UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MAY 6, 1996
THE MULTICARE COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
COMMISSION FILE NO. 34-22090
DELAWARE 22-3152527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
411 HACKENSACK AVENUE
HACKENSACK, NEW JERSEY 07601
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 488-8818
<PAGE>
This Form 8-K/A amends a filing by the Registrant on Form 8-K, Item 2, dated
February 24, 1996, pursuant to which Registrant had reported the completion of
its tender offer for Concord Health Group, Inc. Such Form 8-K is hereby amended
by changing Item 7 thereof to read as follows, and by filing herewith the
attached financial statements and information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired:
. Audited consolidated balance sheets of Concord Health
Group, Inc. and subsidiaries as of June 30, 1994 and 1995
and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of
the three years in the period ended June 30, 1995.
. Consolidated balance sheet of Concord Health Group, Inc.
and subsidiaries as of December 31, 1995 and the related
consolidated statements of operations for the three and six
months ended December 31, 1994 and 1995 and cash flows for
the six months ended December 31, 1994 and 1995.
(b) Pro forma financial information:
. Pro forma condensed consolidated balance sheet of The
Multicare Companies, Inc. and subsidiaries and Concord
Health Group, Inc. and subsidiaries as of December 31,
1995.
. Pro forma condensed consolidated statement of
operations of The Multicare Companies, Inc. and
subsidiaries and Concord Health Group, Inc. for the year
ended December 31, 1995.
(c) Exhibits. None.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 has been prepared as if the
acquisition of Concord Health Group, Inc. and subsidiaries (Concord) by The
Multicare Companies, Inc. and subsidiaries (Company) had been consummated on
January 1, 1995. The accompanying unaudited pro forma condensed consolidated
balance sheet at December 31, 1995 has been prepared as if the acquisition of
Concord had been consummated on December 31, 1995. The unaudited pro forma
financial information has been prepared on the basis of assumptions described in
the notes to the unaudited pro forma condensed consolidated financial
statements. The unaudited pro forma condensed consolidated financial statements
are not necessarily indicative of actual results that would have been achieved
had the acquisitions actually been completed as of the dates indicated. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the respective historical financial statements of the
Company and Concord and the related notes thereto.
3
<PAGE>
The Multicare Companies, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 1995
(In Thousands)
<TABLE><CAPTION>
Adjustments
-------------------------
Concord
Multicare Historical Pro Forma Multicare
Historical (1) Adjustments Pro Forma
---------- ---------- ----------- ----------
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,921 $ 2,265 $ 6,186
Marketable securities 210 210
Accounts receivable, net 86,168 6,383 92,551
Prepaid expense and other current assets 7,971 1,237 $1,009 (2) 10,217
Deferred taxes 3,353 3,353
------------------------------------- ---------
Total current assets 101,623 9,885 1,009 112,517
Property, plant, and equipment, net 286,767 41,997 40,902 (3) 369,666
Restricted investments 1,166 (1,009)(2) 157
Goodwill, net 59,610 8,841 45,450 (4) 113,901
Debt issuance costs, net 4,738 4,738
Other assets 18,220 1,770 19,990
------------------------------------- ---------
$ 470,958 $ 63,659 $ 86,352 $ 620,969
===================================== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $44,469 $ 4,065 $ 48,534
Current portion of long-term debt 1,094 1,185 ($651)(5) 1,628
Current portion of capitalized lease Obligations 518 518
------------------------------------- ---------
Total current liabilities 46,081 5,250 (651) 50,680
Long-term debt 255,839 44,909 83,570 (5) 384,318
Capitalized lease obligations 25,631 25,631
Deferred taxes 24,200 1,307 15,626 (6) 41,133
Other liabilites 5,312 5,312
Stockholders' equity
Preferred stock
Common stock 177 9 (9)(7) 177
Common stock held in escrow (412) 412 (7)
Additional paid-in-capital 75,419 10,904 (10,904)(7) 75,419
Retained earnings 38,299 1,692 (1,692)(7) 38,299
------------------------------------- ---------
Total stockholders' equity 113,895 12,193 (12,193)(7) 113,895
------------------------------------- ---------
$ 470,958 $ 63,659 $ 86,352 $ 620,969
===================================== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
4
<PAGE>
The Multicare Companies, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1995
(In thousands, except per share data)
<TABLE><CAPTION>
Adjustments
-----------------------------------------------------------------------
Concord
Year ended Six months ended Six months ended Year ended
Multicare June 30, 1995 December 31, 1994 December 31, 1995 December 31, 1995
Historical (1a) (1b) (1c) (1d)
--------- -------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues $353,048 $38,430 $14,389 $28,568 $52,609
Expenses:
Facility operating expenses 270,224 28,515 10,464 21,153 39,204
Corporate, general and administrative 17,643 2,698 1,054 1,930 3,574
Depreciation and amortization 13,171 1,703 630 1,213 2,286
--------- -------------- ---------------- ----------------- -----------------
Total expenses 301,038 32,916 12,148 24,296 45,064
--------- -------------- ---------------- ----------------- -----------------
Income from operations 52,010 5,514 2,241 4,272 7,545
Other income (expense) (16,065) (2,268) (746) (2,041) (3,563)
Income (loss) before income taxes
--------- -------------- ---------------- ----------------- -----------------
and extraordinary item 35,945 3,246 1,495 2,231 3,982
Income tax expense (benefit) 13,798 1,180 654 764 1,290
========= ============== ================ ================= =================
Income before extraordinary item $22,147 $2,066 $841 $1,467 $2,692
========= ============== ================ ================= =================
Income before extraordinary item per share $1.25
Weighted average shares outstanding 17,675
<CAPTION>
Pro Forma Multicare
Adjustments Pro Forma
----------- ----------
<S> <C> <C>
Net revenues $405,657
Expenses:
Facility operating expenses 309,428
Corporate, general and administrative ($1,000)(2) 20,217
Depreciation and amortization 1,438 (3) 16,895
----------- ----------
Total expenses 438 346,540
----------- ----------
Income from operations (438) 59,117
Other income (expense) (5,468)(4) (25,096)
Income (loss) before income taxes
----------- ----------
and extraordinary item (5,906) 34,021
Income tax expense (benefit) (1,516)(5) 13,572
=========== ==========
Income before extraordinary item ($4,390) $20,449
=========== ==========
Income before extraordinary item per share $1.16
Weighted average shares outstanding 17,675
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
5
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Balance Sheet
In February 1996, the Company completed the acquisition of Concord. The Company
acquired the outstanding capital stock and warrants of Concord for approximately
$75,000 including transaction costs, repaid approximately $41,000 of debt, and
assumed historical debt of approximately $4,000. The acquisition was financed
through the Company's credit facility. The acquisition has been accounted for
using the purchase method of accounting.
The pro forma balance sheet has been presented assuming the acquisition of
Concord occurred on December 31, 1995. The pro forma adjustments are as follows:
(1) Reflects the historical balance sheet of Concord at December 31, 1995.
(2) To reclassify cash balances previously restricted as to use by loan
agreement which was repaid in connection with acquisition.
(3) The allocation of a portion of the purchase price to property, plant and
equipment, reflecting fair market value of facilities acquired based on
appraised values.
(4) Increase in goodwill resulting from purchase price in excess of fair
market value of net assets acquired and elimination of Concord assets
with no future value.
(5) Additional borrowings under the Company's revolving credit facility to
complete the acquisition and repayment of certain Concord existing debt.
(6) Increase in deferred taxes to reflect the difference in fair values
assigned and tax basis of assets and liabilities acquired.
(7) Elimination of shareholders' equity of Concord.
Pro Forma Statement of Operations
The pro forma adjustments to the statement of operations are as follows:
(1a) Reflects the historical results of operations of Concord for the year ended
June 30, 1995.
(1b) Reflects the historical results of operations of Concord for the six months
ended December 31, 1994.
(1c) Reflects historical results of operations of Concord for the six months
ended December 31, 1995.
(1d) Reflects the historical results of operations of Concord for the year ended
December 31, 1995.
