-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EsyDjQpGgvoaZE0rVClkJ0qtwR3MlW76a3X5lr8KTK3qRCprF8bYJsYNkFRhsex1 HAz/BWrKy2V/prC8AIx39Q== 0000276477-94-000007.txt : 19940414 0000276477-94-000007.hdr.sgml : 19940414 ACCESSION NUMBER: 0000276477-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940228 FILED AS OF DATE: 19940413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLHAVEN CORP CENTRAL INDEX KEY: 0000276477 STANDARD INDUSTRIAL CLASSIFICATION: 8050 IRS NUMBER: 911459952 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10426 FILM NUMBER: 94522527 BUSINESS ADDRESS: STREET 1: 1148 BROADWAY PLZ CITY: TACOMA STATE: WA ZIP: 98402 BUSINESS PHONE: 2065724901 FORMER COMPANY: FORMER CONFORMED NAME: MERIT CORP DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q 3RD QTR. FEB. 28, 1994 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (MARK ONE) X Quarterly Report Pursuant to Section 13 or 15(d) of the ___ Securities Exchange Act of 1934 For the quarterly period ended February 28, 1994. 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 1-10426 THE HILLHAVEN CORPORATION (Exact name of registrant as specified in its charter) FOR THE QUARTER ENDED FEBRUARY 28, 1994 Nevada 91-1459952 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1148 Broadway Plaza Tacoma, WA 98402 (Address of principal executive offices) (206) 572-4901 (Registrant's telephone number, including area code) 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 ____ ____ The number of shares of Common Stock, par value $.75 per share, outstanding on April 1, 1994: 27,166,741. THE HILLHAVEN CORPORATION INDEX PART I. FINANCIAL INFORMATION
Page No. ________ Item 1. Financial Statements: Consolidated Balance Sheets as of February 28, 1994 and May 31, 1993 1 Consolidated Statements of Income for the Three Months and Nine Months Ended February 28, 1994 and 1993 3 Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 1994 and 1993 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 NOTE: Items 1 through 5 of Part II are omitted because they are not applicable.
THE HILLHAVEN CORPORATION CONSOLIDATED BALANCE SHEETS February 28, 1994 and May 31, 1993 (In thousands)
February 28, May 31, 1994 1993 (unaudited) ____________ ___________ ASSETS Current assets: Cash and cash equivalents $ 37,012 $ 73,159 Accounts and notes receivable, less allowance for doubtful accounts of $9,797 at February 28, 1994 and $8,700 at May 31, 1993 138,659 131,383 Inventories 20,124 21,527 Prepaid expenses and other current assets 23,172 29,078 __________ _ __________ _ Total current assets 218,967 255,147 Long-term notes receivable, less allowance for doubtful accounts of $14,352 at February 28, 1994 and $11,386 at May 31, 1993 88,476 112,506 Property and equipment, net 783,979 766,998 Net assets held for disposition --- 29,122 Intangible assets, net of accumulated amortization of $18,195 at February 28, 1994 and $16,128 at May 31, 1993 32,419 20,305 Other noncurrent assets 49,125 34,159 __________ _ __________ _ $1,172,966 $1,218,237 _ __________ __________ _ See accompanying Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE HILLHAVEN CORPORATION CONSOLIDATED BALANCE SHEETS February 28, 1994 and May 31, 1993 (In thousands, except share information)
February 28, May 31, 1994 1993 (unaudited) ____________ ___________ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 38,130 $ 18,835 Accounts payable 53,298 61,423 Employee compensation and benefits 46,902 54,370 Other accrued liabilities 50,507 42,649 __________ _ __________ _ Total current liabilities 188,837 177,277 __________ _ __________ _ Debt payable to NME, a related company --- 147,160 __________ _ __________ _ Other long-term debt 595,792 671,088 __________ _ __________ _ Other long-term liabilities 40,163 42,486 __________ _ __________ _ Stockholders' equity: Series C Preferred Stock, $0.15 par value; 35,000 shares authorized, issued and outstanding (liquidation preference of $35,000) 5 5 Series D Preferred Stock, $0.15 par value; 300,000 shares authorized, 58,650 issued and outstanding (liquidation preference of $58,650) 9 --- Common stock, $0.75 par value; 60,000,000 shares authorized; 27,149,371 and 20,978,862 issued and outstanding at February 28, 1994 and May 31, 1993 20,362 15,734 Additional paid-in capital 324,523 208,157 Retained earnings (accumulated deficit) 6,992 (37,538) Unearned compensation (3,717) (6,132) __________ _ __________ _ Total stockholders' equity 348,174 180,226 __________ _ __________ _ $1,172,966 $1,218,237 _ __________ __________ _ See accompanying Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE HILLHAVEN CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months and Nine Months Ended February 28, 1994 and 1993 (Unaudited) (In thousands)
