/s/ ARTHUR PASMAS*
------------------------------------- Director August 23, 1996
Arthur Pasmas
*By: /s/ RICHARD K. MATROS
--------------------------------
Richard K. Matros,
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
AMERICARE HOMECARE, INC.
AMERICARE MIDWEST, INC.
AMERICARE OF WEST VIRGINIA, INC.
BECKLEY HEALTH CARE CORP.
BRASWELL ENTERPRISES, INC.
BREL, INC.
BRITTANY REHABILITATION CENTER, INC.
CARE FINANCE, INC.
CARE ENTERPRISES, INC.
CARE ENTERPRISES WEST
CARE HOME HEALTH SERVICES
CARMICHAEL REHABILITATION CENTER
CASA DE VIDA REHABILITATION CENTER
CIRCLEVILLE HEALTH CARE CORP.
COALINGA REHABILITATION CENTER
COVINA REHABILITATION CENTER
DUNBAR HEALTH CARE CORP.
EVERGREEN REHABILITATION CENTER
FAIRFIELD REHABILITATION CENTER
FIRST CLASS PHARMACY, INC.
FULLERTON REHABILITATION CENTER
GLENDORA REHABILITATION CENTER
GLENVILLE HEALTH CARE, INC.
GRAND TERRACE REHABILITATION CENTER
HALLMARK HEALTH SERVICES, INC.
HARBOR VIEW REHABILITATION CENTER
HAWTHORNE REHABILITATION CENTER
HEALTHCARE NETWORK
HERITAGE REHABILITATION CENTER
HUNTINGTON BEACH CONVALESCENT HOSPITAL
JACKSON REHABILITATION CENTER, INC.
LINDA-MAR REHABILITATION CENTER
MARION HEALTH CARE CORP.
MEADOWBROOK REHABILITATION CENTER
MEADOWVIEW REHABILITATION CENTER
NEW LEXINGTON HEALTH CARE CORP.
NEWPORT BEACH REHABILITATION CENTER
NORTH STATE HOME HEALTH CARE, INC.
PARADISE REHABILITATION CENTER, INC.
PASO ROBLES REHABILITATION CENTER
PUTNAM HEALTH CARE CORP.
RHS MANAGEMENT CORPORATION
ROSE REHABILITATION CENTER
ROSEWOOD REHABILITATION CENTER, INC.
SALEM HEALTH CARE CORP.
SHANDIN HILLS REHABILITATION CENTER
STOCKTON REHABILITATION CENTER, INC.
VISTA KNOLL REHABILITATION CENTER, INC.
WILLOWVIEW REHABILITATION CENTER
REGENCY -- NORTH CAROLINA, INC.
REGENCY -- TENNESSEE, INC.
OASIS MENTAL HEALTH TREATMENT CENTER, INC.
By: __________/s/_RICHARD K. MATROS__________
Richard K. Matros,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- --------------------------------------------- ------------------
<C> <S> <C>
/s/ RICHARD K. MATROS President, Chief Executive Officer
------------------------------------- (principal executive officer) August 23, 1996
Richard K. Matros and Director
Executive Vice President and
/s/ BRUCE D. BROUSSARD Chief Financial Officer
------------------------------------- (principal financial officer and August 23, 1996
Bruce D. Broussard principal accounting officer)
and Director
/s/ ANTHONY B. WAY
------------------------------------- Director August 23, 1996
Anthony B. Way
</TABLE>
SCRS & COMMUNICOLOGY, INC., OF OHIO
By: /s/ RICHARD K. MATROS
--------------------------------------
Richard K. Matros,
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- --------------------------------------------- ------------------
<C> <S> <C>
/s/ RICHARD K. MATROS Chairman of the Board
------------------------------------- (principal executive officer) August 23, 1996
Richard K. Matros and Director
Chief Financial Officer
/s/ BRUCE D. BROUSSARD (principal financial officer and
------------------------------------- principal accounting officer) August 23, 1996
Bruce D. Broussard and Director
------------------------------------- Director August , 1996
Sherri L. Medina
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
4.11 Indenture, dated as of June 28, 1996, between Regency Health Services, Inc., as Issuer,
the Subsidiaries named therein, as Guarantors, and U.S. Trust Company of California,
N.A. (1)
4.12 Form 12 1/4% Subordinated Note due 2003 of Regency Health Services, Inc. (included in
Exhibit 4.11).
4.13 Registration Rights Agreement dated as of June 28, 1996 by and among Regency Health
Services, Inc., as Issuer, the Guarantors named therein and Bear, Stearns & Co., Inc.
and NationsBanc Capital Markets, Inc., as Initial Purchasers. (1)
5.1 Opinion of Sidley & Austin.
12.1 Statement Re Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Goodman & Company, L.L.P.
23.3 Consent of Sidley & Austin (included in Exhibit 5.1).
24.1 Powers of Attorney to execute Registration Statement on Form S-4, dated August 21, 1996,
executed by Gregory S. Anderson.
24.2 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996,
executed by Tony Astorga.
24.3 Powers of Attorney to execute Registration Statement on Form S-4, dated August 21, 1996,
executed by Robert G. Coo.
24.4 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996,
executed by John F. Nickoll.
24.5 Powers of Attorney to execute Registration Statement on Form S-4, dated August 20, 1996,
executed by Arthur Pasmas.
25.7 Statement on Form T-1, of the Eligibility of U.S. Trust Company of California, N.A., as
Trustee under the Indenture relating to 12 1/4% Subordinated Notes due 2003.
99.1 Quarterly Report of Regency Health Services, Inc, on Form 10-Q for the Fiscal Quarter
ended June 30, 1996.
99.2 Letter of Transmittal for 12 1/4% Subordinated Notes due 2003.
</TABLE>
- ------------
(1) This exhibit is incorporated by reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1996, in which
such exhibit had the same number as such exhibit herein.
<PAGE>
Exh-5.1
August 23, 1996
Regency Health Services, Inc.
2742 Dow Avenue
Tustin, California 92780-7245
Re: 12 1/4% SUBORDINATED NOTES DUE 2003
Gentlemen:
We refer to the Registration Statement on Form S-4 (the "Registration
Statement") being filed by Regency Health Services, Inc. (the "Company") with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the registration of $50,000,000
principal amount of the Company's 12 1/4% Subordinated Notes due 2003 (the
"Exchange Notes "). The Exchange Notes are to be issued under an Indenture
dated as of June 28, 1996 (the "Indenture") between the Company and U.S. Trust
Company of California, N.A., as trustee (the "Trustee"), and certain
subsidiaries of the Company named therein as subsidiary guarantors.
We are familiar with the proceedings to date with respect to the
proposed issuance and exchange of the Exchange Notes for the Company's 12 1/4%
Subordinated Notes due 2003 (the "Outstanding Notes"), and have examined such
records, documents and questions of law, and satisfied ourselves as to such
matters of fact, as we have considered relevant and necessary as a basis for
this opinion.
Based on the foregoing, we are of the opinion that, when (i) the
Registration Statement, as it may be amended, becomes effective under the
Securities Act and the Indenture has been qualified under the Trust Indenture
Act of 1939, as amended; and (ii) the Exchange Notes are duly executed and
authenticated as provided in the Indenture and have been duly delivered to the
holders of Outstanding Notes who have duly tendered their Outstanding Notes for
exchange, the Exchange Notes will be legally issued and binding obligations of
the Company (except to the extent enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws affecting the enforcement of creditors' rights generally and by the
effect of general principles of equity, regardless of whether enforceability is
considered in a proceeding in equity or at law).
<PAGE>
Regency Health Services, Inc.
Augsut 23, 1996
Page 2
We consent to the filing of this opinion letter with the Registration
Statement and the reference to our fimr under the caption "Legal Matters" in the
Registration Statement.
Subject to the foregoing sentence, this opinion letter is solely for
your benefit and may not be relied upon by, nor may copies be delivered to, any
other person without our prior written consent. In giving our consent, we do
not hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations thereunder. The opinions contained herein are given as of the
date hereof and we assume no obligation to advise you of any change that may
hereafter be brought to our attention.
Very truly yours,
/s/ SIDLEY & AUSTIN
-------------------------------
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 12.1
REGENCY HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED,
---------------------------------------------------------------------- ----------------------------------
1991 1992 1993 1994 1995 1995 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense $ 8,855 $ 5,575 $ 5,941 $ 7,844 $ 9,676 $ 16,576 $ 3,835 $ 8,346 $ 9,860
Amortization of
financing costs 221 134 264 572 636 648 293 468 474
Retal expense deemed
representative of the
interest component of
rental expense
* Assume 33% 3,518 4,569 4,515 5,185 5,589 9,667 2,786 3,897 4,075
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges $ 12,594 $ 10,278 $ 10,720 $ 13,601 $ 15,901 $ 26,891 $ 6,914 $ 12,711 $ 14,409
========== ========== ========== ========== ========== ========== ========== ========== ==========
Pre tax income $ 5,165 $ 15,250 $ 19,263 $ 1,193 $ 11,770 $ 16,231 $ 7,850 $ 10,000 $ 8,086
Fixed charges 12,594 10,278 10,720 13,601 15,901 26,891 6,914 12,711 14,409
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 17,759 $ 25,528 $ 29,983 $ 14,794 $ 27,671 $ 43,122 $ 14,764 $ 22,711 $ 22,615
========== ========== ========== ========== ========== ========== ========== ========== ==========
Earnings to fixed charges 1.41x 2.48x 2.80x 1.09x 1.74x 1.60x 2.14x 1.79x 1.56x
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registrations statement.