(2) Corporate, general and administrative expense has been adjusted to reflect
the elimination of duplicative positions at Concord which have been vacated
and will not be replaced, consolidation of Concord corporate offices, and
elimination of various public company costs incurred by Concord.
6
<PAGE>
THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) Depreciation and amortization expense has been increased by amortization of
goodwill incurred in the acquisition, depreciation resulting from the
allocation of the Company's purchase price to Concord property, plant and
equipment, and adjustments to conform Concord's accounting policies to
those of the Company.
(4) For the year ended December 31, 1995, net interest expense has been
increased to reflect the financing of the acquisition with the Company's
credit facility bearing interest at an average rate of 7%, and the
assumption of Concord debt at fair market value of approximately 8%.
(5) Income tax expense has been adjusted to reflect an effective tax rate of
approximately 40% for federal and state taxes.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
The Multicare Companies, Inc.
/s/ STEPHEN R. BAKER
-------------------------------------------------
Stephen R. Baker
Executive Vice President, Chief Financial Officer
May 6, 1996
8
<PAGE>
CONCORD HEALTH GROUP, INC.
Consolidated Financial Statements
as of June 30, 1995 and 1994 and
for the years ended June 30,
1995, 1994, and 1993
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Concord Health Group, Inc:
We have audited the accompanying consolidated balance sheets of Concord Health
Group, Inc. as of June 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended June 30, 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 consolidated financial position of Concord Health
Group, Inc. as of June 30, 1995 and 1994, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended June 30, 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
COOPERS & LYBRAND LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 15, 1995, except for
Note 17 as to which the date
is September 12, 1995
<PAGE>
CONCORD HEALTH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE><CAPTION>
June 30,
------------------------
1995 1994
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,534 $ 1,237
Accounts receivable, net of allowance for
doubtful accounts of $376 and $156, respectively 5,473 2,639
Receivables from related parties 8 512
Restricted investments 65 603
Subordinated notes receivable 78 321
Deferred income taxes 142 --
679 343
Other current assets --- ---
Total current assets 7,979 5,655
Restricted investments 667 --
Property, plant and equipment, net 41,052 21,748
Intangible assets, net 7,940 190
Subordinated notes receivable 348 1,062
Other assets 1,230 447
------ -----
Total assets $59,216 $29,102
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings -- 920
Current maturities of long-term debt 1,089 798
Accounts payable and accrued expenses 5,002 2,179
Accrued salaries and payroll 549 610
Payable to related parties 19 705
---- ----
Total current liabilities 6,659 5,212
Deferred income taxes 1,309 --
Payable to related parties -- 559
Long-term debt 39,560 24,494
------ ------
Total liabilities 47,528 30,265
------ ------
Commitments and contingencies
Mandatorily redeemable common stock -- 1,375
-----
Shareholders' equity (deficit):
Preferred stock, 1,000,000 shares authorized;
none issued -- --
Common stock and partners' capital -- 4
Common stock, $.001 par value - 30,000,000
shares authorized; 7,662,203 outstanding 7 --
Additional paid-in capital 11,811 (190)
Retained earnings (deficit) 281 (1,644)
----- ------
12,099 (1,830)
Shares held in escrow (411) --
Due from shareholders -- (708)
----- ------
Total shareholders' equity (deficit) 11,688 (2,538)
------ -------
Total liabilities and shareholders' equity
(deficit) $59,216 $29,102
====== ======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 2 -
<PAGE>
CONCORD HEALTH GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
-------
<TABLE><CAPTION>
For the Years Ended
June 30,
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating revenue:
Basic services $19,441 $14,888 $ 11,221
Specialty medical services 16,663 7,288 3,532
Management services 1,524 900 1,447
Rental income 360 360 360
Other income 442 488 402
------ ------ ------
Total operating revenues 38,430 23,924 16,962
------ ------ ------
Operating expenses:
Salaries, wages and benefits 16,013 10,731 7,011
Supplies and other operating expenses (includes $237,
$108 and $223 of related parties) 9,336 5,463 4,622
Purchased services (includes $2,007, $1,312 and $1,263 of
related parties) 3,166 1,967 1,188
General corporate expense (includes $155, $115 and
$43 of related parties) 2,698 1,361 1,429
Interest expense, net (includes $46, $122 and $53
of related parties) 2,268 2,503 2,147
Depreciation and amortization 1,703 1,217 950
------ ------ ------
Total expenses 35,184 23,242 17,347
------ ------ ------
3,246 682 (385)
Non-operating income -- -- 322
------ ------ ------
Income (loss) before income taxes and
extraordinary item 3,246 682 (63)
Provision for income taxes 1,180 -- --
------ ------ ------
Income (loss) before extraordinary item 2,066 682 (63)
Extraordinary loss on debt refunding, net
of taxes of $74 in 1995 (141) (683) --
------ ------ ------
Net Income (loss) $ 1,925 $ (1) $ (63)
====== ====== ======
Earnings per share data:
Earnings before extraordinary item $ .27
Extraordinary loss $ (.01)
Net income $ .26
Weighted average common and common
share equivalents outstanding 12,917
Pro forma income data (unaudited):
Income (loss) before income taxes and
extraordinary loss $ 3,246 $ 682 $ (63)
Pro forma income tax provision (1,206) (186) (197)
Extraordinary loss net of pro forma tax benefit (141) (652) --
----- ------ ------
Net income (loss) after pro forma tax provisions $ 1,899 $ (156) $ (260)
====== ====== ======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 3 -
<PAGE>
<TABLE><CAPTION>
CONCORD HEALTH GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
----------------
Common Stock Additional Retained Shares
and Partners' Paid-In Earnings Held Due from
Capital Capital (Deficit) in Escrow Shareholders Total
------- ------- --------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992 4 2,366 (1,580) -- (450) 340
Net loss (63) (63)
Distributions to shareholders (407) (407)
Changes in due from shareholders (258) (258)
------ ------- ------ ------- ----- -------
Balance at June 30, 1993 4 1,959 (1,643) -- (708) (388)
Net loss (1) (1)
Payments to repurchase common stock (215) (215)
Reclassification of mandatorily
redeemable common stock (1,375) (1,375)
Distributions to shareholders (559) (559)
------ ------- ------ ------- ----- -------
Balance at June 30, 1994 4 (190) (1,644) -- (708) (2,538)
Effects of Reorganization with KBLHAC 3 11,936 11,939
Cancellations of amounts due from
shareholders (708) 708 --
Distributions to shareholders (624) (624)
Shares issued for acquisitions 1,397 (411) 986
Net income 1,925 1,925
------ ------- ------ ------- ------ -------
Balance at June 30, 1995 $ 7 $ 11,811 $ 281 $ (411) $ -- $ 11,688
====== ======= ====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 4 -
<PAGE>
CONCORD HEALTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
-----------
<TABLE><CAPTION>
For the Years Ended
June 30,
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,925 $ (1) $ (63)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,748 1,328 1,079
Provision for losses on accounts receivable 312 99 81
Accretion of discount on subordinated
note receivable (41) (38) (29)
Charge-off of deferred financing fees 152 146 --
Charge-off of subordinated note receivable 925 -- --
Write-off of payable to shareholders (880) -- --
Deferred income taxes 338 -- --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,012) (1,083) (943)
(Increase) decrease in receivables
from related parties -- (384) 453
(Increase) in prepaid expenses, inventory
and other assets (793) (324) (99)
Increase in accounts payable,
accrued expenses and accrued payroll 1,490 1,073 (179)
(Decrease) increase in payable to
related parties 19 (16) 16
Other changes -- 19 --
--- ----- -----
Net cash provided by operating activities 3,183 819 316
----- ----- -----
Cash flows from investigating activities:
Purchase of property, plant and equipment (1,968) (699) (5,144)
(Increase) or decrease in subordinated notes receivable 73 -- (1,316)
Decrease in receivable from related parties 504 -- --
(Increase) or decrease in restricted investments (124) (8) (593)
(Increase) in intangible assets (5) (78)
Acquisitions, net of cash acquired (8,213) -- --
------ ----- -----
Net cash used for investing activities (9,713) (712) (7,131)
------ ----- -----
Cash flows from financing activities:
Increase (decrease) in short-term borrowings (920) 170 616
Proceeds from issuance of long-term debt 8,559 1,937 6,191
Payments on long-term debt (10,368) (655) (706)
Change in payable to shareholders (384) (374) 1,121
Distributions to shareholders (624) (559) (407)
Change in due from shareholders -- -- (194)
Payments to repurchase common stock (1,375) (215) --
Net proceeds from Reorganization after transaction costs 11,939 -- --
------ ----- -----
Net cash provided by financing activities 6,827 304 6,621
------ ----- -----
Increase (decrease) in cash and cash equivalents 297 411 (194)
Cash and cash equivalents at beginning of period 1,237 826 1,020
------ ----- -----
Cash and cash equivalents at end of period $1,534 $ 1,237 $ 826
====== ===== =====
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 5 -
<PAGE>
CONCORD HEALTH GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1. Company Background and Significant Accounting Policies:
------------------------------------------------------
CHG and its wholly-owed subsidiaries (the Company) are engaged primarily in
the development, ownership and management of facilities which provide
subacute, skilled, rehabilitative and intermediate nursing care,
residential care and personalized services to the elderly in independent
living and assisted living units. The Company also provides management,
institutional pharmacy and other services for its own facilities and to
unaffiliated facilities.