Three Months Nine Months _____________________ ______________________ 1994 1993 1994 1993 __________ __________ __________ __________ Net operating revenues $ 363,973 $344,065 $ 1,080,214 $1,018,738 ________ _ ________ _ __________ _ __________ _ Expenses: Operating and administrative 310,762 295,378 924,162 872,324 Interest 11,982 13,567 38,402 41,711 Depreciation and amortization 13,495 13,425 40,526 39,921 Rent 13,107 13,595 39,050 39,350 Guarantee fees 1,411 2,400 5,482 7,225 Restructuring --- 1,456 (20,225) 5,169 ________ _ ________ _ __________ _ __________ _ Total expenses 350,757 339,821 1,027,397 1,005,700 ________ _ ________ _ __________ _ __________ _ Operating income 13,216 4,244 52,817 13,038 Interest income 3,256 3,860 10,391 11,519 ________ _ ________ _ ___________ _ __________ _ Income before income taxes, extraordinary charge and cumulative effect of accounting change 16,472 8,104 63,208 24,557 Income tax benefit (expense) (4,765) 1,328 (17,665) 4,795 ________ _ ________ _ __________ _ __________ _ Income before extraordinary charge and cumulative effect of accounting change 11,707 9,432 45,543 29,352 Extraordinary charge - early extinguishment of debt, net of income taxes (73) (565) (1,013) (565) Cumulative effect of change in accounting for income taxes --- --- --- (1,103) ________ _ ________ _ __________ _ __________ _ Net income $ 11,634 $ 8,867 $ 44,530 $ 27,684 ________ _ ________ _ __________ _ __________ _ (Continued on next page)
THE HILLHAVEN CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months and Nine Months Ended February 28, 1994 and 1993 (Unaudited) (In thousands, except per share amounts)
Three Months Nine Months ______________________ ______________________ 1994 1993 1994 1993 __________ __________ __________ __________ Primary income per common share: Income from operations $ .37 $ .36 $1.67 $1.19 Extraordinary charge --- (.02) (.04) (.02) Cumulative effect of accounting change --- --- --- (.05) _____ _____ _____ _____ Net income $ .37 $ .34 $1.63 $1.12 _____ _____ _____ _____ Fully diluted income per common share: Income from operations $ .33 $1.37 Extraordinary charge --- (.03) Cumulative effect of accounting change --- --- _____ _____ Net income $ .33 N/A $1.34 N/A _____ _____ Weighted average common shares and equivalents outstanding: Primary 23,982 23,809 23,660 23,118 Fully diluted 32,492 N/A 32,569 N/A See accompanying Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE HILLHAVEN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended February 28, 1994 and 1993 (Unaudited) (In thousands)
1994 1993 _________ _________ Net cash provided by operating activities (including changes in all operating assets and liabilities) $ 56,296 $ 44,256 _________ _________ Cash flows from investing activities: Purchases of property and equipment (29,815) (20,892) Purchases of previously leased nursing centers (1,668) (13,761) Proceeds from sales of property and equipment 14,842 19,182 Proceeds from collection of notes receivable 16,640 19,396 Distributions from joint ventures and partnerships 951 1,858 Increase in other assets (3,475) (4,297) _________ _________ Net cash used in investing activities (2,525) 1,486 _________ _________ Cash flows from financing activities: Net increase (decrease) in borrowings under revolving lines of credit 8,000 (13,000) Proceeds from long-term debt 357,920 91,501 Payments of principal on long-term debt (495,091) (112,152) Proceeds from sale of preferred stock 63,399 --- Increase in intangible assets (14,731) (3,584) Other items (9,415) (3,246) _________ _________ Net cash used in financing activities (89,918) (40,481) _________ _________ Net increase (decrease) in cash (36,147) 5,261 Cash and cash equivalents at beginning of period 73,159 45,932 _________ _________ Cash and cash equivalents at end of period $ 37,012 $ 51,193 _________ _________
THE HILLHAVEN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended February 28, 1994 and 1993 (Unaudited) (In thousands)
1994 1993 _________ _________ Supplemental disclosures Cash paid for: Interest $ 29,214 $ 40,670 Income taxes 7,233 7,226 Noncash investing and financing activities: Acquisition of previously leased nursing centers Long-term debt assumed 13,705 35,409 Adjustment to property and equipment and capital lease obligations 23,600 6,780 Notes receivable issued in connection with sale of nursing centers 1,540 33,634 Preferred stock issued to retire debt 56,601 --- Consolidation of a previously unconsolidated investee Increase in assets 6,243 4,155 Increase in liabilities 6,292 4,942 Preferred stock tendered for the purchase of common stock 63,300 --- See accompanying Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