ARTHUR ANDERSEN LLP
Orange County, California
August 22, 1996
<PAGE>
EXHIBIT 23.2
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report on
Liberty Healthcare Limited Partnership dated November 16, 1995 except as to
the information presented in Note 9, for which the date is January 16, 1996,
incorporated by reference in Regency Health Services, Inc.'s Form S-4 dated
August 23, 1996 and to all references to our Firm included in this
registration statement.
GOODMAN & COMPANY, L.L.P.
Norfolk, Virginia
August 22, 1996
<PAGE>
Exh. 24.1
REGENCY HEALTH SERVICES, INC.
POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, in his
capacity as a director of Regency Health Services, Inc. (the "Company"), hereby
constitutes and appoints Richard K. Matros, Bruce D. Broussard and David A.
Grant, and each of them severally, as his true and lawful attorneys-in-fact and
agents (each with power of substitution) for such person, to execute the
Registration Statement on Form S-4 for the purpose of the registration by the
Company of $50,000,000 principal amount of 12-1/4% Subordinated Notes due 2003,
and any amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on
the dates indicated.
- ------------------------------ August ____, 1996
John W. Adams, Director
/s/ Gregory S. Anderson
- ------------------------------ August 21, 1996
Gregory S. Anderson, Director
- ------------------------------ August ____, 1996
Tony M. Astorga, Director
- ------------------------------ August ____, 1996
Robert G. Coo, Director
- ------------------------------ August ____, 1996
John F. Nickoll, Director
- ------------------------------ August ____, 1996
Arthur J. Pasmas, Director
<PAGE>
Exh. 24.2
REGENCY HEALTH SERVICES, INC.
POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, in his
capacity as a director of Regency Health Services, Inc. (the "Company"), hereby
constitutes and appoints Richard K. Matros, Bruce D. Broussard and David A.
Grant, and each of them severally, as his true and lawful attorneys-in-fact and
agents (each with power of substitution) for such person, to execute the
Registration Statement on Form S-4 for the purpose of the registration by the
Company of $50,000,000 principal amount of 12-1/4% Subordinated Notes due 2003,
and any amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on
the dates indicated.
- ------------------------------ August ____, 1996
John W. Adams, Director
- ------------------------------ August ____, 1996
Gregory S. Anderson, Director
/s/ Tony M. Astorga
- ------------------------------ August 20, 1996
Tony M. Astorga, Director
- ------------------------------ August ____, 1996
Robert G. Coo, Director
- ------------------------------ August ____, 1996
John F. Nickoll, Director
- ------------------------------ August ____, 1996
Arthur J. Pasmas, Director
<PAGE>
Exh. 24.3
REGENCY HEALTH SERVICES, INC.
POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, in his
capacity as a director of Regency Health Services, Inc. (the "Company"), hereby
constitutes and appoints Richard K. Matros, Bruce D. Broussard and David A.
Grant, and each of them severally, as his true and lawful attorneys-in-fact and
agents (each with power of substitution) for such person, to execute the
Registration Statement on Form S-4 for the purpose of the registration by the
Company of $50,000,000 principal amount of 12-1/4% Subordinated Notes due 2003,
and any amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on
the dates indicated.
- ------------------------------ August ____, 1996
John W. Adams, Director
- ------------------------------ August ____, 1996
Gregory S. Anderson, Director
- ------------------------------ August ____, 1996
Tony M. Astorga, Director
/s/ Robert G. Coo
- ------------------------------ August 21, 1996
Robert G. Coo, Director
- ------------------------------ August ____, 1996
John F. Nickoll, Director
- ------------------------------ August ____, 1996
Arthur J. Pasmas, Director
<PAGE>
Exh. 24. 4
REGENCY HEALTH SERVICES, INC.
POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, in his
capacity as a director of Regency Health Services, Inc. (the "Company"), hereby
constitutes and appoints Richard K. Matros, Bruce D. Broussard and David A.
Grant, and each of them severally, as his true and lawful attorneys-in-fact and
agents (each with power of substitution) for such person, to execute the
Registration Statement on Form S-4 for the purpose of the registration by the
Company of $50,000,000 principal amount of 12-1/4% Subordinated Notes due 2003,
and any amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on
the dates indicated.
- ------------------------------ August ____, 1996
John W. Adams, Director
- ------------------------------ August ____, 1996
Gregory S. Anderson, Director
- ------------------------------ August ____, 1996
Tony M. Astorga, Director
- ------------------------------ August ____, 1996
Robert G. Coo, Director
/s/ John F. Nickoll
- ------------------------------ August 20, 1996
John F. Nickoll, Director
- ------------------------------ August ____, 1996
Arthur J. Pasmas, Director
<PAGE>
Exh. 24.5
REGENCY HEALTH SERVICES, INC.
POWER OF ATTORNEY TO SIGN REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, in his
capacity as a director of Regency Health Services, Inc. (the "Company"), hereby
constitutes and appoints Richard K. Matros, Bruce D. Broussard and David A.
Grant, and each of them severally, as his true and lawful attorneys-in-fact and
agents (each with power of substitution) for such person, to execute the
Registration Statement on Form S-4 for the purpose of the registration by the
Company of $50,000,000 principal amount of 12-1/4% Subordinated Notes due 2003,
and any amendments thereto, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on
the dates indicated.
- ------------------------------ August ____, 1996
John W. Adams, Director
- ------------------------------ August ____, 1996
Gregory S. Anderson, Director
- ------------------------------ August ____, 1996
Tony M. Astorga, Director
- ------------------------------ August ____, 1996
Robert G. Coo, Director
- ------------------------------ August ____, 1996
John F. Nickoll, Director
/s/ Arthur J. Pasmas
- ------------------------------ August 20, 1996
Arthur J. Pasmas, Director
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
----------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)___
----------------------
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
(Exact name of trustee as specified in its charter)
95-4311476
(I.R.S. employer
identification No.)
515 South Flower Street, Suite 2700
Los Angeles, CA 90071
(Address of principal (Zip Code)
executive offices)
DWIGHT LIU
515 South Flower Street, Suite 2700
Los Angeles, California 90071
(213) 861-5000
(Name, address, including zip code and telephone number of agent for service)
----------------------
Regency Health Services, Inc.
(Exact name of obligor as specified in its charter)
DELAWARE 88-0343515
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<PAGE>
2742 Dow Avenue
Tustin, California 92680
(Address of principal chief executive offices)
(Exact name of guarantor as specified in its charter)
DELAWARE 33-0210226
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
12-1/4% Subordinated Securities Due 2003
(Title of indenture securities)
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
490 L'Enfant Plaza East, S.W.
Washington, D.C. 20219
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Federal Reserve Bank (12th District)
San Francisco, California
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
The obligor currently is not in default under any of its outstanding
securities for which U.S. Trust Company of California, N.A. is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15
of Form T-1 are not required under General Instruction B.
<PAGE>
16. LIST OF EXHIBITS
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
California, N.A. currently in effect; incorporated herein by reference to
Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 33-33031.
T-1.2 - Included in Exhibit T-1.1
T-1.3 - Included in Exhibit T-1.1
T-1.4 - A copy of the By-Laws of U.S. Trust Company of California, N.A.,
as amended to date; incorporated by reference to Exhibit T-1.4 filed with Form
T-1 Statement, Registration No. 33-54136.
T-1.6 - The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939; incorporated herein by reference to Exhibit T-1.6
filed with Form T-1 Statement, Registration No. 33-33031.
T-1.7 - A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority
NOTE
As of April 22, 1996 the Trustee had 20,000 shares of Capital Stock
outstanding, all of which are owned by U.S. Trust Corporation
The responses to Items 2, 5, 6, 7, 8, 9, 10, 11 and 14 set forth the information
requested as though U. S. Trust Company of California, N.A. and U.S. Trust
Corporation were the "trustee."
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
<PAGE>
----------------------
Pursuant to the requirements of the Trust Indenture of Act of 1939, the trustee,
U.S. Trust Company of California, N.A., a corporation organized and existing
under the laws of the State of California, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Los Angeles, and State of
California, on the 16th day of August 1996.
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
Trustee
By: /s/ Deborah Young
---------------------------------
Deborah Young
Authorized Signatory
<PAGE>
<TABLE>
<CAPTION>
U.S. TRUST COMPANY OF CALIFORNIA,N.A Call Date: 06/30/96 ST-BK: 06-0784 FPIEC 033
515 S. FLOWER STREET, SUITE 2700 Page RC-1
LOS ANGELES, CA 90071-2291 Vendor ID: D CERT: 33332
9
Transit number: 12204024 Transmitted to EDS as 0003514 on 07/24/96 at 11:00:27 CST
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise indicated,
report the amount outstanding as of the last business day of the quarter.
SCHEDULE RC- BALANCE SHEET
C200 --
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-1) RCOM
----
a. Non interest-bearing balances and currency and coin(1) . . . . . . . . . . . .0081 . . 4,590 1.a
b. Interest-bearing balances (2). . . . . . . . . . . . . . . . . . . . . . . . .0071 . . 9 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) . . . . . . . . . .1754 . . 0 2.a
b. Available-for-sale securities (from Schedule RC-8) . . . . . . . . . . . . . .1773 . . 18,849 2.b
3. Federal funds sold and securities purchased under agreements to resell;
a. Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0276 . . 0 3.a
b. Securities purchased under agreements to resell. . . . . . . . . . . . . . . .0277 . . 0 3.b
4. Loans and lease financing receivables.
a. Loans and leases, net of unearned income RCOM
(from Schedule RC-C . . . . . . . . . . . . . . . 2122 . . 122,574 . . . . . . 4.a
b. LESS: Allowance for Loan and Lease losses . . . . 3123 . . 1,825 . . . . . . 4.b
c. LESS: Allocated transfer risk reserve . . . . . . 3128 . . 0 . . . . . . 4.c
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b and 4.c). . . . . . . . . . . . . .2125 . . 120,749 4.d
5. Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3545 . . 0 5.