In August 1994, KBL Healthcare Acquisition Corp. (KBLHAC) merged with
Concord Service Corporation and Affiliates (Concord), a group of commonly
controlled S-Corporations and a partnership (the Reorganization). Upon
consummation of the Reorganization, KBLHAC changed its name to Concord
Health Group, Inc. (CHG), which became the parent company of the Concord
entities which are now C-Corporations.
Upon consummation of the Reorganization, KBLHAC issued 3,500,000 shares of
its common stock and paid cash of $1,375,000 to a minority shareholder of
Concord to acquire all of the outstanding common stock and partnership
interests of the Concord entities. CHG changed its year end to June 30
immediately after the Reorganization which has been treated as a capital
stock transaction by the Company for accounting purposes. Under this
method of accounting, the transaction is considered to be equivalent to the
issuance of stock by Concord in exchange for the net assets of KBLHAC as of
the closing date, accompanied by a recapitalization of Concord. The
historical financial statements of KBLHAC on a prospective basis are the
historical financial statements of Concord.
KBLHAC's cash and trust fund assets as of the closing date of approximately
$14,826,000 were used by the Company to retire $10,506,000 of long and
short-term debt, to pay $58,000 of accrued interest on the debt retired, to
redeem the common stock and the partnership interest of a minority
shareholder of Concord for $1,375,000 and to pay transaction and other
costs of the Reorganization of approximately $2,887,000.
(a) Principles of Consolidation and Basis of Presentation:
-----------------------------------------------------
The financial statements as of June 30, 1995 and 1994 and for the
three years ended June 30, 1995 are consolidated financial
statements which include the accounts of CHG and its wholly-owned
subsidiaries. The 1995 financial statements include the accounts of
the acquired companies discussed in Note 2 from their respective
acquisition dates. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial
statements.
(b) Cash and Cash Equivalents:
-------------------------
Cash and cash equivalents consist of cash and short-term investments
purchased with original maturities of three months or less. Cash
equivalents are stated at cost which approximates market value.
(c) Inventory:
---------
Inventories of pharmaceuticals and supplies are included in other
current assets and are stated at the lower of cost or market. Cost
is determined primarily on the first-in, first-out method.
(d) Property, Plant and Equipment:
-----------------------------
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over estimated useful lives ranging
from four years to 40 years. Expenditures for maintenance and
repairs necessary to maintain property and equipment in efficient
operating condition are charged to operations. Costs of additions
and betterments are capitalized. Interest costs associated with
construction or renovations are capitalized in the period in which
they are incurred.
- 6 -
<PAGE>
(e) Intangible Assets:
-----------------
Goodwill is being amortized on a straight-line basis over lives
ranging from 15 to 20 years. Organization costs and costs incurred
in connection with the arrangement of certain financings have been
capitalized and are being amortized on a straight-line basis over
five years and the term of the related debt, respectively. The
Company evaluates the realizability of goodwill based upon
expectations of nondiscounted cash flows and operating income for
each subsidiary having a material goodwill balance.
(f) Basic Services and Specialty Medical Services Revenues:
------------------------------------------------------
Basic services and specialty medical services revenues are recorded
at the estimated net realizable amounts from residents, third-party
payors (e.g. Medicare, Medicaid, managed care companies and
insurers) and other for services rendered.
Revenues under Medicare and Medicaid payor agreements are 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 the interim or final settlements are reported in
operations in the year of settlement.
(g) Management Services and Rental Income:
-------------------------------------
Management service revenues are recorded when the services are
rendered and rental income is recorded on the accrual basis over the
term of the lease.
(h) Income Taxes:
------------
The Subchapter S and partnership elections were automatically
terminated when the entities became wholly-owned subsidiaries of
CHG. Accordingly, a pro forma provision for income taxes is
presented as if the Company were taxed as a C Corporation during the
periods prior to the Reorganization. Upon termination of the Concord
entities' S-Corporation and partnership elections, the Company
became subject to the provisions of Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes". As a
result, the Company records deferred taxes for the effect of
cumulative temporary differences between the tax and book bases of
its assets and liabilities.
(i) Earnings Per Share:
------------------
The weighted average shares outstanding for the year ended June 30,
1995 have been determined in accordance with the modified treasury
stock method which limits the repurchase common shares to 20% of the
Company's outstanding shares as of the end of the period at the
average market price during the period.
(j) Pro Forma Earnings Per Share:
----------------------------
The pro forma earnings per share for the year ended June 30, 1994 of
$.14 before extraordinary loss and $(.04) on net income reflect the
Company's results assuming that the Concord entities would have been
taxed as C-Corporations and are computed assuming 3,500,000 shares
were outstanding for the period in the same manner as described in
Note 1(i) above.
(k) Supplementary Earnings Per Share Data (unaudited):
-------------------------------------------------
For the year ended June 30, 1995, supplementary earnings per share
was $.27 on income before extraordinary loss on debt refunding and
$.26 on net income based on 13,472,000 weighted average shares
outstanding. For the year ended June 30, 1994, supplementary
earnings per share was $.16 on income before extraordinary loss and
$.10 on net income based on 7,028,000 weighted average shares
outstanding. Supplementary earnings per share for the years ended
June 30, 1995 and 1994 are calculated assuming that
Continued
- 7 -
<PAGE>
the Reorganization was consummated at the beginning of the
respective periods and the Company retired $10,506,000 of its
outstanding debt on July 1, 1994 and 1993, respectively. The
weighted average shares outstanding and the method used for
computing earnings per share is the same as that described in Note
1(i) above. Shares issuable pursuant to the warrants aggregating
6,050,000 and 590,000 options have been excluded from the
computations for the year ended June 30, 1994 because their effect
is not dilutive.
(l) Recently Issued Pronouncements:
------------------------------
Statement of Financial Accounting Standards No. 121 on Impairments
of Long Lived Assets will apply to the Company beginning in the year
ending June 30, 1995, but will not have a material impact.
(m) Reclassifications:
-----------------
Certain amounts in the consolidated financial statements for prior
years have been reclassified to conform to the 1995 presentation.
2. Acquisitions:
------------
(a) Acquisition of Berks Nursing Homes, Inc. and Lehigh Nursing Homes,
------------------------------------------------------------------
Inc.:
----
The Company developed two 120-bed skilled nursing facilities for
Berks Nursing Homes, Inc. (Berks) and Lehigh Nursing Homes, Inc.