THE HILLHAVEN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share information) 1. The unaudited financial information furnished herein, in the opinion of management, reflects all adjustments which are necessary to state fairly the financial position, cash flows and results of operations of The Hillhaven Corporation ("Hillhaven" or "the Company") as of and for the periods indicated. Hillhaven presumes that users of the interim financial information herein have read or have access to the Company's audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnote and other disclosures which would substantially duplicate the disclosures contained in Hillhaven's most recent annual report to stockholders have been omitted. In December 1993, the Company announced the completion of its facility disposition program (Note 3). Accordingly, the revenues and expenses related to facilities previously held for disposition and subsequently retained have been reclassified to ongoing operations in the consolidated statement of income for all periods presented. In addition, certain other reclassifications of prior year amounts have been made to conform to current year classifications. The financial information herein is not necessarily representative of a full year's operations. 2. The provision for doubtful accounts and notes receivable is included in operating and administrative expenses. Provisions totalled $3,956, $6,622, $1,282 and $5,315 for the three months and nine months ended February 28, 1994 and 1993, respectively. In the third quarter of 1994 the reserve for losses on notes receivable was increased by $2,500. 3. On December 5, 1991, Hillhaven announced a restructuring plan which included the disposition of 82 nursing centers over an estimated 24-month period. A restructuring charge of $90,000 was recorded in the quarter ended November 30, 1991, which included provisions for losses on disposition of the 82 nursing centers, operating losses of these centers during the disposition period and other related costs. As of November 30, 1993, the Company had completed the disposition of 50 of these nursing centers as well as three retirement housing facilities which prior to March 1, 1992 had been recorded as discontinued operations. Definitive agreements were in place to sell an additional nine of the nursing centers held for disposition. During the three months ended November 30, 1993, the Company reviewed its asset disposition program; because of improvements in reimbursement rates and results of operations and the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) difficult financing environment for nursing facilities and other real estate assets, the Company decided not to pursue the sales of the remaining nursing centers and a retirement housing facility. In addition, several parcels of land which had been held for development have been reclassified to other noncurrent assets. Assets related to the Company's restructuring program were as follows:
September 1, May 31 1993 1993 ____________ ___________ Assets $ 85,183 $ 85,768 Restructuring reserve (54,550) (56,646) ________ _ ________ _ Net assets $ 30,633 $ 29,122 ________ _ ________ _
Accrued loss reserves remaining at the date of reinstatement were comprised of $17,668 for losses from operations and $36,882 for estimated future losses on sale. Pretax losses charged to the reserve were as follows:
Three months ended Nine months ended February 28, February 28, 1994 1993 1994 1993 __________ __________ __________ __________ (Income) loss from operations $ --- $ (219) $ 235 $ 3,797 Loss on dispositions --- 834 1,860 28,824 _______ ______ ________ _ ________ _ $ --- $ 615 $ 2,095 $ 32,621 _______ ______ ________ _ ________ _
Revenues and expenses related to the 32 nursing centers and other properties previously held for disposition have been reclassified to ongoing operations in the consolidated statement of income for all periods presented. Total revenues and expenses of these facilities were as follows: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three months ended Nine months ended February 28, February 28, 1994 1993 1994 1993 __________ __________ __________ __________ Revenues $27,954 $ 28,946 $ 88,615 $ 86,131 Expenses 24,637 27,490 82,045 80,962 ________ ________ ________ ________ Income from operations before income taxes $ 3,317 $ 1,456 $ 6,570 $ 5,169 ________ ________ ________ ________
Net assets of these facilities as of September 1, 1993, less adjustments to asset carrying values and remaining accrued restructuring costs aggregating $32,646, have been reclassified from net assets held for disposition to appropriate balance sheet accounts. 4. Income tax expense reported for the three months and nine months ended February 28, 1994 differs from expected income tax expense on pretax income as the result of current tax credits, increased deferred tax benefits related to an increase in the statutory federal income tax rate from 34% to 35% and a reduction in the valuation allowance for deferred tax assets related to forecasted earnings for future years. For the Company to realize its net deferred tax assets, it must continue to achieve future pretax earnings. Although the Company believes such pretax earnings will be achieved, a lack of earnings could result in an increased provision for income taxes. 5. The extraordinary charges resulted from the write-off of capitalized financing costs in connection with the refinancing of certain of the Company's industrial revenue bonds and are shown net of the tax effect of $33 and $459 in the three and nine months ended February 28, 1994, respectively, and $178 in both the three and nine months ended February 28, 1993. 