-----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, rGXtWO/IASAx6YbhAnzKJVaFroYv369LkNDnBAnqzKatnoOuScJFeilSs8EW5PJY vv1W1f8GPBr1ktksWZzvOQ== 0000891020-95-000110.txt : 19950417 0000891020-95-000110.hdr.sgml : 19950417 ACCESSION NUMBER: 0000891020-95-000110 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19950414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLHAVEN CORP CENTRAL INDEX KEY: 0000276477 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 911459952 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-58641 FILM NUMBER: 95529035 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 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE HILLHAVEN CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ NEVADA 8051 91-1459952 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
1148 BROADWAY PLAZA TACOMA, WASHINGTON 98402 (206) 572-4901 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ RICHARD P. ADCOCK SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL THE HILLHAVEN CORPORATION 1148 BROADWAY PLAZA TACOMA, WASHINGTON 98402 (206) 572-4901 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT THE EFFECTIVE TIME OF THE EXCHANGES OF THE OUTSTANDING SHARES OF COMMON STOCK OF NATIONWIDE CARE, INC. AND CERTAIN AFFILIATED ENTITIES FOR SHARES OF COMMON STOCK OF THE REGISTRANT AS DESCRIBED IN THE ENCLOSED PROSPECTUS/INFORMATION STATEMENT. ------------------------ If any of the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: / / If any of the securities being registered on this Form are being offered on a continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: /X/ CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM OFFERING PROPOSED TITLE OF SECURITIES AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED SHARE(1) OFFERING PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- Common Stock, par value $.75 per share........................... 5,500,000 shares $25.75 $141,625,000 $48,836.21 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Pursuant to Rules 457(f)(1) and 457(c), the proposed maximum offering price per share is estimated based on the average of the high and low prices of the Registrant's Common Stock reported on the New York Stock Exchange Composite Tape on April 10, 1995. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE HILLHAVEN CORPORATION CROSS REFERENCE SHEET REQUIRED BY ITEM 501(B) OF REGULATION S-K
LOCATION IN PROSPECTUS/INFORMATION ITEM OF FORM S-4 STATEMENT ---------------- ---------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus/Information Statement.......... Forepart of Registration Statement and Outside Front Cover Page of Prospectus/Information Statement 2. Inside Front and Outside Back Cover Pages of Prospectus/Information Statement....... Inside Front Cover Page of Prospectus/ Information Statement; Table of Contents; Available Information; Incorporation of Certain Documents by Reference 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information............. Cover Page; Summary; Selected Financial Data; Comparison of Historical and Equivalent Per Share Data (Unaudited); Incorporation of Certain Documents by Reference; Risk Factors; Summary Unaudited Pro Forma Condensed Combined Financial Information 4. Terms of the Transaction.................. Summary; Background of and Reasons for the Share Exchange; Terms and Conditions of the Share Exchange; Description of Capital Stock; Principal Differences between Hillhaven and Corporate Targets' Capital Stock 5. Pro Forma Financial Information........... Selected Financial Data; Unaudited Pro Forma Condensed Combined Financial Statements 6. Material Contacts with the Company Being Acquired.................................. Not applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters........................ Summary; Resales of Hillhaven Common Shares 8. Interests of Named Experts and Counsel.... Experts; Legal Matters 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect to S-3 Registrants............................... Summary; Incorporation of Certain Documents by Reference; Risk Factors; Comparison of Historical and Equivalent Per Share Data (Unaudited); Selected Financial Data; Summary Unaudited Pro Forma Condensed Combined Financial Information; Unaudited Pro Forma Condensed Combined Financial Statements; Market Price and Dividend Data. 11. Incorporation of Certain Information by Reference................................. Incorporation of Certain Documents by Reference 12. Information with Respect to S-2 or S-3 Registrants............................... Not Applicable
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LOCATION IN PROSPECTUS/INFORMATION ITEM OF FORM S-4 STATEMENT ---------------- ---------------------------------- 13. Incorporation of Certain Information by Reference................................. Not Applicable 14. Information with Respect to Registrants Other Than S-2 or S-3 Registrants......... Not Applicable C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies................................. Not Applicable 16. Information with Respect to S-2 or S-3 Companies................................. Not Applicable 17. Information with Respect to Companies Other Than S-2 or S-3 Companies........... Summary; Market Price and Dividend Data; Comparison of Historical and Equivalent Per Share Data (Unaudited); Selected Financial Data; The Nationwide Entities; Nationwide Care, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations; Description of Capital Stock; Principal Differences Between Hillhaven and Corporate Targets' Capital Stock; Index to Financial Statements; Financial Statements D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authorizations are to be Solicited........ Not applicable 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer...................... Incorporation of Certain Documents by Reference; Corporate Targets' Special Meetings; Other Matters to Voted Upon by NCI Voting Common Shareholders; Corporate Targets' Principal Shareholders