(Lehigh) which were owned by certain of the Company's executive
officers and shareholders. The facilities were developed for sale to
Berks/Lehigh Healthcare Corporation (BLHC), an unrelated nonprofit
organization. The Company assisted with completing tax-exempt
financing of approximately $17 million for BLHC in May 1993 and the
bond proceeds were placed in escrow to provide for the purchase of
the facilities by BLHC from the Berks and Lehigh shareholders on or
before February 1, 1995. This transaction structure provided the
Berks and Lehigh shareholders the opportunity to develop and manage
the facilities since they were unable to obtain the financing
necessary to own the facilities represented by their Certificates of
Need. In connection with this financing, the Company made a loan of
approximately $925,000 to BLHC which bore interest at 12.5% and was
subordinated to all claims of BLHC's tax-exempt bondholders and
general creditors. In connection with this subordinated loan, the
Company borrowed $880,000 from Berks and Lehigh pursuant to a note
payable agreement which bore interest at 12.5% and provided that the
$880,000 would be repaid only to the extent that the $925,000
subordinated note receivable from BLHC was collected.
In connection with the Reorganization, the Berks and Lehigh
shareholders granted CHG an option to purchase the facilities in the
event that the sale to BLHC was not consummated. The Berks and
Lehigh shareholders also indemnified CHG against any and all losses
relating to the development and sale of the two facilities. The sale
of the facilities to BLHC was not consummated and CHG exercised its
option to purchase the facilities. On March 24, 1995, the Company
purchased all of the outstanding common stock of Berks and Lehigh.
The purchase price of approximately $15.7 million. including direct
acquisition costs, was paid in CHG common stock (147,598 shares of
CHG common stock which is restricted) with an estimated fair value
of $574,000 (net of a 25% discount due to the restrictions on sale
of the stock), cash of $773,000 and the assumption of approximately
$14.9 million of liabilities. A special subcommittee of the Board of
Directors was appointed to review and analyze the determination of
the purchase price which was based on appraisals prepared by
independent consultants, discounted cash flow analyses prepared by
management and an analysis of comparable transactions by an
independent investment banking firm. The Board of Directors voted
unanimously to approve the mergers and the consideration paid. The
members of the Board of Directors who are Berks and Lehigh
shareholders abstained from all deliberations on this matter as well
as the vote on the related resolution. Accordingly. the Company
wrote-off the $925,000 subordinated note receivable and the related
$880,000 note payable.
The acquisition has been accounted for using the purchase method.
The excess of the purchase price over the net assets acquired has
been allocated to property, plant and equipment to record it at its
appraised fair
Continued
- 8 -
<PAGE>
value. The remainder of the excess of approximately $2,083,000 has
been recorded as goodwill which is being amortized over an estimated
useful life of twenty years.
(b) Acquisition of National Pharmacy Service, Inc. (NPS):
----------------------------------------------------
Effective January 1, 1995, the Company acquired all of the
outstanding common stock of NPS, an institutional pharmacy business.
The purchase price of approximately $4,081.000, including direct
acquisition costs, was paid $3,131,000 in cash and a $950,500 note
payable to the sellers who are now officers of the Company at a rate
of 7.875 %. The purchase price is subject to downward adjustment to
the extent that NPS's earnings before interest, taxes, depreciation
and amortization (EBITDA) for the year ended December 31, 1995 is
less than its EBITDA for the twelve months ended September 30, 1994.
The note payable to the sellers is payable 40% on April 1, 1996 and
60% on January 1, 1998. However, the payments on these notes payable
would be reduced by 5.5 times any EBITDA shortfall. Since ultimate
payment of the $950,500 portion of the purchase price is uncertain
until NPS's 1995 EBITDA is known, this portion of the purchase price
will not be recorded until payment is assured beyond a reasonable
doubt. As a result, the acquisition has been recorded at a purchase
price of $3,130,500 and has been accounted for using the purchase
method. The excess of the purchase price over the fair value of the
net assets acquired of approximately $2,556,000 is being amortized
over a 20-year estimated useful life using the straight-line method.
If the EBITDA target is met, additional goodwill will be recorded
for the $950,500.
(c) Acquisition of National Healthcare Services, Inc. (NHS):
-------------------------------------------------------
Effective January 1, 1995, the Company acquired the business and
certain of the assets of NHS, a nursing facility management company.
The consideration for the acquisition was paid through the issuance
of 199,605 shares of unregistered CHG common stock. The purchase
price is subject to downward adjustment to the extent that NHS does
not generate $2.7 million in revenues for the three year period
ending January 1, 1998. One-half of the shares issued have been
placed in escrow. As a result, the purchase price of approximately
$438,000, including direct acquisition costs, has been recorded for
one-half of the shares issued since issuance of the remaining shares
to the seller is not assured beyond a reasonable doubt. Also, the
value assigned to the shares issued has been discounted by 25% from
the quoted market price since the shares are restricted. The
acquisition has been accounted for using the purchase method and the
excess of the purchase price over the fair value of the net assets
acquired of approximately $316,000 is being amortized over the 15-
year estimated useful life using the straight-line method. The
purchase price could be adjusted to record additional goodwill of up
to $412,000 if the revenue target is achieved.
(d) Acquisition of Hillcrest Nursing Center Associates (Hillcrest):
--------------------------------------------------------------
On January 31, 1995, the Company completed the acquisition of all of
the operating assets of Hillcrest which operates a 121-bed skilled
nursing and rehabilitation facility. The purchase price of
approximately $5,126,000, including direct acquisition costs, was
paid $2,003,000 in cash. the assumption of $2,558,000 of long-term
debt and a consulting agreement of $565,000 which requires payments
over the next five years. The acquisition has been accounted for
using the purchase method and the excess of the purchase price over
the net assets acquired has been allocated to Hillcrest's fixed
assets to record them at their appraised fair values.
(e) Acquisition of American Therapy Corporation(ATC):
------------------------------------------------
On February 3, 1995, the Company acquired the business and certain
of the assets of ATC, a company which provides physical, speech and
occupational therapy services. The total consideration of
$2,310,000, including direct acquisition costs, was paid in cash.
The acquisition has been accounted for using the purchase method and
the excess of the purchase price over the fair value of the net
assets acquired of approximately $2,315,000 is being amortized over
an estimated useful life of 20 years using the straight-line method.
Continued
- 9 -
<PAGE>
(f) Pro Forma Financial Information (unaudited):
-------------------------------------------
The following unaudited pro forma financial information shows the
results of the Company's operations as though the acquisitions
discussed above had been completed as of the beginning of the
respective periods (dollars in thousands):
Year Ended Year Ended
June 30, 1995 June 30, 1994
------------- -------------
Total Operating Revenue $ 47,605 $ 35,713
Net Income $ 934 $ 1,350
Earnings Per Share $ 0.18 $ 0.18
The estimated pro forma results are not necessarily indicative of
the actual results of operations that would have occurred had the
acquisitions been made at the beginning of the respective periods.
(g) Acquisition Related Cash Flow Information:
-----------------------------------------
Acquisition related non-cash investing activities for the year ended
June 30, 1995 were as follows (dollars in thousands):
Fair value of assets acquired $ 27,714
Liabilities assumed (18,515)
Fair value of stock issued (986)
Cash paid for acquisitions, net of $79 cash acquired $ 8,213
-------
3. Concentration of Credit Risks:
-----------------------------
Approximately 21% and 30% of the Company's accounts receivable are from
Medicaid programs and 22% and 20% are from Medicare programs at June 30,
1995 and 1994, respectively. Should the related government agencies suspend
or significantly reduce contributions to these programs. the Company's
ability to collect on its receivables would be adversely affected.
Management believes that the remaining receivable balances from various
payors do not represent any concentration of credit risk to the Company.
Management continually monitors and adjusts its allowance for doubtful
accounts and contractual allowances associated with these receivables.
Federal law limits the degree to which states are permitted to alter
Medicaid programs.
4. Restricted Investments:
----------------------
At June 30. 1995, restricted investments represent debt service reserve
accounts maintained with several of the Company's lenders as well as
certain escrow accounts related to a HUD mortgage which are invested in
certificates of deposit and other cash equivalents. At June 30, 1994. this
investment represented a $593,000 face value U.S. Treasury Bill which
matured in February, 1995 and was pledged as collateral for a $2,000,000
standby letter of credit from a bank in connection with the construction
financing of Berks and Lehigh which expired on March 15, 1995.