6. In September 1993, Hillhaven substantially completed a recapitalization plan (the "Recapitalization") which included the modification of the Company's relationship with National Medical Enterprises, Inc. (NME) to (i) purchase the remaining 23 nursing centers leased from NME for a purchase price of $111,800, (ii) repay all existing debt to NME in the aggregate principal amount of $147,202, (iii) release NME guarantees on approximately $400,000 of debt, (iv) limit the annual fee payable to NME to 2% of the remaining amount guaranteed and (v) amend existing NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) agreements to eliminate obligations of NME to provide additional financing to the Company. The Recapitalization was financed through (i) the issuance to NME of $120,000 of payable-in-kind Series D Preferred Stock, (ii) the incurrence of $205,000 of term loans and working capital loans, (iii) the issuance of $175,000 of 10-1/8% Senior Subordinated Notes due 2001 and (iv) the use of cash amounting to approximately $43,000. 7. On September 28, 1993, the Company's stockholders approved a proposal by the Board of Directors to amend the Articles of Incorporation to effect a reverse split of all authorized shares of Hillhaven Common Stock. A one-for-five reverse stock split was effected on November 1, 1993 which resulted in a decrease in the number of authorized shares of common stock from 300,000,000 to 60,000,000 and an increase in the par value of the common stock from $.15 to $.75 per share. Accordingly, all share and per share data have been restated to retroactively reflect the reverse stock split. 8. On December 31, 1993, Hillhaven completed the sale of thirteen nursing centers, nine of which had previously been held for disposition (Note 3). The Company received cash for the $15,594 sales price. The sale resulted in a gain of $5,102 which is included in net operating revenues. 9. On February 28, 1994, NME exercised its warrants to purchase six million shares of Hillhaven common stock. The aggregate exercise price of $63,300 was paid by the tender of a like amount of Hillhaven's payable-in-kind Series D Preferred Stock owned by NME. On February 28, 1994, NME held 32.7% of the outstanding shares of the Company's common stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per patient day amounts) The following material should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto. All references in this discussion and analysis to years are to fiscal years of the Company ended May 31 of such year. In the 1994 third quarter, Hillhaven realized net income of $11,634 compared to $8,867 in the prior year period. Net income for the nine months ended February 28, 1994 and 1993 amounted to $44,530 and $27,684, respectively. Income from operations before income taxes and extraordinary charges increased to $16,472 in the third quarter from $8,104 in the prior year period, and to $63,208 in the nine months ended February 28, 1994 from $24,557 in the same period in the prior year. Earnings for the nine months ended February 28, 1994 include a $21,904 pretax restructuring credit, as described below. Conclusion of the Disposition Program On December 5, 1991, Hillhaven announced a restructuring plan which included the disposition of 82 nursing centers over an estimated 24-month period. As of November 30, 1993, the Company had completed the disposition of 50 of these nursing centers as well as three retirement housing facilities which prior to March 1, 1992 had been recorded as discontinued operations. Definitive agreements were in place to sell an additional nine of the nursing centers held for disposition. During the 1994 second quarter, the Company reviewed its asset disposition program; because of improvements in reimbursement rates and results of operations and the difficult financing environment for nursing facilities and other real estate assets, the Company decided not to pursue the sale of the remaining nursing centers and a retirement housing facility. In addition, several parcels of land which had been held for development have been reclassified to other noncurrent assets. Accrued loss reserves remaining at the date of reinstatement amounted to $54,550. Revenues and expenses related to the 32 nursing centers and other properties previously held for disposition have been reclassified to ongoing operations in the consolidated statements of income for all periods presented. See Note 3 of Notes to Consolidated Financial Statements. Net assets of these facilities, less adjustments to asset carrying values and remaining accrued restructuring costs aggregating $32,646, have been reclassified from net assets held for disposition to appropriate balance sheet accounts. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results of Operations Net operating revenues were $363,973, $1,080,214, $344,065 and $1,018,738 in the three and nine months ended February 28, 1994 and 1993, respectively. Operating income before property-related expenses (which are comprised of rent, depreciation and amortization, interest and guarantee fees) for the three and nine months ended February 28, 1994, was $53,211 (14.6% of net operating revenues), and $156,052 (14.4% of net operating revenues), respectively, an increase of approximately 9.3% and 6.6% from $48,687 (14.2% of net operating revenues) and $146,414 (14.4% of net operating revenues) in the same periods in the prior year. The following table summarizes selected operating statistics:
At February 28, 1994 1993 __________ __________ Nursing Centers _______________ Number of centers owned/leased and operated 272 293 Number of licensed beds 34,143 36,208 Centers managed for others 16 17 Pharmacy Outlets 80 115 ________________ Retirement Housing Communities 20 23 ______________________________
Nursing center net operating revenues, comprised primarily of patient revenues, increased 7.3% and 7.4% in the three and nine months ended February 28, 1994 to $311,793 and $927,330, respectively, from $290,515 and $863,420 in the same periods in the prior year. The most significant revenue increases were provided by subacute medical and rehabilitation care services which constituted, respectively, approximately 26% and 24% of nursing center net operating revenues in the current three- and nine-month periods and 21% and 18% in the three and nine months ended February 28, 1993. These results reflect the continued emphasis by the Company on these higher revenue specialty services and the expansion of such operations. Revenues for the 1994 three- and nine-month periods also include gains on the sales of 13 nursing centers in the amount of $5,102 (Note 8). Net patient revenues per patient day increased by 8.2% in both the three and nine months ended February 28, 1994 to $103.24 and $100.65, respectively, from $95.40 and $93.03 in the same periods in the prior year. These increases were due to overall increases in rates for each payor type, as well as higher levels of subacute medical and rehabilitation care services. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Average occupancy in the owned and leased nursing centers operated by the Company was 93.2% and 93.5% in the 1994 three- and nine-month periods and 93.3% and 93.5% in the same periods in 1993. Data for nursing center operations with respect to sources of net patient revenues and patient mix by payor type are set forth below:
Three months ended Nine months ended February 28, February 28, 1994 1993 1994 1993 __________ __________ __________ __________ Net Patient Revenues ____________________ Medicaid 49.2% 53.8% 50.9% 55.7% Private and other 26.8 26.4 26.6 26.7 Medicare 24.0 19.8 22.5 17.6 Patient Census ______________ Medicaid 65.9% 68.1% 67.1% 68.7% Private and other 23.6 23.2 23.2 23.4 Medicare 10.5 8.7 9.7 7.9
Patient revenues are affected by changes in Medicare and Medicaid reimbursement rates, private pay and other rates charged by Hillhaven, occupancy levels and the payor mix. Medicare census increased over the prior year periods as a result of Hillhaven's continued focus on subacute medical and rehabilitation care programs. Hillhaven is working to improve private pay and other census by increasing the number of managed care patients in its nursing centers. The Company has entered into managed care contracts with insurance companies to provide subacute care to their insureds, offering a less expensive alternative to acute care hospitals. The number of managed care patients in Hillhaven's nursing centers averaged approximately 500 in the current quarter compared to 230 in the prior year period. Net operating revenues from pharmacy operations decreased to $43,745 and $128,906 in the three and nine months ended February 28, 1994, respectively, from $46,488 and $135,332 in the prior year periods. Decreased revenues resulted primarily from the disposition of 47 marginally performing retail outlets in 1993 and the first nine months of 1994. Institutional revenues accounted for approximately 76% of pharmacy net operating revenues in both the three and nine months ended February 28, 1994, versus 62% in both the same periods in 1993. The growing contribution from institutional operations reflects the Company's increasing focus on the nursing home market, disposition of MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) retail outlets and continuing pricing pressure in the retail operations. Institutional revenues increased by 15.6% and 16.7% to $33,243 and $97,647 in the three and nine months ended February 28, 1994, respectively, from $28,759 and $83,705 in the prior year periods. These increases are the result of an increase in the number of nursing center beds serviced and higher sales volumes per bed. The increase in per bed sales reflects the Company's strategy of aggressively marketing higher margin ancillary products and services, such as respiratory and intravenous therapies and enteral and urological supplies. Pharmacy operations produced operating income before property- related expenses of $5,706 in the current quarter (13.0% of net operating revenue), a decrease of approximately 9.7% from $6,319 (13.6% of net operating revenue) in the prior year quarter. For the nine months ended February 28, 1994, operating income