6. Premises and fixed assets (including capitalized leases) . . . . . . . . . . . . .2145 . . 7,499 6.
7. Other real estate owned (from Schedule RC-M) . . . . . . . . . . . . . . . . . . .2150 . . 0 7.
8. Investments in unconsolidated subsidiaries and associated companies (from
Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2130 . . 0 8.
9. Customers' liability to this bank on acceptances outstanding . . . . . . . . . . .2155 . . 0 9.
10. Intangible assets (from Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . .2143 . . 166 10.
11. Other assets (from Schedule RC-F). . . . . . . . . . . . . . . . . . . . . . . . .2160 . . 3,524 11.
12. Total assets (sum of Items 1 through 11) . . . . . . . . . . . . . . . . . . . . .2170 . . 155,386 12.
</TABLE>
- ------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
<TABLE>
<CAPTION>
U.S. TRUST COMPANY OF CALIFORNIA,N.A Call Date: 06/30/96 ST-BK: 06-0784 FPIEC 033
515 S. FLOWER STREET, SUITE 2700 Page RC-1
LOS ANGELES, CA 90071-2291 Vendor ID: D CERT: 33332
10
Transit number: 12204024 Transmitted to EDS as 0003514 on 07/24/96 at 11:00:27 CST
SCHEDULE RC- CONTINUED
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES
13. Deposita RCOM
a. In domestic offices (sum of totals of ----
columns A and C from Schedule RC-E). . . . . . . . . . . . . . . . . . . . . .2200 . . 116,996 13.a
RCOM
----
(1) Noninterest-bearing (1) . . . . . . . . . . . 6631 . . 24,244 . . . . . . 13.a.1
(2) Interest bearing. . . . . . . . . . . . . . . 6636 . . 92,752 . . . . . . 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries and IBFs . . . . . . . . . . . . . . . . . . .
(1) Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2) Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14. Federal funds purchased and securities sold under agreements to repurchase:
a. Federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . .0278 . . 12,840 14.a
b. Securities sold under agreements to repurchase . . . . . . . . . . . . . . . .0279 . . 0 14.b
15. a. Demand notes issued to the U.S. Treasury . . . . . . . . . . . . . . . . . . .2840 . . 0 15.a
b. Trading liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3348 . . 0 15.b
16. Other borrowed money:
a. With a remaining maturity of one year or less. . . . . . . . . . . . . . . . .2232 . . 0 16.a
b. With a remaining maturity of more than one year. . . . . . . . . . . . . . . .2333 . . 0 16.b
17. Mortgage indebtedness and obligations under capitalized leases . . . . . . . . . .2910 . . 0 17.
18. Bank's liability on acceptances executed and outstanding . . . . . . . . . . . . .2920 . . 0 18.
19. Subordinated notes and debentures. . . . . . . . . . . . . . . . . . . . . . . . .3200 . . 0 19.
20. Other liabilities (from Schedule RC0G) . . . . . . . . . . . . . . . . . . . . . .2930 . . 3,297 20.
21. Total liabilities (sum of Items 13 through 20) . . . . . . . . . . . . . . . . . .2948 . . 133,133 21.
22. Limited-life preferred stock and related surplus . . . . . . . . . . . . . . . . .3282 . . 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus. . . . . . . . . . . . . . . . . . .3838 . . 5,000 23.
24. Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3230 . . 2,000 24.
25. Surplus (excludes all surplus related to preferred stock). . . . . . . . . . . . .3839 . . 10,251 25.
26. a. Undivided profits and capital reserves . . . . . . . . . . . . . . . . . . . .3632 . . 5,094 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities . . . .8434 . . ( 92) 26.b
27. Cumulative foreign currency translation adjustments. . . . . . . . . . . . . . .
28. Total equity capital (sum of items 23 through 27). . . . . . . . . . . . . . . . .3210 . . 22,253 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of
items 21, 22, and 28). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3300 . . 155,386 29.
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the bank
by independent external auditors as of any date during 1995. . . . . . . . . . . .6724 . . N/A M.1
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank.
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority).
4 = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
- -------------------------
(1) Includes total demand deposits and noninterest-bearing savings deposits.
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-11144
REGENCY HEALTH SERVICES, INC.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
DELAWARE 33-0210226
Regency Health Services, Inc.
2742 Dow Avenue
Tustin, California 92780
714-544-4443
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
----- -----------
Common Stock 16,173,695
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,900 $ 104,238
Restricted cash 4,400 -
Accounts receivable, net of allowances of $4,150 at
June 30, 1996 and $3,757 at December 31, 1995 79,737 54,050
Notes and other receivables 1,369 2,182
Deferred income taxes 5,447 5,447
Assets held for sale 7,640 8,970
Other current assets 8,046 6,396
--------- ---------
Total current assets 173,539 181,283
--------- ---------
PROPERTY AND EQUIPMENT:
Land 21,281 21,249
Buildings and improvements 101,432 96,396
Leasehold interest - other 17,554 17,556
Leasehold interest - related party 2,075 2,075
Equipment 29,384 24,610
--------- ---------
171,726 161,886
Less - accumulated depreciation and amortization (39,131) (34,679)
--------- ---------
Total property and equipment 132,595 127,207
--------- ---------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $949 at
June 30, 1996 and $951 at December 31, 1995 4,651 5,163
Goodwill, net of accumulated amortization of $2,023 at
June 30, 1996 and $563 at December 31, 1995 57,951 13,621
Other assets, net of accumulated amortization of $3,323 at
June 30, 1996 and $2,206 at December 31, 1995 31,201 15,697
--------- ---------
Total other assets 93,803 34,481
--------- ---------
$399,937 $ 342,971
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 51,438 $4,371
Accounts payable 24,748 22,285
Accrued expenses 4,828 5,946
Accrued compensation 21,023 18,051
Accrued workers' compensation 4,892 5,377
Deferred revenue 1,428 1,743
Accrued interest 4,197 4,231
--------- ---------
Total current liabilities 112,554 62,004
LONG-TERM DEBT, NET OF CURRENT PORTION 183,607 179,615
OTHER LIABILITIES AND NONCURRENT RESERVES 11,878 13,017
DEFERRED INCOME TAXES 10,414 7,946
--------- ---------
Total liabilities 318,453 262,582
--------- ---------
OMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000
shares; 16,174 and 16,670 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively 167 167
Additional paid-in capital 51,972 56,679
Retained earnings 29,345 23,543
--------- ---------
Total stockholders' equity 81,484 80,389
--------- ---------
$ 399,937 $ 342,971
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET OPERATING REVENUE $137,632 $99,766 $267,595 $197,314
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 112,567 80,881 218,693 159,853
Corporate general and administrative 5,617 4,450 11,680 9,698
Rent expense 6,178 4,205 11,690 8,358
Depreciation and amortization 3,836 2,336 7,186 4,622
Interest expense 4,194 1,925 8,346 3,835
Class action suit settlement - 3,098 - 3,098
--------- --------- --------- ---------
Total costs and expenses 132,392 96,895 257,595 189,464
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,240 2,871 10,000 7,850
PROVISION FOR INCOME TAXES 2,175 1,091 4,198 2,983
--------- --------- --------- ---------
NET INCOME $ 3,065 $ 1,780 $ 5,802 $ 4,867
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME PER COMMON SHARE:
Primary $ 0.19 $ 0.11 $ 0.35 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted $ 0.18 $ 0.11 $ 0.33 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OF COMMON STOCK
AND EQUIVALENTS:
Primary 16,382 16,600 16,617 16,594
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted 20,341 20,567 20,573 20,548
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
----- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,802 $ 4,867
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 7,186 4,622
Deferred income taxes and charge in lieu of taxes 2,468 1,252
Other, net 296 2
Change in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable (24,158) (1,359)
Other current assets 335 234
Current and other liabilities 2,033 3,418
--------- ---------
Net cash provided by (used in) operating activities (6,038) 13,036
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from mortgage notes receivable 109 87
Acquisitions (48,183) --
Purchases of property and equipment (5,600) (7,829)
Changes in other assets, net (5,823) 1,242
--------- ---------
Net cash used in investing activities (59,497) (6,500)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (4,898) (2,727)
Proceeds from exercise of warrants and options 232 99
Proceeds from exercise of stock appreciation rights -- 615
Purchase of treasury stock (5,082) --
Workers' compensation trust funding (10,637) --
Proceeds from issuance of long-term debt 48,582 1,066
--------- ---------
Net cash provided by (used in) financing activities 28,197 (947)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37,338) 5,589
CASH AND CASH EQUIVALENTS, beginning of period 104,238 25,677
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 66,900 $ 31,266
--------- ---------
--------- ---------
</TABLE>
<PAGE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1995, $20,000 of the Company's
Convertible Subordinated Debentures were converted into 1,616 shares of
common stock.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have not been presented. The accompanying
unaudited financial statements and related notes should be read in conjunction
with the consolidated financial statements and related notes included in Regency
Health Services, Inc.'s ("Regency" or the "Company") 1995 Annual Report on Form
10-K.
In the opinion of the management of Regency, all material adjustments
necessary to present fairly the Company's financial condition, results of
operations, and changes in financial position have been made. All material
intercompany balances, profits, and transactions have been eliminated. The
consolidated results of operations presented are not necessarily indicative of
the consolidated results for a full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
2. ACQUISITIONS
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, comprised of $3.2 million cash and a
$2.6 million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in
18 health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy with a $763,000 note payable and an enteral feeding
business for $1.5 million cash from businesses affiliated with Liberty. In
addition, the Company paid $400,000 cash for the inventory of Liberty. A
portion of the purchase was funded with notes payable, which may be reduced as a
result of certain seller liabilities and audit adjustments. Escrow accounts
established at the time of purchase were funded with $2.96 million for payment
on the notes payable and are included in other assets on the accompanying
consolidated balance sheet as of June 30, 1996.