Continued
- 10 -
<PAGE>
5. Property, Plant and Equipment:
-----------------------------
Property, plant and equipment are comprised of the following (dollars in
thousands):
June 30,
------------
1995 1994
---- ----
Land and land improvements $4,040 $ 2,297
Buildings and improvements 29,218 14,531
Fixed and moveable equipment 9,112 5,636
Assets leased to others 2,945 2,935
Vehicles 243 66
Construction in progress 992 -
--- -----
46,550 25,465
Less: Accumulated depreciation 5,498 3,717
----- -----
$ 41,052 $ 21,748
====== ======
Accumulated depreciation includes approximately $506,000 and $396,000
relating to assets leased to others at June 30, 1995 and 1994.
respectively. Depreciation expense related to property, plant and equipment
for the years ended June 30, 1995, 1994 and 1993 was approximately
$1,539,000, $1,199,000 and $934,000, respectively. Total interest cost
incurred during the years ended June 30, 1995, 1994 and 1993 was
$2,226,000, $2.392,000 and $2,018,000 of which $0, $29,000 and $72,000 was
capitalized, respectively.
The Company is the lessor of an 80-unit assisted living facility under an
operating lease which expires in July 2000 The lessee pays all utilities,
property taxes and other costs relating to the facility. Minimum future
rentals to be received on this noncancellable lease are $360,000 annually.
Operating expenses related to assets leased to others were approximately
$351,000, $414,000 and $451,000 (including depreciation expense of
$111,000, $103,000 and $103,000) for the years ended June 30, 1995, 1994
and 1993, respectively.
6. Intangible Assets:
-----------------
Intangible assets, net consist of the following (dollars in thousands):
June 30,
1995 1994
---- ----
Goodwill $ 7,401 $ -
Financing fees 725 245
Organization costs 52 32
-- --
8,178 277
less accumulated amortization 238 87
--- --
$ 7,940 $ 190
===== ===
Amortization expense related to intangible assets for the years ended June
30, 1995, 1994 and 1993 was approximately $209,000, $129,000 and $145,000,
respectively, and included amortization of deferred financing costs of
approximately $45,000, $111,000 and $129,000. respectively which was
recorded as interest expense.
The increase in other assets in 1995 relates primarily to deferred costs
for the development of assisted living facilities,
Continued
- 11 -
<PAGE>
7. Subordinated Notes Receivable:
------------------------------
Subordinated notes receivable consist of the following (dollars in
thousands):
June 30,
---------------
1995 1994
---- ----
Alpha Housing and Healthcare. Inc. $ 426 $ 458
Berks/Lehigh Healthcare Corporation (see Note 2(a)) -- 925
-- -----
426 1,383
Less current portion (78) (321)
---- ------
$ 348 $1,062
=== =====
In August 1992, Concord earned fees for assigning its rights to purchase
two nursing facilities and arranging the tax-exempt financing for Alpha
Housing and Healthcare, Inc. (Alpha Housing). an unrelated nonprofit
organization, which purchased the facilities. Concord manages these two
facilities for Alpha Housing. in August 1992, Concord loaned Alpha Housing
$638,000 pursuant to the financing arrangements for Alpha Housing's
purchase of the facilities, which is collateralized by a second mortgage on
the two facilities and bears interest at 9%. If the unpaid balance of
principal plus accrued interest reaches $800,000. interest ceases to accrue
on the note until a payment has been received from Alpha Housing. The note
receivable is subordinated. Management estimates that only nominal payments
will be received on the note for approximately seven years. After that
time, management expects that the available cash flows of the two
facilities will be sufficient to make annual payments to Concord which
would allow for the payment of interest on the note receivable at 9% such
that the balance would not exceed $800,000.
For financial reporting purposes, the Company discounted the note
receivable to provide for the accrual of interest at an effective rate of
9% on the net carrying value of the note over the estimated period until
Alpha Housing is expected to begin making payments on the note. The
discount of approximately $247,000 was recorded as a reduction of the fee
revenues which Concord earned in connection with the purchase and financing
of the facilities by Alpha Housing and is being amortized using the
interest method. The amount of the unamortized discount at June 30, 1995
and 1994 was $139,000 and $180,000, respectively.
8. Short-Term Borrowings:
---------------------
In December 1994, CHG obtained a $1,000,000 working capital line of credit
from a bank which is due on demand and bears interest at the bank's
national commercial rate (8.0% at June 30, 1995) plus 0.75% which is
payable monthly. This line of credit is collateralized by the accounts
receivable and certain other assets of CHG and two of its subsidiaries as
well as the collateral for the $13.9 million credit facility described in
Note 9. As of June 30, 1995, the borrowing limit was $983,000 which was
unused. This borrowing agreement prohibits the payment of dividends.
At June 30, 1994, short-term borrowings were at rates ranging from 8.25% to
8.75% and were collateralized by certain real and personal property of
certain subsidiaries. Interest expense on short-term borrowings for the
years ended June 30, 1995, 1994 and 1993 was $49,000, $74.000 and $34.000,
respectively.
Continued
- 12 -
<PAGE>
9. Long-Term Debt:
--------------
Long-term debt consisted of the following (dollars in thousands):
June 30,
-----------------
1995 1994
---- ----
Mortgages Payable to Banks $ 39,882 $ 24,480
Notes Payable to Banks 236 788
Other 531 24
------ ------
40,649 25,292
Less: Current portion 1,089 798
------ ------
$39,560 $ 24,494
====== ======
Mortgages Payable to Banks:
---------------------------
In February, 1995, the Company obtained credit facilities aggregating
$20,530,000 from a bank. The outstanding balance at June 30, 1995 was
$20,446,000. The proceeds were used to refinance an existing mortgage loan
and the construction loans for two nursing facilities, to fund a $517,000
debt service reserve fund with the lender, to fund financing costs and for
working capital. This mortgage loan bears interest at LIBOR plus 2.75%
(8.75% at June 30, 1995) and requires the Company to make monthly payments
aggregating $172,000 for interest and principal and a final payment of
approximately $19,262,000 in February, 2000. The mortgage loan is
collateralized by the real and personal property of three of the Company's
nursing facilities which had a carrying value of approximately $21.4
million at June 30, 1995, as well as a guarantee of CHG. The loan agreement
requires the Company to maintain certain minimum debt service coverage
ratios.
In January, 1995, the Company obtained a $13.9 million credit facility.
Borrowings on this credit facility were $13,772,000 at June 30, 1995 with
interest at the bank's federal funds rate plus 3.50% (9.56% at June 30,
1995) and were collateralized by all real and personal property of three of
the Company's nursing facilities and an independent living facility. The
total carrying amount of assets pledged on the credit facilities and line
of credit (see Note 8) was approximately $17.2 million at June 30, 1995.
The loan agreements require the Company to maintain certain financial
ratios. The Company was not in compliance with the net worth and tangible
net worth ratio covenants at June 30, 1995 primarily as a result of the
intangible assets and additional liabilities recorded in connection with
the nursing facility acquisitions in March 1995 which had not been expected
to occur at the time when this loan was negotiated. However, the Company
obtained waivers of the ratio covenants from the lender through June 30,
1996.
The remaining mortgage loans outstanding at June 30, 1995 represent three
loans aggregating $5,664,000 at interest rates ranging from 8.06% to 9.5%
with aggregate monthly payments of approximately $51,000 for principal and
interest with balloon payments of $227,000 in September 1995 and $2,706,000
in March 1998. These mortgage loans are collateralized by the assets of the
Company's assisted living facility. a skilled nursing facility and certain
land with an aggregate carrying value of approximately $8.2 million.
Mortgages payable at June 30, 1994, represent seven mortgages aggregating
$24,480,000 with interest rates ranging from 6.25% to 9.5% which were
collateralized by substantially all of the Company's real and personal
property as well as guarantees from certain shareholders. As of June 30.
1995, all but two of these mortgage loans had been paid-off or refinanced
except two with an aggregate balance of $3,155,000.