before property-related expenses amounted to $16,761 (13.0% of net operating revenue) compared to $17,331 (12.8% of net operating revenue) in the same period in the prior year. Net operating revenues from retirement housing operations increased to $8,435 and $23,978 in the three and nine months ended February 28, 1994, respectively, from $7,062 and $19,986 in the prior year periods. These increases were primarily due to improvements in average occupancy, which increased to 96.7% and 95.9% in the three and nine months ended February 28, 1994 from 92.7% and 91.4% in the same periods in 1993. Operating and administrative expenses of the Company's nursing centers increased by 6.5% and 7.4% in the three and nine months ended February 28, 1994 to $267,017 and $795,269, respectively, from $250,627 and $740,331 in the same periods in 1993. These increases were attributable primarily to increased staffing levels and a higher cost of labor and related benefits, which represented approximately 76% and 77% of operating and administrative expense in the current three- and nine-month periods, respectively. Hillhaven has increased staffing levels in its nursing centers to accommodate the expansion of its subacute medical and rehabilitation care programs and services. Therapy wages and benefits, comprising approximately 12% and 11% of total nursing center labor costs in the three and nine months ended February 28, 1994, respectively, increased by 57% and 71% from the prior three- and nine-month periods to $24,293 and $68,289 respectively. Nursing wages and benefits, accounting for approximately 54% of total nursing center labor costs in both the three and nine months ended February 28, 1994, remained consistent in the third quarter as compared to the prior year quarter and increased by 2.5% in the nine-month period over the prior year. Increases in labor costs were mitigated by favorable results of workers' compensation loss experience in prior years as actuarially computed during the 1994 fiscal year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Included in operating and administrative expenses in the current period is a provision for losses on certain of the Company's notes receivable in the amount of $2,500. Combined interest and guarantee fee expense decreased by $2,574 to $13,393 in the current quarter and by $5,052 to $43,884 in the current nine- month period due to the recent refinancing of certain of the Company's indebtedness. See "The Recapitalization". Effective June 1, 1992 Hillhaven adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Adoption of SFAS 109 resulted in a charge of $1,103 to the 1993 first quarter statement of income. Including the impact of this charge, the effect of the adoption of SFAS 109 on the three and nine months ended February 28, 1993 was a reduction of net income tax expense and an increase in net income of $1,601 and $4,745, respectively, as compared to amounts that would have been reported under APB Opinion No. 11. The Recapitalization On September 2, 1993, Hillhaven substantially completed a recapitalization plan (the "Recapitalization") which improved the Company's balance sheet, extended the maturities of outstanding indebtedness, increased operating flexibility through the acquisition of leased facilities, fixed the interest rate on a portion of its previously floating rate indebtedness and also modified the relationship between Hillhaven and NME. The Company's relationship with NME was modified by (i) the purchase of the remaining 23 nursing centers leased from NME for $111,800, which represents a $23,600 discount from the aggregate purchase price specified in the purchase option agreements, (ii) the repayment of all existing debt to NME in the aggregate principal amount of $147,202, (iii) the release of NME guarantees on approximately $400 million of debt, (iv) the limitation of the annual fee payable to NME to 2% of the remaining amount guaranteed and (v) the amendment of existing agreements to eliminate obligations to NME to provide additional financing to the Company. The Recapitalization was financed through (i) the issuance to NME of $120,000 of payable-in-kind Series D Preferred Stock, (ii) the incurrence of a $175,000 five-year term loan under a secured credit facility with a syndicate of banks (the "Bank Term Loan"), (iii) the issuance of $175,000 of 10-1/8% Senior Subordinated Notes due 2001, (iv) borrowings of $30,000 under an accounts receivable-backed credit facility and (v) the use of approximately $43,000 of cash. The Bank Term Loan bears interest at a floating rate which, as of February 28, 1994, was 5.75%. The Recapitalization included a $100,000 letter of credit February 1994, the letter of credit facility was reduced to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) facility, the availability of which is subject to certain replace NME guarantees on existing indebtedness, and an $85,000 conditions and which the Company anticipates will be used to or provide cash for investment or other corporate purposes. In revolving bank line of credit. The availability