4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS/INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 14, 1995 THE HILLHAVEN CORPORATION NATIONWIDE CARE, INC. 1148 BROADWAY PLAZA 9200 KEYSTONE CROSSING, SUITE 800 TACOMA, WASHINGTON 98402 INDIANAPOLIS, INDIANA 46240 (206) 572-4901 (317) 848-5063 PHILLIPPE ENTERPRISES, INC. 9200 KEYSTONE CROSSING, SUITE 800 INDIANAPOLIS, INDIANA 46240 (317) 848-5063 MEADOWVALE SKILLED CARE CENTER, INC. 1529 WEST LANCASTER STREET BLUFFTON, INDIANA 46714 (317) 848-5063 PROSPECTUS/INFORMATION STATEMENT This Prospectus/Information Statement is being furnished to the shareholders of Nationwide Care, Inc., an Indiana corporation ("NCI"), Phillippe Enterprises, Inc., an Indiana corporation ("PEI") and Meadowvale Skilled Care Center, Inc., an Indiana corporation ("Meadowvale"), in connection with the proposed issuance by The Hillhaven Corporation ("Hillhaven" or the "Company") of its common stock, par value $0.75 per share (the "Hillhaven Common Shares") in exchange for the outstanding common stock of NCI, PEI and Meadowvale, respectively (the "Share Exchange"), pursuant to the terms and subject to the conditions of the Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests executed on April , 1995, but dated as of February 27, 1995 (the "Share Exchange Agreement") by and among Hillhaven, NCI, PEI, Meadowvale and certain NCI-affiliated partnerships. NCI, PEI and Meadowvale are sometimes collectively referred to herein as the "Corporate Targets." Each of the partners of the NCI-affiliated partnerships has executed the Share Exchange Agreement, although none of them will receive any consideration in exchange for their respective partnership interests. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Share Exchange Consideration and Mechanics." Upon consummation of the Share Exchange, the Corporate Targets will become wholly-owned subsidiaries of Hillhaven. The Share Exchange Agreement amended and restated the Agreement and Plan of Merger and Agreements to Assign Partnership Interests filed with the Company's Form 8-K on March 6, 1995, and the Share Exchange Agreement is filed as an exhibit to the Registration Statement of which this Prospectus/Information Statement is a part. The number of Hillhaven Common Shares to be received by the shareholders of the Corporate Targets in connection with the consummation of the Share Exchange ranges from 5,000,000 to 5,500,000, depending upon the average closing price of the Hillhaven Common Shares as reported on the New York Stock Exchange ("NYSE") for the ten trading days immediately preceding the Closing Date (as defined in the Share Exchange Agreement). See "SUMMARY -- The Share Exchange" and "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Share Exchange Consideration and Mechanics." Upon consummation of the Share Exchange, all outstanding shares of common stock of the Corporate Targets (the "Target Common Shares"), except for shares for which statutory dissenters' rights are exercised, will be exchanged for Hillhaven Common Shares. See "CORPORATE TARGETS SPECIAL MEETINGS -- Dissenters' Rights." All such Hillhaven Common Shares may be sold by the former shareholders of the Corporate Targets from time to time subject to various restrictions as described herein. See "RESALES OF HILLHAVEN COMMON SHARES." The Share Exchange will constitute a "reorganization" for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, as a general rule, no gain or loss should be recognized by shareholders of the Corporate Targets to the extent such shareholders exchange their securities solely for Hillhaven Common Shares in the Share Exchange. See "SUMMARY -- Certain Federal Income Tax Consequences" and "TERMS AND CONDITIONS OF THE SHARE EXCHANGE -- Certain Federal Income Tax Consequences." Hillhaven Common Shares are listed on the NYSE under the symbol HIL. On April 11, 1995, the last sale price for Hillhaven Common Shares as reported on the NYSE composite tape was $25.375 per share. FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE SHARE EXCHANGE, SEE "RISK FACTORS." NO PROXIES OF THE CORPORATE TARGET SHAREHOLDERS ARE BEING SOLICITED HEREBY AND SUCH SHAREHOLDERS ARE REQUESTED NOT TO DELIVER PROXIES. SEE "SUMMARY -- APPROVAL OF CORPORATE TARGET SHAREHOLDERS REQUIRED." THE SECURITIES TO BE ISSUED IN THE SHARE EXCHANGE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NEITHER THE DELIVERY OF THIS PROSPECTUS/INFORMATION STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES MADE HEREUNDER SHALL IMPLY OR CREATE THE IMPRESSION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE HEREOF OR IN THE AFFAIRS OF THE COMPANY, NCI, PEI, MEADOWVALE AND CERTAIN NCI-AFFILIATED PARTNERSHIPS SINCE THE DATE HEREOF OR THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS/INFORMATION STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS ARE AVAILABLE UPON REQUEST FROM RICHARD P. ADCOCK, SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL, THE HILLHAVEN CORPORATION, 1148 BROADWAY PLAZA, TACOMA, WASHINGTON 98402, TELEPHONE NUMBER (206) 572-4901. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY A DATE FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE FINAL INVESTMENT DECISION MUST BE MADE. ------------------------ The date of this Prospectus/Information Statement is , 1995. 5 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................................. 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2 SUMMARY............................................................................... 4 The Companies....................................................................... 4 Parties to the Share Exchange Agreement............................................. 5 The Share Exchange.................................................................. 5 Approval of Corporate Target Shareholders Required.................................. 5 Regulatory Approvals Required....................................................... 