Notes Payable to Banks:
----------------------
At June 30, 1995, the outstanding note payable of $236,000 bears interest
at 8% with monthly principal and interest payments of $6,100. At June 30,
1994, the $788,000 of notes payable bore interest at rates ranging from
8.0% to 8.5%. In connection with the Reorganization, $500,000 of these
notes were repaid.
Continued
- 13 -
<PAGE>
Other:
-----
Other long-term debt includes $515,000 payable over five years pursuant to
a consulting agreement (see Note 2(d)) related to the Hillcrest acquisition
with quarterly payments ranging from $25,000 to $32,500.
At June 30, 1995, the aggregate maturities of long-term debt for the next
five fiscal years ending June 30 are as follows (dollars in thousands):
1996 $ 1,089
1997 $ 905
1998 $ 3,569
1999 $ 922
2000 $19,771
Interest paid, net of amounts capitalized, for the years ended June 30,
1995, 1994 and 1993 amounted to approximately $2,258,000, $2,445,000 and
$2,012,000, respectively.
10. Basic Services and Specialty Medical Services Revenues:
------------------------------------------------------
The distribution of basic services and specialty medical services revenues
by class of payor was as follows (dollars in thousands):
For the Years Ended
June 30
--------------------------------
1995 1994 1993
---- ---- ----
Class of Payor:
Private pay and other $17,873 $10,729 $ 7,446
Medicaid 10,604 6,670 4,784
Medicare 7,627 4,777 2,523
----- ----- -----
$36,104 $22,176 $14,753
====== ====== ======
11. Income Taxes:
------------
The provision for income taxes, including the tax benefit of the
extraordinary loss, consists of the following for the year ended June 30,
1995 (dollars in thousands):
Federal:
Current $ 566
Deferred 249
State:
Current 202
Deferred 89
-----
$1,106
=====
The differences between the U.S. statutory tax rate and the Company's
effective rate for the year ended June 30. 1995 are as follows:
U.S. federal statutory tax rate 34.0%
State income taxes (net of federal benefit) 5.9
Benefit of federal loss carryforwards (5.5)
Benefit of extraordinary loss (2.3)
Amortization of assets not deductible 1.4
Change in valuation allowance for state taxes 2.3
Other (1.7)
-----
34.1%
====
Continued
- 14 -
<PAGE>
Tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at June 30, 1995 are as follows
(dollars in thousands):
Assets:
Provision for bad debts $ 152
Amortization of intangibles 176
---
328
Liabilities:
Property, plant and equipment, net (1,420)
(1,092)
-------
Valuation allowance (75)
Net deferred tax liability $(1,167)
=======
The change in the valuation allowance was $75,000 and relates to future
deductible amounts for the excess of the tax basis for certain fixed
assets. As of August 16, 1994, KBLHAC had net operating loss
carryforwards (NOL's) for federal income tax purposes of approximately
525,000. The Company utilized the benefits of these NOL's during the
current fiscal year.
Cash paid for taxes was $861,000 for the year ended June 30, 1995 and no
income taxes were paid during the year ended June 30, 1994.
Pro Forma Income Tax Information (unaudited):
--------------------------------------------
The pro forma tax data is based on the assumption that, prior to the
Reorganization, the Company was taxable as a C-Corporation and could
utilize net operating loss benefits to reduce subsequently incurred
federal income taxes. Immediately subsequent to the Reorganization,
there are no such benefits available to the Company related to these net
operating losses. The pro forma income tax provision results from state
income taxes.
12. Extraordinary Items and Nonoperating Income:
-------------------------------------------
In August 1994, the Company recognized extraordinary losses on the early
extinguishment of certain mortgage loans payable and on the renegotiation
of certain mortgage loans payable due to substantial modifications to the
loan terms. The extraordinary loss of $215,000 before the tax benefit of
$74,000 represents the charge-off of unamortized deferred financing
fees of $152,000 and a prepayment penalty of $63,000.
On April 1, 1994, Concord renegotiated and revised the interest rate on
two mortgage loans from approximately 10.68% to LIBOR plus 2.0% (6.25% at
June 30, 1994) and extended the maturity of these loans by approximately
two years. Due to the substantial modifications to the terms of these
loans, the original debt was considered extinguished for accounting
purposes. As a result, Concord recognized an extraordinary loss for the
fees paid of $537,000 and the write-off of the unamortized deferred
financing fees of $146, 000 related to the original debt.
The Company recognized a gain of approximately $324,000 from the sale of
the right to develop 60 long-term care beds in the year ended June 30,
1993 which is included in nonoperating income.
13. Shareholder's Equity:
--------------------
Preferred Stock:
---------------
The Company is authorized to issue 1,000,000 shares of preferred stock
with such designation, voting and other rights and preferences as may be
determined from time to time by the Board of Directors.
Continued
- 15 -
<PAGE>
The Company recognized a gain of approximately $324,000 from the sale of
the right to develop 60 long-term care beds in the year ended June 30,
1993 which is included in nonoperating income.
13. Shareholders Equity:
-------------------
Preferred Stock:
---------------
The Company is authorized to issue 1,000,000 shares of preferred stock
with such designation, voting and other rights and preferences as may be
determined from time to time by the Board of Directors.
Common Stock Warrants:
---------------------
As of June 30, 1995, the Company had 6,050,000 redeemable common stock
warrants outstanding each entitling the holder to purchase one share of
common stock at an exercise price of $5.50 through April 19, 2000. The
Warrants will be redeemable at a price of $.01 per Warrant in certain
circumstances.
The Company previously had 305,479 Unit Purchase Options (UPO's)
outstanding. On May 1, 1995, the Company exchanged 315,000 shares of its
common stock for all of the outstanding UPO's. This exchange has been
accounted for as a purchase of the UPO's into treasury followed by a
cancellation of the UPO's with no impact on total shareholders' equity.
Outstanding Common Stock:
------------------------
At June 30, 1994, KBLHAC had 3,500,000 shares of common stock
outstanding. During the year ended June 30, 1995, 3,500,000 shares were
issued in connection with the Reorganization, 347,203 shares were issued
for acquisitions and 315,000 shares were issued in exchange for the
UPO's.
Due from Shareholders:
---------------------
The amounts due from shareholders have been reported as a separate
deduction from shareholders' equity since it was the intent of the
Company to cancel the amounts due from shareholders upon consummation of
the Reorganization.
Shares Held in Escrow:
---------------------
The shares held in escrow represent one-half of the shares (99,802 shares
issued in connection with the acquisition of National Healthcare
Services, Inc. (NHS) which will not be released to the NHS seller unless
certain future revenue levels are attained (see Note 2(c)). The shares
held in escrow ar included in the Company's earnings per share
calculations. The NHS seller has the voting rights to these shares.
Other Escrowed Shares:
---------------------
Pursuant to the indemnification provisions of the Reorganization
Agreement and the Berks/Lehigh Acquisition Agreement, the former owners
of the Concord Entities and of Berks and Lehigh have escrowed 1,022,598
shares which they retain the voting rights to. For financial reporting
purposes, these shares are treated as outstanding and are included in the
Company's earnings per share calculations.
Mandatorily Redeemable Common Stock:
-----------------------------------
In January 1994, the shareholders of the Company reached an agreement
with a minority shareholder to purchase all of his interests in the
Company and to repay his shareholder payables for a total sum of
$1,625,000. The Company partially redeemed his interests in the Company
and made a payment of $250,000 in January 1994 and granted the
shareholder a put option to fully redeem the shareholder's interest
not later than October 31, 1994 in exchange for cash and indebtedness
aggregating the unpaid balance of the $1,625,000. The minority
shareholder's remaining interest in the Company was redeemed August 16,
1994 upon consummation of the Reorganization.
Continued
- 16 -
<PAGE>
14. Stock Option Plan:
-----------------
On August 12, 1994, the Company's shareholders approved the 1994 Stock
Option Plan which permits the granting of incentive and non-qualified
stock options to purchase an aggregate of 1,000,000 shares of CHG'S
common stock to officers, directors, employees, consultants and advisors
of the Company.