of the $85,000 revolving line of credit will allow the Company to maintain lower cash balances, and may facilitate repayments of higher-rate debt $90,000. At February 28, 1994, letters of credit outstanding aggregate sales price of $52,007. Hillhaven provided financing for $33,634 of the total sales price and received cash for the balance. aggregating $8,145 and borrowings of $2,750. During this same partially financed by the assumption of underlying debt period, the Company disposed of 44 nursing centers for an The Company also has an accounts receivable-backed revolving $8,000. none of which was outstanding at February 28, 1994. earnings. Cash Flows and Financial Condition credit facility which provides for borrowings of up to $30,000, Hillhaven believes that it will generate sufficient cash to fund operations and meet its debt and lease obligations for the prior year. The increase is due primarily to higher pretax nine months of 1994 totaled $56,296, compared to $44,256 in the current fiscal year. Cash provided by operations in the first under the letter of credit facility totalled $68,668 and the revolving bank line of credit had an outstanding balance of period. In connection with the Recapitalization, the Company expended $14,829 for financing costs. On December 31, 1993, the proceeds from the sale of $74,750 of 7-3/4% Convertible Hillhaven completed the sale of thirteen nursing centers. The centers for an aggregate purchase price of $19,957. One of the aggregate purchase price of $140,090. Nine of these nursing centers were subsequently sold. The purchase was financed with During the nine months ended February 28, 1993, Hillhaven Company received cash for the $15,594 aggregate sales price. purchased 51 nursing centers previously leased from NME for an $52,700, with the balance settled in cash. The Company also debt amounting to $4,582 and NME financing in the amount of acquired from third parties five previously leased nursing Subordinated Debentures due 2002, the assumption of underlying Net cash used in investing activities amounted to $17,256 in the facilities was subsequently sold. These transactions were first nine months of 1994 compared to $2,098 in the prior year MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Capital expenditures for routine replacements and refurbishment of facilities and capital additions amounted to $29,815, compared to $20,892 in the prior year. Net cash used in financing activities increased to $75,187 from $36,897 in the prior year due to the overall reduction in the Company's borrowings. On February 28, 1994, NME exercised its warrants to purchase six million shares of Hillhaven common stock. NME tendered shares of the Company's payable-in-kind Series D Preferred Stock in payment of the $63,300 purchase price. Legislative Action On August 6, 1993, Congress approved a budget reconciliation bill, certain provisions of which will impact the Company's future results of operations. Effective October 1, 1993, the elimination of return-on-equity payments and a two-year freeze on routine cost limit increases may reduce the Company's Medicare revenues by approximately $7,000 annually. The Company believes it can mitigate a major portion of these revenue reductions by containing operating cost increases. Management believes that the Company will benefit from a series of restrictions included in the bill designed to limit access to Medicaid coverage. Individuals targeted by these changes are those who can afford to pay for their care but seek Medicaid eligibility through "artificial impoverishment" or transfer of assets. The Company cannot estimate the benefit of these restrictions on future operating results. The bill also extends (retroactive to July 1, 1992) though December 31, 1994 tax incentives for hiring the disadvantaged; the Company expects to receive the benefit of approximately $2,500 of these targeted jobs tax credits annually. In the aggregate, management believes that the provisions of the budget reconciliation bill will not have a material adverse impact on the future operations of the Company. President Clinton campaigned on health care reform and following his election formed a task force to study and formulate a plan for reform of the United States' health care system. On October 27, 1993, President Clinton submitted the American Health Security Act of 1993 (the "Health Security Act") to Congress for consideration. The Health Security Act, which is designed to guarantee health coverage to all United States citizens and legal residents and to create regional alliances to negotiate contracts with qualified health plans, is currently being studied by the relevant Congressional committees. At the same time, numerous other health care reform proposals have been introduced by members of the House of Representatives and the Senate. These proposals range from the formation a single payor system to the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) creation of health plan purchasing cooperatives to pool the purchasing power of individuals and employees of small