6 Dissenters' Rights.................................................................. 6 Certain Differences in Shareholders' Rights......................................... 6 Certain Federal Income Tax Consequences............................................. 6 Advice Regarding Accounting Treatment Required...................................... 6 Closing and Effective Time.......................................................... 7 MARKET PRICE AND DIVIDEND DATA........................................................ 8 COMPARISON OF HISTORICAL AND EQUIVALENT PER SHARE DATA (UNAUDITED).................... 10 SELECTED FINANCIAL DATA............................................................... 11 Hillhaven Selected Financial Data................................................... 11 NCI Selected Financial Data......................................................... 12 Summary Unaudited Pro Forma Condensed Combined Financial Information................ 13 RISK FACTORS.......................................................................... 15 Recent Developments................................................................. 15 Volatility of Share Price........................................................... 15 Certain Litigation.................................................................. 15 Substantial Leverage................................................................ 16 Reimbursement by Third Party Payors................................................. 16 Governmental Regulation............................................................. 17 Limited Availability of Labor....................................................... 17 CORPORATE TARGETS' SPECIAL MEETINGS................................................... 17 The NCI Special Meeting............................................................. 17 Recommendation of the NCI Board of Directors........................................ 18 The Meadowvale Special Meeting...................................................... 18 Recommendation of the Meadowvale Board of Directors................................. 19 Consent of PEI Shareholders......................................................... 19 Expenses of Special Meetings........................................................ 19 Dissenters' Rights.................................................................. 19 BACKGROUND OF AND REASONS FOR THE SHARE EXCHANGE...................................... 22 Background of the Share Exchange.................................................... 22 Hillhaven's Reasons for the Share Exchange.......................................... 22 The Nationwide Entities' Reasons for the Share Exchange and Recommendations of the Boards of Directors.......................................................... 24 TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT.................................. 25 Effective Time of the Share Exchange................................................ 25 Share Exchange Consideration and Mechanics.......................................... 25 Redemption of NCI Subordinated Notes and NCI Preferred Stock........................ 27 Escrow Agreement and Supplemental Escrow Agreement.................................. 27 Representations and Warranties...................................................... 27
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PAGE ---- Certain Covenants................................................................... 28 Conditions to the Share Exchange.................................................... 29 Indemnification and Supplemental Indemnification.................................... 30 Noncompetition Agreements........................................................... 30 Agreement Among Corporate Target Shareholders....................................... 31 Additional Agreements............................................................... 31 Termination......................................................................... 32 Supplement, Modification or Amendment of the Share Exchange Agreement............... 32 Share Exchange Expenses............................................................. 33 Certain Relationships and Related Party Transactions................................ 33 Certain Federal Income Tax Consequences............................................. 33 Accounting Treatment................................................................ 34 OTHER MATTERS TO BE VOTED UPON BY NCI VOTING COMMON SHAREHOLDERS...................... 35 Approval of Employment Agreement Payments........................................... 35 Approval of Accelerated Vestings.................................................... 36 THE NATIONWIDE ENTITIES............................................................... 36 Description of NCI Business......................................................... 36 Centers............................................................................. 37 Revenue Sources..................................................................... 38 Government Regulation............................................................... 39 Personnel........................................................................... 40 Affiliated Entities................................................................. 40 Legal Proceedings................................................................... 40 CORPORATE TARGETS' PRINCIPAL SHAREHOLDERS............................................. 41 NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................... 43 Overview............................................................................ 43 Results of Operations............................................................... 43 Liquidity and Capital Resources..................................................... 46 Seasonality......................................................................... 47 New Accounting Standards............................................................ 