Transactions under this plan for the year ended June 30, 1995, are
summarized as follows:
Shares
Under Option Price Range
------------ -----------
Outstanding at July 1, 1994 590,000 $4.50 - $5.25
Granted 410,000 $5.25 - $5.50
Exercised -- --
Cancelled (21,500) $5.25
-------
Outstanding at June 30, 1995 978,500 $4.50 - $5.50
=======
The stock options granted during 1994 vest primarily over two years
(178,500 options) and four years (720,000 options). As of June 30,
1995, 334,250 of the options were exercisable. On May 9, 1995, the Board
of Directors approved the grant of 107,000 stock options which vest over
four years and are exercisable at $4.75 per share, the fair market value
of the common stock on the grant date. These options grants are
contingent upon the shareholder approval discussed Note 17.
15. Related Party Transactions:
--------------------------
The Company had the following related party transactions:
- Housekeeping and laundry services provided by companies owned by a
relative of a shareholder/officer.
- Legal services provided by certain shareholders and a Director.
- Office space leased from companies owned by certain shareholders.
- Equipment and supplies purchased from companies partially owned by a
shareholder/officer.
- Insurance premiums paid to purchase insurance policies owned by
certain shareholders.
- Design services provided by relatives of certain shareholders.
- Directors fees paid to shareholders of the Company by certain of its
nursing facilities.
- General contracting services provided by a construction company
owned by two shareholders.
- Transportation services provided by a construction company owned by
two shareholders.
A summary of those transactions follows (dollars in thousands):
For the Year Ended
June 30,
------------------------------
1995 1994 1993
---- ---- ----
Housekeeping and laundry services $2,007 $1,312 $1,263
Legal services 83 61 18
Office space rental 113 54 25
Equipment and supplies purchases 76 91 108
Insurance premiums - 11 46
Fees for design services - 21 89
Directors fees - 30 153
Construction services - 60 2,852
Transportation services 115 - -
Continued
- 17 -
<PAGE>
In addition, the Company earned $162,000 of management fees from two
nursing facilities which were owned by certain shareholders before the
Company purchased them in March, 1995. Accounts payable and accrued
expenses at June 30, 1995 and 1994 includes approximately $318,000 and
$199,000, respectively, related to these services.
Payables to related parties at June 30, 1994 include the $925,000 note
payable described in Note 2(a), a $265,000 uncollateralized, non-interest
bearing working capital advance to Concord related to the development of
the Berks and Lehigh facilities and a $119,000 uncollateralized working
capital loan which was due on demand and bore interest at the prime rate
plus 1% (8.25% at June 30, 1994).
16. Commitments and Contingencies:
-----------------------------
Leases:
------
The Company leases certain office space and equipment under
noncancellable operating leases which expire through 1998. At June 30,
1995, long-term operating lease commitments were immaterial. Total
rental expense for the years ended June 30, 1995, 1994 and 1993 was
approximately $343,000, $160,000 and $146,000, respectively.
Other:
-----
Alpha Housing has a $900,000 working capital line of credit from a bank
which expires on December 31, 1995 and is collateralized by first lien
on Alpha Housing's gross revenues, as defined, and a guarantee by the
Company. There were no borrowings under this line as of June 30, 1995
and 1994. The Company has entered into a $3.7 million contract for the
construction of a 120-bed skilled nursing facility.
Self-Insurance:
--------------
Since July 1993, the Company has been self-insured for workers'
compensation claims through an arrangement with a domestic insurer and an
offshore reinsurer. In connection with this arrangement, the Company has
a $500,000 letter of credit from a bank as collateral for its potential
obligation to the reinsurer for the difference between the maximum loss
(capped at $2,020,000 through the reinsurance arrangement) and the
amounts funded ($1,520,000) for fiscal 1995. The Company has funded the
estimated losses and related expenses for fiscal 1994 based on actuarial
estimates. The annual letter of credit fee is 1.25% of the letter of
credit amount.
Litigation:
----------
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of
management, all such matters are adequately covered by insurance or, if
not so covered, are without merit or are of such kind, or involve such
amounts, that their unfavorable disposition would not have a material
effect on the financial position, results of operations or the liquidity
of the Company.
17. Subsequent Events:
-----------------
On September 12, 1995, the Company borrowed approximately $19 million
from the same bank and on essentially the same terms as the $20,530,000
mortgage payable described in Note 9 except that the interest rate is
fixed at 8.98%. Certain of the proceeds were used to repay the
$13,900,000 mortgage payable described in Note 9 and the remainder will
be used to provide funds for the Company's growth. During the quarter
ended September 30, 1995, the Company will recognize an extraordinary
loss on the early retirement of debt for the $93,000 of unamortized
deferred financing fees related to the debt which was extinguished.
The Company's Board of Directors has approved an increase in the number
of stock options which can be granted under the Plan to 1,600,000. This
amendment to the Plan will be submitted for approval of the Company's
stockholders at the 1995 Annual Meeting of Stockholders. The Board of
Directors also approved the grant of approximately 332,000 stock options
which vest immediately and are exercisable at $5.00 per share, the fair
market value of the common stock on August 24, 1995, the grant date.
These options grants are contingent upon the
Continued
- 18 -
<PAGE>
shareholder approval discussed above.
On August 25, 1995, the Company completed an exchange offer to exchange
one share of its common stock for three of its outstanding warrants.
Warrantholders exchanged 5,353,926 warrants for 1,784,642 shares of the
Company's common stock and there are 696,074 remaining warrants
outstanding. If the exchange offer had been completed as of the
beginning of the year ended June 30, 1995, net income per share would
have been $.21 per share based on 9,348,015 weighted average common and
common share equivalents outstanding.
- 19 -
<PAGE>
CONCORD HEALTH GROUP, INC.
BALANCE SHEET
December 31, 1995
(Dollars in Thousands)
(UNAUDITED)
________
ASSETS
Current Assets
Cash and cash equivalents $ 2,265
Accounts receivable, net allowance for
doubtful accounts of $587 6,383
Other current assets 1,237
-------
Total current assets 9,885
Restricted investments 1,166
Property, plant and equipment 41,997
Intangible assets, net 8,841
Other assets 1,770
-------
Total assets $63,659
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt 1,185
Accounts payable and accrued expenses 4,065
------
Total current liabilities 5,250
Long-term debt 44,909
Deferred income taxes 1,307
-------
Total liabilities 51,466
-------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 1,000,000 authorized;
none issued
Common stock, $.001 par value - 20,000,000
shares authorized; 9,446,845 outstanding 9
Additional paid-in capital 10,904
Retained earnings 1,692
-------
12,605
Common stock held in escrow (412)
-------
Total stockholders' equity 12,193
-------
Total liabilities and stockholders'
equity $63,659
=======
See accompanying notes to financial statements.
<PAGE>
CONCORD HEALTH GROUP, INC.
STATEMENTS OF INCOME
(Dollars and Share Amounts in Thousands)
(UNAUDITED)
______
Six Months Ended Three Months Ended
December 31, December 31,
1995 1994 1995 1994
---- ---- ---- ----
Revenue:
Basic services $13,688 $ 8,296 $ 6,771 $ 4,179
Special medical services 13,574 5,246 7,340 2,733
Management services 849 442 419 231
Rental and other income 457 405 255 127
------- ------- ------- -------
Total operating revenues 28,568 14,389 14,785 7,270
------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits 11,569 6,344 6,019 2,897
Supplies and other
operating expenses 6,688 3,125 3,512 1,824
Purchased services 2,896 995 1,361 499
General corporate expense 1,930 1,054 1,056 610
Interest expense 2,041 746 l,068 294
Depreciation and amortization 1,213 630 609 318
------ ------ ------ -----
Total operating expenses 26,337 12,894 13,625 6,442
------ ------ ------ -----
Income before income taxes
and extraordinary item 2,231 1,495 1,160 828
Provision for income taxes (764) (654) (402) (301)
------- ------- ------- ------
Income before extraordinary
item 1,467 841 758 527
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit of $37 and $74 (56) (141) - -
------- ------- ------ -----
Net income $1,411 $ 700 $ 758 $ 527
====== ====== ====== ======
Primary earnings per share data:
Earnings before extraordinary item $.61 $.11 $.08 $.06
==== ==== ==== ====
Net income $.15 $.10 $.08 $.06
==== ==== ==== ====
Weighted average common and
common share equivalents
outstanding 9,447 12,417 9,447 13,311
======= ====== ===== ======
See accompanying notes to financial statements
<PAGE>
CONCORD HEALTH GROUP, INC.