businesses, or the formation of purchasing groups to negotiate contracts with health plans and offer them to individuals. These proposals also differ on the treatments of long term care services. While it is expected that health care reform legislation will be enacted, the exact nature or extent of such legislation has yet to be determined. In any case, it is possible that any legislation passed will have an effect on the operation and finances of the Company. PART II. OTHER INFORMATION Items 1 - 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K ________________________________ (A) Exhibits: (11) Statement Re: Computation of per share earnings for the three months and nine months ended February 28, 1994 and 1993 (B) Reports filed on Form 8-K: None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE HILLHAVEN CORPORATION (Registrant) Date: April 13, 1994 /s/ Michael B. Weitz ____________________________________ Michael B. Weitz * * Vice President and Principal Accounting Officer * Michael B. Weitz is signing in the dual capacities as i) * principal accounting officer, and ii) a duly authorized officer of the Company. EX-11 2 EXHIBIT 11 3RD QTR. FEB. 28, 1994 PART I - EXHIBIT 11 THE HILLHAVEN CORPORATION Statement Re: Computation of Per Share Earnings (in thousands, except per share amounts)
Three Months Ended Nine Months Ended February 28, February 28, 1994 1993 1994 1993 ________ ________ ________ ________ FOR PRIMARY EARNINGS PER SHARE Shares outstanding at beginning of period (1) 21,020 20,911 20,979 20,883 Shares issued upon exercise of stock options 9 10 34 20 Restricted share awards, net --- 76 (5) 25 Shares issued upon conversion of debentures 4 --- 1 --- Dilutive effect of outstanding stock options and contingent shares 210 222 213 187 Dilutive effect of warrants held by NME 2,739 2,590 2,438 2,003 _______ _______ _______ _______ Weighted average number of shares and share equivalents outstanding (2) 23,982 23,809 23,660 23,118 _______ _______ _______ _______ Income before extraordinary charge and cumulative effect of accounting change $11,707 $ 9,432 $45,543 $29,352 Adjustments related to proceeds from exercise of options and warrants under the "modified treasury stock" method --- --- --- 478 Preferred stock dividends (2,645) (722) (6,012) (2,166) _______ _______ _______ _______ Adjusted income 9,062 8,710 39,531 27,664 Extraordinary charge, net of income taxes (73) (565) (1,013) (565) Cumulative effect of change in accounting for income taxes --- --- --- (1,103) _______ _______ _______ _______ Net income as adjusted $ 8,989 $ 8,145 $38,518 $25,996 _______ _______ _______ _______ Primary earnings per share: Income before extraordinary charge and cumulative effect of accounting change $ .37 $ .36 $ 1.67 $ 1.19 Extraordinary charge --- (.02) (.04) (.02) Cumulative effect of change in accounting for income taxes --- --- --- (.05) _______ _______ _______ _______ Net income $ .37 $ .34 $ 1.63 $ 1.12 _______ _______ _______ _______
(Continued on next page) PART I - EXHIBIT 11 THE HILLHAVEN CORPORATION Statement Re: Computation of Per Share Earnings (in thousands, except per share amounts)
Three Months Ended Nine Months Ended February 28, February 28, 1994 1993 1994 1993 ________ ________ ________ ________ FOR FULLY DILUTED EARNINGS PER SHARE Weighted average number of shares used in primary calculation 23,982 23,809 23,660 23,118 Additional dilutive effect of stock options and warrants 292 --- 580 10 Assumed conversion of convertible debentures 8,218 8,384 8,329 5,841 _______ _______ _______ _______ Fully diluted weighted average number of shares (2) 32,492 32,193 32,569 28,969 _______ _______ _______ _______ Income before operations, extraordinary charge and cumulative effect of accounting change, adjusted per primary calculation $ 9,062 $ 8,710 $39,531 $27,664 Adjustments for interest expense and related income taxes 1,729 2,649 5,049 5,396 _______ _______ _______ _______ Adjusted income used in fully diluted calculation 10,791 11,359 44,580 33,060 Extraordinary charge, net of income taxes (73) (565) (1,013) (565) Cumulative effect of change in accounting for income taxes --- --- --- (1,103) _______ _______ _______ _______ $10,718 $10,794 $43,567 $31,392 _______ _______ _______ _______ Fully diluted earnings per share: Income before extraordinary charge and cumulative effect of accounting change $ .33 $ .35 $ 1.37 $ 1.14 Extraordinary charge --- (.01) (.03) (.02) Cumulative effect of change in accounting for income taxes --- --- --- (.04) _______ _______ _______ _______ Net income (3) $ .33 $ .34 $ 1.34 $ 1.08 _______ _______ _______ _______
---------- [FN] (1) Share amounts have been adjusted for the effect of a one-for-five reverse stock split effective November 1, 1993. (2) All shares in these tables are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. (3) The calculations for the three and nine months ended February 28, 1993 are submitted in accordance with Regulation S-K item 601(b)(11) although they are contrary to paragraph 37 of APB Opinion No. 15. -----END PRIVACY-ENHANCED MESSAGE-----