On April 1, 1996, the Company completed the acquisition of the assets
of Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64
skilled nursing beds and 22 assisted living beds, located in Lexington, North
Carolina. The purchase price was $2.875 million, consisting of $2.675 million
in cash and a $200,000 note payable. Payment of the note is dependent upon
Buena Vista attaining certain financial performance targets.
These transactions were accounted for using the purchase method of
accounting under generally accepted accounting principles. Revenues and
expenses are included in the accompanying financial statements subsequent to the
purchase date. The purchase price allocation related to these transactions has
not yet been finalized.
<PAGE>
The following unaudited pro forma condensed consolidated statements of
earnings present the summarized consolidated results of operations of the
Company after giving effect to the acquisitions of Liberty and Liberty-
affiliated businesses for the six months ended June 30, 1996 and 1995, as if
such acquisitions had been consummated on January 1, 1995 (in thousands, except
per share data):
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
----------- -----------
(Unaudited)
Net operating revenue $ 274,401 $ 237,113
Total costs and expenses 263,820 228,813
---------- ----------
Income before provision for income taxes 10,581 8,300
Provision for income taxes 4,442 3,163
---------- ----------
Net income $ 6,139 $ 5,137
---------- ----------
---------- ----------
Income per common share -
Primary $ 0.37 $ 0.31
---------- ----------
---------- ----------
Fully diluted $ 0.35 $ 0.30
---------- ----------
---------- ----------
The pro forma results are presented for informational purposes only and
are not necessarily indicative of what results of operations actually would have
been had such acquisitions been consummated at the beginning of such period or
of future operations or results. The effect of the other acquisitions is
immaterial.
3. DISPOSITIONS
On March 1, 1996, the Company disposed of a 98-bed facility in Lynwood,
California resulting in a $182,000 charge against the reserve established in the
fourth quarter 1995.
4. WORKERS' COMPENSATION CLAIMS TRUST
In 1995, the Company established a revocable workers' compensation
claims trust ("Trust") to pre-fund its workers' compensation obligations. The
Trust was funded in March 1996 with approximately $10.6 million from available
cash. Of the remaining $9.2 million in the Trust at June 30, 1996, $4.4 million
was classified as current restricted cash and $4.8 million was classified as
other long-term assets.
5. ISSUANCE OF SUBORDINATED NOTES
On June 28, 1996, the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Subordinated Notes will mature on July 15,
2003, unless previously redeemed. Net proceeds received by the Company
totaled approximately $48.4 million and funded the redemption of the
Company's outstanding 6 1/2% Convertible Subordinated Debentures due 2003
(the "Convertible Subordinated Debentures") on July 29, 1996 (see Note 7 -
Subsequent Event). The Subordinated Notes contain certain covenants similar
to the 9-7/8% Senior Subordinated Notes, including limitations on the ability
of the
<PAGE>
Company to, among other things, (a) incur additional indebtedness and issue
redeemable preferred stock, (b) sell equity interests in subsidiaries, (c) make
certain restricted payments (as defined), (d) create liens, and (e) engage in
mergers, consolidations or transfers of substantially all of the assets of the
Company to another party.
6. NET INCOME PER SHARE
For the three and six months ended June 30, 1996 and 1995, primary
income per share was calculated based on the weighted average number of common
and common equivalent shares outstanding during the periods. For the three and
six months ended June 30, 1996 and 1995, fully diluted income per share was
computed as described above and includes the issuance of common shares upon the
assumed conversion of the Convertible Subordinated Debentures. Additionally,
interest and amortization of underwriting costs related to such debentures were
added, net of tax, to income for the purpose of calculating fully diluted income
per share. Such amounts aggregated $496,000 and $509,000 for the three months
ended June 30, 1996 and 1995, respectively, and $984,000 and $1,019,000 for the
six months ended June 30, 1996 and 1995, respectively.
7. SUBSEQUENT EVENT
On July 29, 1996, the Company completed the redemption of all $48.9
million of its outstanding Convertible Subordinated Debentures for cash at such
amount. The redemption was financed through the issuance of the Subordinated
Notes and available cash. The redemption reduces fully diluted shares by 3.9
million shares. The full amount of outstanding Convertible Subordinated
Debentures is recorded in the current portion of long-term debt at June 30,
1996.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following table sets forth certain operating data for the Company
on the dates indicated:
JUNE 30,
---------------------
1996 1995
------ ------
In-patient operations
Facilities. . . . . . . . . . . . . . . . . 112 93
Licensed beds . . . . . . . . . . . . . . . 11,541 9,134
Subacute beds . . . . . . . . . . . . . . . 1,108 1,028
Subacute units. . . . . . . . . . . . . . . 46 43
Contract rehabilitation therapy operations(1)
Non-affiliated facilities served . . . . . 86 --
Regency operated facilities served . . . . 49 --
------ -----
Total . . . . . . . . . . . . . . 135 --
------ -----
------ -----
Pharmacy operations
Non-affiliated facilities served . . . . . 76 5
Regency operated facilities served. . . . . 60 34
------ -----
Total . . . . . . . . . . . . . . 136 39
------ -----
------ -----
__________________
(1) The Company did not provide contract rehabilitation therapy services
until the acquisition of SCRS & Communicology, Inc. ("SCRS") in July 1995.
IN-PATIENT OPERATIONS
The Company's in-patient operations derive its net operating revenue
from the performance of routine and ancillary services at the Company's
facilities. Revenue from routine services is comprised of charges for room and
board and basic nursing services for the care of patients, including those in
the Company's subacute specialty units. Revenue from ancillary services is
comprised of charges for rehabilitative services, subacute specialty services,
and pharmaceutical products and services provided to patients at the Company's
facilities. In-patient operations derive most of its ancillary services revenue
from Medicare- and HMO-eligible patients. The Company has classified revenue
from in-patient operations as either basic nursing care revenue or subacute
revenue. Basic nursing care revenue includes charges for room and board for
non-Medicare and non-HMO patients. Subacute revenue includes room and board and
basic nursing services for Medicare and HMO patients and revenues from all
ancillary services provided to patients at the Company's facilities.
The Company's growth strategy includes the selective acquisition of
both new facilities as well as other service providers. The Company incurs
certain costs and experiences operating inefficiencies in connection with the
acquisition of a new facility following such acquisition, relating to the
integration of such facility's financial and administrative systems, physical
plant and other aspects of its operations into those of the Company. In
addition, the introduction of a substantial portion of the Company's contract
rehabilitation therapy, pharmacy and other ancillary services to a new facility
may take as long as 12 months to fully implement. There can be no assurance
that each of the service providers the Company may acquire will be profitable,
or that the acquisition of new facilities that result in significant integration
costs and inefficiencies will not adversely affect the Company's profitability.
<PAGE>
During the fourth quarter of 1995 the Company exchanged leasehold
interests in three healthcare facilities with 360 beds in New Mexico for
leasehold interests in four healthcare facilities with 461 beds in Ohio
previously operated by another company. In October 1995, the Company also
opened a newly constructed facility and disposed of one additional facility.
In December 31, 1995, the Company determined to dispose of 13
facilities located in California as part of its strategic plan of diversifying
from the California Medicaid system ("Medi-Cal"). The results of operations of
these facilities will continue to be reflected in the Company's financial
statements until the disposition is completed. In March 1996, the Company
disposed of one of the thirteen facilities with 98 beds.
Effective February 1, 1996, the Company acquired 18 healthcare
facilities with 2,375 beds in Tennessee and North Carolina (see Note 2 to the
Consolidated Financial Statements).
In addition, effective April 1, 1996, the Company acquired 1 healthcare
facility in North Carolina with 86 beds.
ANCILLARY BUSINESSES OPERATIONS
In July 1995, the Company acquired SCRS which provides rehabilitation
services to Company-operated and non-affiliated healthcare facilities in 14
states in the West, Midwest, and Southeast. In the second quarter 1996, 65% of
SCRS revenues were derived from providing services to non-affiliated healthcare
providers.
The Company's pharmacy operations provide prescription services and
basic pharmaceutical dispensing programs to Company and third party healthcare
facilities. During the first six months of 1996 and 1995, 65% and 55%,
respectively, of revenues from pharmacy operations were derived from providing
services to non-affiliated healthcare providers and patients at Regency
facilities billed directly to third-party payors. In January and February of
1996, the Company acquired three additional pharmacy operations (see Note 2 to
the Consolidated Financial Statements).
The Company's 29 home healthcare locations provide skilled nursing,
rehabilitation and other services in selected areas in California and Ohio.
The acquisitions occurring in the first and second quarters 1996 are
collectively referred to as the "1996 Acquisitions."
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amounts of certain elements of net
operating revenue and the percentage of total net operating revenue for the
periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Basic nursing care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,660 51% $58,443 59%
Subacute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,915 32 31,425 31
--------- ----- --------- ----
Total in-patient operations. . . . . . . . . . . . . . . . . . . . . . . . 113,575 83 89,868 90
Home healthcare operations . . . . . . . . . . . . . . . . . . . . . . . . . . 8,856 6 7,529 7
Contract rehabilitation therapy operations to
non-affiliates (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,292 7 -- --
Pharmacy operations to non-affiliates (2). . . . . . . . . . . . . . . . . . . 5,379 4 1,755 2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 -- 614 1
--------- ----- --------- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,632 100% $ 99,766 100%
--------- ----- --------- ----
--------- ----- --------- ----
</TABLE>
(1) Net of intercompany billings of $4,962,000 for the three months ended June
30, 1996.