STATEMENTS OF CASH FLOWS
Dollars in Thousands
(UNAUDITED)
For the Six Months Ended
--------------------------
December 31, December 31,
1995 1994
-------- ---------
Net cash provided (used) by operating activities: $ (160) $1,045
------- -----
Cash flows from investing activities:
Purchase of property, plant and
equipment (1,956) (515)
Increase in intangible assets (1,284) -
(Increase) decrease in restricted
investments (464) 1
Increase in indebtedness of related parties - (702)
Change in other assets 54 43
------- -------
Net cash used by investing activities (3,650) (1,173)
------- -------
Cash flows from financing activities:
Increase in line of credit borrowings - (410)
Proceeds from issuance of long-term debt 6,324 -
Payment on long-term debt (878) (10,053)
Payable to related parties - (189)
Distributions to Shareholders - (634)
Payments to repurchase common stock - (1,375)
Costs associated with warrant exchange (905)
Net proceeds from merger after transaction
costs - 11,939
------- -------
Net cash provided (used) by financing
activities 4,541 (722)
-------- --------
Increase (decrease) in cash
and cash equivalents 731 (850)
Cash and cash equivalents at
beginning of period 1,534 1,237
-------- --------
Cash and cash equivalents at end of period $ 2,265 $ 387
======== ========
See accompanying notes to financial statements.
<PAGE>
CONCORD HEALTH GROUP, INC.
Notes To Financial Statements
1. Company Background
Concord Health Group, Inc. (CHG) and its wholly-owned subsidiaries (the
Company) are engaged primarily in the development, ownership and management of
facilities which provide subacute, skilled, rehabilitative and intermediate
nursing care, residential care and personalized services to the elderly in
independent living and assisted living units. The Company also provides
management, institutional pharmacy and therapy services for its own facilities
and to unaffiliated facilities.
In August 1994, KBL Healthcare Acquisition Corp. (KBLHAC) merged with
Concord Service Corporation and Affiliates (Concord), consisting of a group of
commonly controlled S-Corporations and a partnership (the Reorganization). Upon
consummation of the Reorganization, KBLHAC changed its name to Concord Health
Group, Inc. (CHG), which became the parent company of the Concord entities which
are now C-Corporations.
Upon consummation of the Reorganization, KBLHAC issued 3,500,000 shares of
its common stock and paid cash of $1,375,000 to a minority shareholder of
Concord to acquire all of the outstanding common stock and partnership interests
of the Concord entities. CHG changed its year end to June 30 immediately after
the Reorganization which was treated as a capital stock transaction for
accounting purposes. Under this method of accounting, the transaction was
considered to be equivalent to the issuance of stock by Concord in exchange for
the net assets of KBLHAC as of the closing date, accompanied by a
recapitalization of Concord.
2. Summary of Significant Accounting Policies:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the financial statements reflect all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods
presented. Results for the interim periods presented are not necessarily
indicative of the results which might be expected for the entire year. The
unaudited financial statements should be read in conjunction with the financial
statements for the year ended June 30, 1995.
(a) Principles of Consolidation.
The financial statements as of and for the three and six month periods
ended December 31, 1995 and 1994 are consolidated and
<PAGE>
include the accounts of CHG and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
(b) Primary and Fully Diluted Earnings Per Share
For the three and six month periods ended December 31, 1995, the weighted
average common and common share equivalents outstanding have been determined in
accordance with the modified treasury stock method which limits the repurchase
of common shares to 20% of the Company's outstanding shares as of the end of the
period at the average market price during the period. The warrants converted in
the warrant exchange on August 25, 1995 have been treated as "if converted"
which assumes the conversion of the warrants for shares of common stock occurred
as of the beginning of the period (July 1, 1995) since the application of the
"if converted" method is dilutive. For the three and six month periods ended
December 31, 1994, the weighted average common and common share equivalents
outstanding have been determined in accordance with Fully diluted earnings per
share is not presented as the dilution is less than 3%.
(c) Pro Forma (Supplementary) Earnings Per Share Data
For the three and six month periods ended December 31, 1995, pro forma
earnings per share were $.08 and $.16 on income before extraordinary item and
$.08 and $.15 on net income based on 9,446,845 weighted average shares
outstanding. For the three and six month periods ended December 31, 1994, pro
forma earnings per share was $.06 and $.10 on income before extraordinary item
and $.06 and $.08 on net income based on 9,396,000 and 9,447,000 weighted
average common and common share equivalents outstanding. Pro forma earnings per
share for the three and six month periods ended December 31, 1995 and 1994 have
been calculated assuming that the Warrant Exchange was consummated as of July 1,
1994 (the beginning of the periods presented), the Reorganization was
consummated as of July 1, 1994 and the Company was taxable as a C-Corporation
commending July 1, 1994.
(d) Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 123 on Accounting
for Stock-Based Compensation will apply to the Company beginning in the fiscal
year ending June 30, 1997. As permitted by SFAS No. 123, the Company will
continue to account for employee stock options or similar equity instruments
using the intrinsic value method.
3. Extraordinary Item:
In September 1995, the Company recognized an extraordinary loss on certain
mortgage loans payable which were extinguished early and refinanced with another
lender. The extraordinary loss of $93,000 before tax benefit represents the
charge-off of
<PAGE>
unamortized deferred financing fees.
4. Short-Term Borrowings:
During December 1995, the Company replaced its existing line of credit with
a $3 million line of credit with the same bank. The new line of credit is due
on demand and bears interest at the bank's national commercial rate (8.50% at
December 31, 1995) plus 0.25%. Borrowings on this line are limited to the
lesser of 75% of accounts receivable of certain of the Company's subsidiaries
(three nursing facilities, its two pharmacy subsidiaries and its therapy
subsidiary) aged less than 90 days or $3,000,000. Borrowings on this line of
credit are collateralized by the accounts receivable of those subsidiaries. The
agreement requires the company to maintain a current ratio of at least 1.1 to 1
at each quarter end and a minimum debt service coverage ratio of 1.15 times at
each year end. At December 31, 1995, there were no borrowings outstanding under
this line and available borrowings were approximately $2,335,000.
5. Stockholders' Equity:
(a) Warrant Exchange
On August 25, 1995, the Company completed an exchange offer to exchange one
share of its common stock for three of its outstanding warrants. Warrantholders
exchanged 5,353,926 warrants for 1,784,642 shares of the Company's common stock
and there are 696,074 remaining warrants outstanding. The company incurred
total expenses of approximately $905,000 to complete this transaction which have
been charged directly to additional paid-in capital.
(b) Authorized Shares
On November 21, 1995, the shareholders approved a decrease in the number of
authorized shares of common stock from 30,000,000 to 20,000,000 shares.
6. Subsequent Events:
On January 15, 1996, the Company, the Multicare Companies, Inc. (Multicare)
and CHG Acquisition Corp., a wholly-owned subsidiary of Multicare (CHG
Acquisition) entered into an Agreement and Plan of Merger (the "Merger
Agreement") providing for the acquisition of all of the issued and outstanding
shares of the Company's common stock at a net cash price of $7.35 per share and
all outstanding warrants to purchase the Company's common stock at a net cash
price of $1.85 per warrant (the difference between $7.35 and $5.50, the per
share exercise price of the warrants). On January 22, 1996, CHG Acquisition
commenced a cash tender offer (the "Tender Offer") for all outstanding shares
at $7.35 per share and all outstanding warrants at $1.85 per warrant. The
Tender Offer is conditioned upon, among other things, a majority of the total
number of shares outstanding, on a fully-diluted basis, being validly tendered
and not withdrawn.