(2) Net of intercompany billings of $2,880,000 and $1,426,000 for the three
months ended June 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Basic nursing care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,257 51% $115,719 58%
Subacute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,410 32 62,751 32
-------- ---- --------- ----
Total in-patient operations . . . . . . . . . . . . . . . . . . . . . . . 221,667 83 178,470 90
Home healthcare operations . . . . . . . . . . . . . . . . . . . . . . . . . . 17,548 6 14,443 7
Contract rehabilitation therapy operations to
non-affiliates (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,755 6 -- --
Pharmacy operations to non-affiliates (2). . . . . . . . . . . . . . . . . . . 10,105 4 3,287 2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,520 1 1,114 1
-------- ---- --------- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $267,595 100% $197,314 100%
-------- ---- --------- ----
-------- ---- --------- ----
</TABLE>
(1) Net of intercompany billings of $7,890,000 for the six months ended June
30, 1996.
(2) Net of intercompany billings of $5,352,000 and $2,678,000 for the six
months ended June 30, 1996 and 1995, respectively.
<PAGE>
The following table sets forth certain operating data for the Company for
the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient Days by Payor:
Medicare 79,733 62,382 156,060 125,051
Private/Other 191,264 171,686 373,923 342,926
Managed Care 27,593 23,221 59,643 47,657
Medicaid 635,352 474,161 1,202,522 940,689
-------- -------- ---------- ----------
Total 933,942 731,450 1,792,148 1,456,323
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Home Health Visits 70,307 66,017 145,284 128,031
Home Health Hours 109,171 101,336 215,049 168,741
Revenue Mix:
Medicare 29.9 % 33.4 % 30.4 % 32.9 %
Private/Other 23.9 % 20.3 % 23.9 % 20.4 %
Managed Care 4.9 % 5.2 % 5.5 % 5.6 %
Medicaid 41.3 % 41.1 % 40.2 % 41.1 %
</TABLE>
The following table presents the percentage of net operating revenue
represented by certain items reflected in the Company's Consolidated Statements
of Operations for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET OPERATING REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
--------- -------- -------- --------
COSTS AND EXPENSES:
Operating expenses 81.8 81.1 81.7 81.0
Corporate general and administrative 4.1 4.5 4.4 4.9
Rent expense 4.5 4.2 4.4 4.2
Depreciation and amortization 2.8 2.3 2.7 2.3
Interest expense 3.0 1.9 3.1 2.0
Class action lawsuit settlement 0.0 3.1 0.0 1.6
--------- -------- -------- --------
Total costs and expenses 96.2 97.1 96.3 96.0
--------- -------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3.8 % 2.9 % 3.7 % 4.0 %
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
<PAGE>
QUARTER COMPARISON 1996 TO 1995
NET OPERATING REVENUE
The Company's net operating revenue for the three months ended June 30,
1996 ("Second Quarter 1996") was $137.6 million compared to $99.8 million for
the three months ended June 30, 1995 ("Second Quarter 1995"), an increase of
$37.8 million or 38.0%.
Net operating revenue from in-patient operations increased $23.7 million,
or 26.4%, to $113.6 million from $89.9 million primarily due to the 1996
acquisition of 18 in-patient facilities and, on a same store basis, a shift in
payor mix from Medicaid (42.8% to 41.2%) and private (14.7% to 12.9%) to
Medicare (30.3% to 31.4%) and managed care (5.9% to 6.9%), partially offset by a
slight decrease in total patient days. The 18 in-patient facilities acquired by
the Company in February 1996 contributed $20.9 million of net operating revenue
during Second Quarter 1996. On a same store basis, the average increase in
reimbursement rates per patient day was 5.7% from Second Quarter 1995 and was
primarily due to providing services to higher acuity patients. The Company
experienced a 0.4% net decrease in total patient days in Second Quarter 1996
from Second Quarter 1995 on a same store basis, consisting of a decrease of
3,402 and 7,960 from Medicaid and private and other sources, respectively, and
an increase of 3,830 and 4,447 from Medicare and managed care, respectively.
Net operating revenue from home healthcare operations grew $1.3 million to
$8.9 million, or 17.6% in Second Quarter 1996 over Second Quarter 1995,
primarily reflecting an increase in patient visits to 70,307 in Second Quarter
1996 from 66,017 in Second Quarter 1995 and an increase in treatment hours to
109,171 in Second Quarter 1996 from 101,336 in Second Quarter 1995. Net
operating revenue from pharmacy operations to non-affiliates increased $3.6
million or 206.5% in Second Quarter 1996 over Second Quarter 1995, primarily due
to the acquisition of Assist-A-Care in January 1996 and Executive Pharmacy in
February 1996 (collectively, the "Pharmacy Acquisitions"). Net operating
revenue from the Pharmacy Acquisitions for Second Quarter 1996 was $2.9
million. Net operating revenue from contract rehabilitation therapy
operations to non-affiliates was $9.3 million in Second Quarter 1996 and was
a result of the purchase of SCRS in July 1995. The Company had no net
operating revenue from contract rehabilitation therapy operations in the
Second Quarter 1995.
COSTS AND EXPENSES
Total costs and expenses for Second Quarter 1996 increased $35.5 million,
or 37%, to $132.4 million (96.2% of net operating revenue) from $96.9 million
(97.1% of net operating revenue) for Second Quarter 1995.
Operating expenses as a percentage of net operating revenue increased to
81.8% for Second Quarter 1996, from 81.1% for Second Quarter 1995. The increase
resulted from the incurrence of increased labor costs in the in-patient
operations while reimbursement rates per patient day for room and board charges
remained relatively flat for the Medi-Cal and Medicare systems.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. This expense decreased
as a percentage of net operating revenue to 4.1% for Second Quarter 1996 from
4.5% in Second Quarter 1995. The decrease as a percentage of revenues is
attributed to achieving economies of scale through acquisition and same store
growth.
Rent expense as a percentage of net operating revenue increased to 4.5% in
Second Quarter 1996 from 4.2% in Second Quarter 1995 primarily due to the 1996
Acquisitions.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.8% in Second Quarter 1996 from 2.3% in Second Quarter
1995 primarily due to goodwill amortization related to the purchase of SCRS in
July 1995 and the 1996 Acquisitions.
<PAGE>
Interest expense as a percentage of net operating revenue increased to 3.0%
in Second Quarter 1996 from 1.9% in Second Quarter 1995 primarily due to the
Company issuing the 9-7/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") in October 1995 partially offset by the repayment of the 8.1% Senior
Secured Notes in that month.
Pursuant to the settlement of a class action lawsuit, the Company recorded
a charge of $3.1 million in Second Quarter 1995. The amount represents the
Company's portion of the settlement, together with related legal fees and other
costs.
SIX MONTHS COMPARISON 1996 TO 1995
NET OPERATING REVENUE
The Company's net operating revenue for the six months ended June 30, 1996
("Six Months 1996") was $267.6 million compared to $197.3 million for the six
months ended June 30, 1995 ("Six Months 1995"), an increase of $70.3 million or
35.6%.
Net operating revenue from in-patient operations increased $43.2 million,
or 24.2%, to $221.7 million from $178.5 million due to the 1996 acquisition of
18 in-patient facilities and, on a same store basis, a shift in payor mix from
Medicaid (42.8% to 40.4%) and private (14.9% to 13.0%) to Medicare (29.6% to
31.6%) and managed care (6.2% to 7.5%). The 18 in-patient facilities acquired
by the Company in February 1996 contributed $33.5 million of net operating
revenue during Six Months 1996. On a same store basis, the average increase in
reimbursement rates per patient day was 7.2% and was primarily due to providing
services to higher acuity patients.
Net operating revenue from home healthcare operations grew $3.1 million to
$17.5 million, or 21.5%, in Six Months 1996 over Six Months 1995, primarily
reflecting an increase in patient visits to 145,284 in Six Months 1996 from
128,031 in Six Months 1995 and an increase in treatment hours to 215,049 in Six
Months 1996 from 168,741 in Six Months 1995. Net operating revenue from
pharmacy operations to non-affiliates increased $6.8 million or 207.4% in Six
Months 1996 over Six Months 1995, primarily due to the acquisition of
Assist-A-Care in January 1996 and Executive Pharmacy in February 1996
(collectively, the "Pharmacy Acquisitions"). Net operating revenue from the
Pharmacy Acquisitions for Six Months 1996 was $5.6 million. Net operating
revenue from contract rehabilitation therapy operations to non-affiliates was
$16.8 million in Six Months 1996 and was a result of the purchase of SCRS in
July 1995. The Company had no net operating revenue from contract
rehabilitation therapy operations in Six Months 1995.
COSTS AND EXPENSES
Total costs and expenses for Six Months 1996 increased $68.1 million, or
36%, to $257.6 million (96.3% of net operating revenue) from $189.5 million
(96.0% of net operating revenue) for Six Months 1995.
Operating expenses as a percentage of net operating revenue increased to
81.7% for Six Months 1996, from 81.0% for Six Months 1995. The increase
resulted from the incurrence of increased labor costs in the in-patient
operations while reimbursement rates per patient day for room and board charges
remained relatively flat for the Medi-Cal and Medicare systems. In addition,
the home health agency participating in the Medicare Prospective Pay System
pilot project beginning in 1996 did not adequately reduce costs at the outset of
this program.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. This expense decreased
as a percentage of net operating revenue to 4.4% for Six Months 1996 from 4.9%
in Six Months 1995. The decrease as a percentage of revenues is attributed to
achieving economies of scale through acquisition and same store growth.
Rent expense as a percentage of net operating revenue increased to 4.4% in
Six Months 1996 from 4.2% in Six Months 1995 primarily due to the 1996
Acquisitions.
<PAGE>
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.7% in Six Months 1996 from 2.3% in Six Months 1995
primarily due to goodwill amortization related to the purchase of SCRS in July
1995 and the 1996 Acquisitions.
Interest expense as a percentage of net operating revenue increased to 3.1%
in Six Months 1996 from 2.0% in Six Months 1995 primarily due to the Company
issuing the Senior Subordinated Notes in October 1995 partially offset by the
repayment of the Senior Secured Notes in that month.
Pursuant to the settlement of a class action lawsuit, the Company recorded
a charge of $3.1 million in Six Months 1995. The amount represents the
Company's portion of the settlement, together with related legal fees and other
costs.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1996 decreased $58.3 million to $61.0 million
(including cash and cash equivalents of $66.9 million) from $119.3 million
(including cash and cash equivalents of $104.2 million) at December 31, 1995.
The decrease was primarily attributable to funding the purchase of the 1996
Acquisitions. During the Six Months 1996, the Company's receivables increased
approximately $24 million primarily related to the 1996 Acquisitions. A portion
of the increase in receivables is due to delays in securing state and federal
provider numbers for certain of the 18 healthcare facilities acquired in the
1996 Acquisitions. Management anticipates the collections related to the delay
will occur in the third and fourth quarter 1996. In addition, the Company
established a revocable workers' compensation claims payment trust to pre-fund
its workers' compensation obligations which was funded in March 1996 with
approximately $10.6 million from available cash. (See Note 4 to the Consolidated
Financial Statements).
The Company's major requirements for liquidity relate to funding working
capital, capital improvements and debt service obligations. The Company must
also provide funding to cover potential delays, temporary cessations or
interruptions in payments by third-party payors due to political or budgetary
constraints. Management believes that these liquidity needs can be met from
available cash, internally generated funds and existing borrowing capacity under
a revolving credit loan agreement ("Credit Agreement") with NationsBank of
Texas, N.A. as agent for a group of banks (discussed below).
The Company's healthcare facilities require capital improvements for
renovations and improvements in physical appearance. Future capital
improvements may be required as a result of routine regulatory inspections. In
addition, the Company is and will continue to invest in improving its
information systems. The Company's capital expenditures for the six months ended
June 30, 1996 and 1995 were approximately $5.6 million and $7.8 million,
respectively. These capital expenditures have been financed through a
combination of internally generated funds and debt. The Company expects to
spend approximately an aggregate of $13.0 million for capital expenditures
during 1996 to be financed through leases, borrowings under the Credit Agreement
and funds generated from operations.
The Company has financed its acquisitions from a combination of borrowings
and funds generated by operations. The Company expects to finance future
acquisitions from a combination of existing cash, the Credit Agreement, and
alternative sources such as real estate investment trusts. Depending on the
numbers, size and timing of any such transactions, the Company may in the future
require additional financing in order to continue to make acquisitions.
Periodically, the Company has funded temporary delays in reimbursement from
third-party payors. For example, in July 1995, the State of California, due to
budgetary constraints, delayed payment of significant amounts owed to healthcare
providers under the Medi-Cal program. In 1992, the State of California
reimbursed providers with registered warrants, which some banks temporarily
refused to redeem at face value. The Company has been able to mitigate the
effects of such payment delays by monitoring the related activities of the
California legislature, expediting billings through its direct access electronic
billing arrangement, and obtaining the agreement of creditors to extend the due
date for payables. The Company has not recently experienced any
<PAGE>
material adverse effects on its liquidity as a result of such delays. There can
be no assurance, however, that the Company will be able to mitigate the effects
of any future funding delays by the State of California or other third-party
payors.
In April and May 1996, the Company purchased 555,000 shares of Company
common stock at an average price of $9.16 per share. The transaction, accounted
for using the cost method, reduced stockholders' equity by $5.1 million.
On June 28, 1996 the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Notes will mature on July 15, 2003, unless
previously redeemed. Net proceeds received by the Company totaled approximately
$48.4 million and funded the redemption of the Company's outstanding 6 1/2%
Convertible Subordinated Debentures due 2003 on July 29, 1996.
On December 28, 1995 the Company entered into the Credit Agreement, which
provides up to $50,000,000 in a revolving line of credit and letters of credit.
As of July 31, 1996, no borrowings have been drawn on the Credit Agreement and
approximately $9,000,000 of standby letters of credit have been issued in
connection with the Company's self-insured workers' compensation programs.
SEASONALITY
The Company's income from operations before fixed charges generally
fluctuates from quarter to quarter. The fluctuation is related to several
factors: the timing of Medicaid rate increases, seasonal census cycles, and the
number of calendar days in a given quarter. As a result, the Company's income
from operations before fixed charges tends to be higher in its third and fourth
quarters when compared to the first and second quarters.
IMPACT OF INFLATION
The healthcare industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation. Increases in wages and other labor costs
as a result of inflation, or increases in federal or state minimum wages without
a corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
REIMBURSEMENT
The majority of the Company's net operating revenue is derived from
services provided under the Medicare and Medicaid programs. Numerous proposals
relating to healthcare reform have been or may be introduced in the United
States Congress, state legislatures or by governmental agencies who regulate the
Medicare and Medicaid programs. It is uncertain what reform will ultimately be
enacted by the federal government, any state government or governmental agencies
and therefore, the Company cannot predict at this time the impact on the Company
of any proposed reforms.
As discussed above, the Company provides contract rehabilitation and
pharmacy services to both Regency operated and non-affiliated facilities. Under
current Medicare regulations, reimbursement for these services provided to
Medicare eligible patients in Regency facilities is based upon the related
entity's cost to provide the services unless a significant portion of the
related entity's revenues is derived from non-affiliated facilities. If a
significant portion of the related entity's revenues is derived from
non-affiliated facilities, Medicare will reimburse the facility's cost, which
includes a profit paid to the related entity. During 1995 and prior years,
the Company was reimbursed by Medicare based on its pharmacy operation costs
on billings to Regency facilities, as it did not meet the significant portion
criteria. After the acquisition of Assist-A-Care Pharmacy and Executive
Pharmacy in 1996, the Company believes it meets the "significant portion"
criteria and began recording a profit on billings for pharmacy services
provided to Medicare eligible patients in Regency facilities. The Company
believes it meets the "significant portion" criteria for its contract
rehabilitation therapy operations provided by SCRS, and therefore has
recorded a profit on billings to Regency facilities since the acquisition of
SCRS.
<PAGE>
Medicare regulations do not define a "significant portion," therefore, the
Company's and Medicare's interpretations could differ, which could result in
retroactive adjustments related to the profit on billings to Regency facilities
for pharmacy and contract rehabilitation services.
In the recently enacted federal budget deficit reduction bill, various
reimbursement rules and regulations were adopted by the federal government that
pertain to the Company. The recently effective changes to regulations
promulgated under OBRA, some of which expand the remedies available to enforce
regulations mandating minimum healthcare standards, may have an adverse effect
on the Company's operations. The Company is unable to predict the particular
effect on the Company until the manner in which these regulations is implemented
becomes known.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.11 Indenture, dated as of June 28, 1996, between Regency Health
Services, Inc. as Issuer, the Guarantors named therein and U.S. Trust Company of
California, N.A., as Trustee.
4.12 Form 12-1/4% Subordinated Note due 2003 of Regency Health
Services, Inc. (included in Exhibit 4.11).
4.13 Registration Rights Agreement, dated as of June 28, 1996, by
and among Regency Health Services, Inc., as Issuer, the Guarantors named therein
and Bear, Stearns & Co., Inc. and NationsBanc Capital Markets, Inc., as Initial
Purchasers.
(b) Reports on Form 8-k
Current Report on Form 8-K/A, dated April 12, 1996, reporting an event
dated February 1, 1996 under Items 2 and 7 of Form 8-K, and filing the following
audited financial statements of Liberty Healthcare Limited Partnership: (i)
balance sheets as of September 30, 1994 and 1995, (ii) statements of partners'
capital for the years ended September 30, 1994 and 1995, (iii) statements of
income for the years ended September 30, 1994 and 1995, and (iv) statements of
cash flows for the years ended September 30, 1994 and 1995.
<PAGE>
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.
REGENCY HEALTH SERVICES, INC.
By: /s/ BRUCE D BROUSSARD
_____________________________________________________
Bruce D. Broussard
Executive Vice President and Chief Financial Officer
Date: August 14, 1996
<PAGE>
LETTER OF TRANSMITTAL
FOR
121/4% SUBORDINATED NOTES DUE 2003
OF
REGENCY HEALTH SERVICES, INC.
PURSUANT TO THE PROSPECTUS DATED ____________, 1996
BY
REGENCY HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON __________________, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
To: EXCHANGE AGENT
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<S><C>
BY MAIL: BY HAND DELIVERY:
U.S. Trust Company of California, N.A. U.S. Trust Company of California, N.A.
c/o United States Trust Company of New York 111 Broadway, Lower Level
P.O. Box 841, Peter Cooper Station New York, New York 10036-1906
New York, New York 10276-0841 Attn: Corporate Trust and Agency Services
Attn: Corporate Trust and Agency Services
BY OVERNIGHT DELIVERY: FACSIMILE TRANSMISSION:
U.S. Trust Company of California, N.A. (212) 420-6504
770 Broadway, 13th Floor TO CONFIRM RECEIPT:
New York, NY 10003 (800) 225-2398
Attn: Corporate Trust and Agency Services
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN
SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus, dated
_____________, 1996 (the "Prospectus"), of Regency Health Services, Inc., a
Delaware corporation (the "Company"), and this Letter of Transmittal, including
the instructions hereto, that together with the Prospectus constitute the
Company's offer (the "Exchange Offer") to exchange its 121/4% Subordinated Notes
due 2003 that have been registered under the Securities Act of 1933, as amended,
(the "Securities Act") (the "Exchange Notes") for any and all of the outstanding
121/4% Subordinated Notes due 2003 of the Company (the "Outstanding Notes"), at
the rate of $1,000 principal amount of the Exchange Notes for each $1,000
principal amount of the Outstanding Notes. Capitalized terms used but not
defined herein have the meanings given to them in the Prospectus.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
This Letter of Transmittal is to be used whether the Outstanding Notes are
to be physically delivered herewith, or whether guaranteed delivery procedures
or book-entry delivery procedures are being used, pursuant to the procedures set
forth under "The Exchange Offer--Procedures for Tendering" in the Prospectus.
If a Registered Holder desires to tender Outstanding Notes and such Outstanding
Notes are not immediately available or time will not permit all documents
required by the Exchange Offer to reach the Exchange Agent (or such Registered
Holder is unable to complete the procedure for book-entry transfer on a timely
basis) prior to the Expiration Date, a tender may be effected in accordance with
the guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer--Procedures for Tendering."
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated below. Subject to, and effective upon, the
acceptance for exchange of the Outstanding Notes tendered hereby, the
undersigned hereby irrevocably sells, assigns and transfers to or upon the order
of the Company all right, title and interest in and to such Outstanding Notes.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that said Exchange Agent also acts as the agent of the Company) with
respect to such Outstanding Notes, with full power of substitution (such power
of attorney being deemed to be an irrevocable power coupled with an interest),
to take such further action as may be required in connection with the delivery
and tender of the Old Notes.
The undersigned understands that tenders of the Outstanding Notes pursuant
to any one of the procedures described under "The Exchange Offer -- Procedures
for Tendering" in the Prospectus and in the instructions hereto will constitute
a binding agreement between the undersigned and the Company in accordance with
the terms and subject to the conditions of the Exchange Offer. The undersigned
hereby represents and warrants that the undersigned accepts the terms and
conditions of the Exchange Offer, has full power and authority to tender,
exchange, assign and transfer the Outstanding Notes tendered hereby, and that
when the same are accepted for exchange by the Company, the Company will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim or right. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be reasonably necessary or
desirable to complete the sale, assignment and transfer the Outstanding Notes
tendered hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the undersigned
hereunder shall be binding upon the successors, assigns, heirs, executors,
administrators, trustees in bankruptcy and legal representatives of the
undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned.
The undersigned recognizes that, under certain circumstances set forth in
the Prospectus, the Company may not be required to accept for exchange any of
the Outstanding Notes tendered. Outstanding Notes not accepted for exchange or
withdrawn will be returned to the undersigned at the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated under the box entitled "Special Delivery
Instructions" below, please send Exchange Notes to the undersigned at the
address shown below the signature of the undersigned.
The undersigned acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Outstanding Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchased such Outstanding Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or (ii) any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such Exchange Notes.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
beneficial owners in connection with the Exchange Offer are being acquired by
the undersigned and any beneficial owners in the ordinary course of business of
the undersigned and any beneficial owners, (ii) the undersigned and each
beneficial owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, and (iii) the undersigned and each
beneficial owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities
Act, in connection with a secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the position of the staff of the SEC
described above.
The undersigned and each beneficial owner understand that a secondary
resale transaction described in clause (iii) above should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the SEC. Except as
otherwise disclosed to the Company in writing, the undersigned hereby represents
and warrants that neither it nor any beneficial owner is an "affiliate" (as
defined in Rule 405 of the Securities Act) of the Company.
If the undersigned or any beneficial owner is a "broker" or "dealer"
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
undersigned understands and acknowledges that it and any such beneficial owner
may be deemed to be an "underwriter" within the meaning of the Securities Act
and, therefore, must deliver a prospectus relating to the Exchange Notes in
connection with any resales by it or any beneficial owner of Exchange Notes
acquired for its own account or the account of any beneficial owner in the
Exchange Offer. If the undersigned or any
-2-
<PAGE>
beneficial owner is a "broker" or "dealer" that acquired Outstanding Notes for
its own account pursuant to its market-making or other trading activities (other
than Outstanding Notes acquired directly from the Company), the undersigned and
any beneficial owner may use the Prospectus to satisfy the prospectus delivery
requirements of the Securities Act. Notwithstanding the foregoing, the
undersigned does not thereby admit that it or any beneficial owner is an
"underwriter" within the meaning of the Securities Act.
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT
NOT TO ACCEPT TENDERED OUTSTANDING NOTES FROM ANY TENDERING HOLDER IF THE
COMPANY DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE
COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
THE UNDERSIGNED BY COMPLETING BOX 2 ENTITLED "DESCRIPTION OF Outstanding
Notes" BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE
Outstanding Notes AND MADE CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE
PROSPECTUS.
-3-
<PAGE>
BOX 1
TENDERING HOLDER SIGNATURE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH)
X..................................... .....................................
X..................................... .....................................
Signature of Owner(s) Date
Area Code and Tel. No.:........................................................
If the holder(s) is/are tendering any Outstanding Notes, this Letter of
Transmittal must be signed by the Registered Holder(s) of the Outstanding Notes
as the name(s) appear(s) on the Outstanding Notes or on a security position
listing or by person(s) authorized to become Registered Holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s):.......................................................................
...............................................................................
(Please Type or Print)
Capacity:......................................................................
Address:.......................................................................
(Include Zip Code)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized
Signature:.....................................................................
Printed
Name:..........................................................................
Title:.........................................................................
Name of
Firm:..........................................................................
(Must be an Eligible Institution as defined in Instruction 3)
Dated:.........................................................................
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE Outstanding
Notes OR A NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST
BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
-4-
<PAGE>
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers
and principal amounts should be listed on a separate signed schedule affixed
hereto. The minimum permitted tender is $1,000 principal amount of Outstanding
Notes; all other tenders must be in integral multiples of $1,000.
- --------------------------------------------------------------------------------
BOX 2
DESCRIPTION OF OUTSTANDING NOTES
- --------------------------------------------------------------------------------
Aggregate
Principal
Name(s) and Address(es) of Holder(s) Certificate Amount Amount
(Please fill in, if blank) Number (s) Represented Tendered*
- -------------------------------------------------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
Total..................................
- -------------------------------------------------------------------------------
* The minimum permitted tender is $1,000 in principal amount at maturity of
Outstanding Notes. All tenders must be in multiples of $1,000 of principal
amount at maturity. Unless otherwise indicated in the column labeled
"Principal Amount Tendered" and subject to the terms and conditions of the
Exchange Offer, the undersigned will be deemed to have tendered the entire
aggregate principal amount represented by the Outstanding Notes indicated
in the column labeled "Aggregate Principal Amount Represented." See
Instruction 8.
/ / CHECK HERE IF TENDERED Outstanding Notes ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED Outstanding Notes ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution _________________________________________
Account Number ____________ Transaction Code Number _______________
/ / CHECK HERE IF TENDERED Outstanding Notes ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING (See Instructions 1 and 3):
Name(s) of Registered
Holder(s):................................................................
Date of Execution of Notice of Guaranteed
Delivery:.................................................................
Name of Eligible Institution that Guaranteed
Delivery:.................................................................
IF DELIVERY OF OUTSTANDING NOTES IS TO BE MADE BY BOOK-ENTRY TRANSFER TO
THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT AT DTC, THEN TENDERS OF OUTSTANDING
NOTES MUST BE EFFECTED IN ACCORDANCE WITH THE PROCEDURES MANDATED BY DTC AND THE
PROCEDURES SET FORTH IN THE PROSPECTUS UNDER THE CAPTION "THE EXCHANGE OFFER --
EXCHANGING BOOK-ENTRY NOTES."
-5-
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 4 and 5)
To be completed ONLY if Outstanding Notes in a principal amount not exchanged
and/or Exchange Notes are to be sent to someone other than the person or persons
whose signature(s) appear(s) on the Letter of Transmittal above or to such
person or persons at an address other than that shown in the box entitled
"Description of Outstanding Notes" on this Letter of Transmittal above.
EXCHANGE NOTES WILL NOT BE ISSUED IN THE NAME OF A PERSON OTHER THAN THAT OF A
REGISTERED HOLDER OF THE OUTSTANDING NOTES APPEARING ON THE NOTE REGISTER.
Mail or deliver: (check appropriate box(es)):
/ / Exchange Notes to: / / Outstanding Notes to:
Name(s)................................................
(Please Type or Print)
.......................................................
(Please Type or Print)
Address................................................
.......................................................
Zip Code
.......................................................
Employer Identification or Social Security Number
- --------------------------------------------------------------------------------
TO BE COMPLETED BY ALL EXCHANGING HOLDERS
(See Instruction 5)
<TABLE>
<CAPTION>
PAYER'S NAME: REGENCY HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
<S><C>
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN TIN
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY ---------------
SIGNING AND DATING BELOW. Social Security Number or
Employer Identification Number
-------------------------------------------------------------------------------------
Department of the Treasury CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT
Internal Revenue Service (1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER
IDENTIFICATION NUMBER (OR I AM WAITING FOR A NUMBER TO BE
Payer's Request for Taxpayer ISSUED TO ME), (2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER
Identification Number (TIN) BECAUSE I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
and Certification (THE "IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF
A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR THE IRS NOTIFIED
ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING AND (3) ANY Part 2-
OTHER INFORMATION PROVIDED ON THIS FORM IS TRUE AND CORRECT. Awaiting TIN / /
SIGNATURE DATE
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU
ARE SUBJECT TO BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR
DIVIDENDS ON YOUR TAX RETURN AND YOU HAVE NOT BEEN NOTIFIED BY THE IRS THAT YOU
ARE NO LONGER SUBJECT TO BACKUP WITHHOLDING.
-6-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
A. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURE. To be effectively tendered pursuant to the Exchange Offer,
the Outstanding Notes, together with a properly completed Letter of Transmittal
(or facsimile thereof) duly executed by the Registered Holder thereof, and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the front page of this
Letter of Transmittal and tendered Outstanding Notes must be received by the
Exchange Agent at one of such addresses on or prior to the Expiration Date;
PROVIDED, HOWEVER, that book-entry transfers of Outstanding Notes may be
effected in accordance with the procedures set forth in the Prospectus under the
caption "The Exchange Offer -- Exchanging Book-Entry Notes." If the beneficial
owner of any Outstanding Notes is not the Registered Holder, then such person
may validly tender his or her Outstanding Notes only by obtaining and submitting
to the Exchange Agent a properly completed Letter of Transmittal from the
Registered Holder. LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE
DELIVERED ONLY BY HAND OR BY COURIER, OR TRANSMITTED BY MAIL, AND ONLY TO THE
EXCHANGE AGENT AND NOT TO THE COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER REQUIRED
DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, BUT
IF SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY
INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED.
IF OUTSTANDING NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE
MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Outstanding Notes and such holder's
Outstanding Notes are not immediately available or time will not permit such
holder to complete the procedures for book-entry transfer on a timely basis or
time will not permit such holder's Letter of Transmittal documents to reach the
Exchange Agent on or before the Expiration Date, such holder's tender may be
effected if:
(a) such tender is made by or through an Eligible Institution (as
defined below);
(b) on or prior to the Expiration Date, the Exchange Agent has
received a telegram, facsimile transmission or letter from such Eligible
Institution setting forth the name and address of the holder of such
Outstanding Notes, the certificate number(s) of such Outstanding Notes
(except in the case of book-entry tenders) and the principal amount of
Outstanding Notes tendered and stating that the tender is being made
thereby and guaranteeing that, within five business days after the
Expiration Date, a duly executed Letter of Transmittal, or facsimile
thereof, together with the Outstanding Notes, and any other documents
required by this Letter of Transmittal and the Instructions hereto, will be
deposited by such Eligible Institution with the Exchange Agent; and
(c) this Letter of Transmittal, or a facsimile hereof, and
Outstanding Notes, in proper form for transfer (or a Book-Entry
Confirmation with respect to such Outstanding Notes), and all other
required documents are received by the Exchange Agent within five business
days after the Expiration Date.
1. WITHDRAWAL OF TENDERS. Tendered Outstanding Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. To be
effective, a written, telegraphic, telex or facsimile transmission notice of
withdrawal must (i) be timely received by the Exchange Agent at one of its
addresses set forth on the first page of this Letter of Transmittal before the
Exchange Agent receives notice of acceptance from the Company, (ii) specify the
name of the person who tendered the Outstanding Notes, (iii) contain the
description of the Outstanding Notes to be withdrawn, the certificate numbers
shown on the particular Outstanding Notes, the certificate number(s) of such
Outstanding Notes (except in the case of book-entry tenders) and the aggregate
principal amount represented by such Outstanding Notes or a Book-Entry
Confirmation with respect to such Outstanding Notes, and (iv) be signed by the
holder of such Outstanding Notes in the same manner as the original signature
appears on this Letter of Transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to the Company that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Outstanding Notes. The signature(s) on the notice of withdrawal must be
guaranteed by an Eligible Institution (unless such holder is an Eligible
Institution). If the Outstanding Notes have been tendered pursuant to the
procedure for book-entry tender set forth in the Prospectus under the caption
"Exchanging Book-Entry Notes," a notice of withdrawal must specify, in lieu of
certificate numbers, the name and account number at DTC to be credited with the
withdrawn Outstanding Notes. If the Outstanding Notes to be withdrawn have been
delivered or otherwise identified to the Exchange Agent, a signed notice of
withdrawal is effective immediately upon receipt by the Exchange Agent of a
written, telegraphic, telex or facsimile transmission notice of withdrawal even
if physical release is not yet effected. In addition, such notice must specify,
in the case of Outstanding Notes tendered by delivery of such Outstanding Notes,
the name of the Registered Holder (if different from that of the tendering
holder) to be credited with the withdrawn Outstanding Notes. Withdrawals may
not be rescinded, and any Outstanding Notes withdrawn will thereafter be deemed
not validly tendered for purposes of the Exchange Offer. However, properly
withdrawn Outstanding Notes may be retendered by following one of the procedures
described under "The Exchange Offer -- Procedures for Tendering" in the
Prospectus at any time on or prior to the applicable Expiration Date.
-7-
<PAGE>
2. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the Registered Holder of the Outstanding Notes tendered hereby, the signature
must correspond exactly with the name as written on the face of the Outstanding
Notes without any change whatsoever.
If any Outstanding Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Outstanding Notes tendered hereby are registered in different names,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Outstanding
Notes.
When this Letter of Transmittal is signed by the Registered Holder or
Holders specified herein and tendered hereby, no endorsements of such
Outstanding Notes or separate bond powers are required.
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
Outstanding Notes or bond powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Except as described in this paragraph, signatures on this Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by
an Eligible Institution. Signatures on this Letter of Transmittal or a notice
of withdrawal, as the case may be, must be guaranteed by an Eligible Institution
(unless such Outstanding Notes are tendered by an Eligible Institution). In the
event that signatures on this Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
eligible guarantor institution which is a member of one of the following
recognized signature guarantee programs: (1) the Securities Transfer Agents
Medallion Program ("STAMP"), (2) the New York Stock Exchange Medallion Signature
Program ("MSP") and (3) the Stock Exchange Medallion Program ("SEMP") (each, an
"Eligible Institution").
Endorsements on Outstanding Notes or signatures on bond forms required by
this Instruction 3 must be guaranteed by an Eligible Institution.
3. SPECIAL DELIVERY INSTRUCTIONS. Tendering holders should indicate in
the applicable box the address to which Exchange Notes and/or substitute
Outstanding Notes for the principal amounts not exchanged are to be issued or
sent, if different from the address of the person signing this Letter of
Transmittal. If no such instructions are given, such Outstanding Notes not
exchanged will be returned to the name and address of the person signing this
Letter of Transmittal.
EXCHANGE NOTES WILL NOT BE ISSUED IN THE NAME OF A PERSON OTHER THAN THAT
OF A REGISTERED HOLDER OF THE OUTSTANDING NOTES APPEARING ON THE NOTE REGISTER.
4. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax
law requires that a holder of Outstanding Notes whose Outstanding Notes are
accepted for exchange provide the Company with his correct taxpayer
identification number, which, in the case of a holder who is an individual, is
his social security number, or otherwise establish an exemption from backup
withholding. If the Company is not provided with the correct taxpayer
identification number, the exchanging holder of Outstanding Notes may be subject
to a penalty imposed by the Internal Revenue Service ("IRS"). In addition,
interest on the Exchange Notes acquired pursuant to the Exchange Offer may be
subject to backup withholding in an amount equal to 31 percent of any interest
payment. If withholding occurs and results in an overpayment of taxes, a refund
may be obtained from the IRS upon filing of a return.
To prevent backup withholding, each exchanging holder of Outstanding Notes
subject to backup withholding must provide his correct taxpayer identification
number by completing the Substitute Form W-9 provided in this Letter of
Transmittal, certifying that the taxpayer identification number provided is
correct (or that the exchanging holder of Outstanding Notes is awaiting a
taxpayer identification number) and that either (a) the exchanging holder has
not been notified by the IRS that he is subject to backup withholding as a
result of failure to report all interest or dividends or (b) the IRS has
notified the exchanging holder that he is no longer subject to backup
withholding.
Certain exchanging holders of Outstanding Notes (including, among others,
all corporations and certain foreign individuals) are not subject to these
backup withholding requirements. A foreign individual and other exempt holders
(e.g., corporations) should certify, in accordance with the enclosed Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9, to
such exempt status on the Substitute Form W-9 provided in this Letter of
Transmittal.
5. TRANSFER TAXES. Holders tendering pursuant to the Exchange Offer will
not be obligated to pay brokerage commissions or fees or to pay transfer taxes
with respect to their exchange under the Exchange Offer. The Company will pay
all other charges or
-8-
<PAGE>
expenses in connection with the Exchange Offer. If holders tender Outstanding
Notes for exchange and the Exchange Offer is not consummated, such Outstanding
Notes will be returned to the holders at the Company's expense.
6. INADEQUATE SPACE. If the space provided herein is inadequate, the
aggregate principal amount of the Outstanding Notes being tendered and the
security numbers (if available) should be listed on a separate schedule attached
hereto and separately signed by all parties required to sign this Letter of
Transmittal.
7. PARTIAL TENDERS. Tenders of Outstanding Notes will be accepted only
in integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Outstanding Notes, fill in the principal
amount of Outstanding Notes which are tendered in column (iv) of the
"Description of Outstanding Notes." In the case of partial tenders, the
Outstanding Notes in fully registered form for the remainder of the principal
amount of the Outstanding Notes will be sent to the person(s) signing this
Letter of Transmittal, unless otherwise indicated in the appropriate place on
this Letter of Transmittal, as promptly as practicable after the expiration or
termination of the Exchange Offer.
Unless otherwise indicated in the box labeled "Description of Outstanding
Notes," and subject to the terms and conditions of the Exchange Offer, tenders
made pursuant to this Letter of Transmittal will be deemed to have been made
with respect to the entire aggregate principal amount represented by the
Outstanding Notes indicated in the column labelled "Aggregate Principal Amount
Represented" in such box.
8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any holder
whose Outstanding Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
or additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address and telephone number set forth
above and in the Prospectus.
-9-