47 Impact of Inflation................................................................. 47 Meadowvale and PEI Businesses....................................................... 47 DESCRIPTION OF CAPITAL STOCK.......................................................... 48 Description of Hillhaven Capital Stock.............................................. 48 Description of NCI Capital Stock.................................................... 49 Description of Meadowvale Capital Stock............................................. 50 Description of PEI Capital Stock.................................................... 51 PRINCIPAL DIFFERENCES BETWEEN HILLHAVEN AND CORPORATE TARGETS' CAPITAL STOCK.......... 52 General............................................................................. 52 Board of Directors.................................................................. 52 Removal of Directors; Filling Vacancies on the Board of Directors................... 53 Limitation on Directors' Liability.................................................. 53 Indemnification..................................................................... 53 Restrictions on Business Combinations............................................... 54 Restrictions on Voting Rights....................................................... 54 Shareholder Action by Written Consent; Special Meetings............................. 55 Amendment or Repeal of the Articles of Incorporation and By-Laws.................... 55
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PAGE ---- Cumulative Voting................................................................... 56 Shareholder Vote for Mergers or Share Exchanges..................................... 56 Appraisal Rights in Mergers or Share Exchanges...................................... 56 Dividends........................................................................... 56 Hillhaven Rights Plan............................................................... 56 RESALES OF HILLHAVEN COMMON SHARES.................................................... 58 LEGAL MATTERS......................................................................... 59 EXPERTS............................................................................... 59 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........................... 61 Unaudited Pro Forma Condensed Combined Balance Sheet as of February 28, 1995........ 62 Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended February 28, 1995.......................................................... 63 Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended February 28, 1994.......................................................... 64 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended May 31, 1994............................................................... 65 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended May 31, 1993............................................................... 66 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended May 31, 1992............................................................... 67 Notes to Unaudited Pro Forma Condensed Combined Financial Statements................ 68 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 ANNEX A -- OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED.............. A-1 ANNEX B -- CHAPTER 44 OF THE INDIANA BUSINESS CORPORATION LAW......................... B-1
iii 8 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission" or "SEC") in Washington, D.C., a Registration Statement on Form S-4 (together with all amendments and exhibits and schedules thereto, hereinafter referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Hillhaven Common Shares offered by this Prospectus/Information Statement. This Prospectus/Information Statement, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Hillhaven Common Shares, reference is made to the Registration Statement. Statements contained in this Prospectus/Information Statement as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission, reference is made to such contract, agreement or other document for a complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information and the Registration Statement and exhibits and schedules thereto filed by the Company with the Commission can be inspected and copied at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies may also be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements and other information filed on or before November 1, 1993 can also be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York 10006. Such reports, proxy statements and other information filed on or after November 2, 1993 can also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed by the Company with the Commission, are hereby incorporated in this Prospectus/Information Statement by reference and made a part hereof: 1. The Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994; 2. Quarterly Report on Form 10-Q for the quarter ended August 31, 1994; 3. Quarterly Report on Form 10-Q for the quarter ended November 30, 1994; 4. Quarterly Report on Form 10-Q for the quarter ended February 28, 1995; 5. Current Report on Form 8-K dated as of October 12, 1994; 6. Current Report on Form 8-K dated as of January 27, 1995; 7. Current Report on Form 8-K dated as of March 6, 1995; 8. The descriptions of the Hillhaven Common Shares and of the purposes and certain anti-takeover effects of certain provisions of the Company's Amended and Restated Articles of Incorporation and By-Laws and of the Rights Plan, which are contained in the Company's Registration Statement on Form 10 filed with the Commission on January 8, 1990, pursuant to Section 12 of the Exchange Act, including any amendments or reports filed for the purpose of updating such descriptions; and 9. Registration Statement on Form 8-A dated October 8, 1993 and any amendment or report filed for the purpose of updating the description of the Company's securities contained in such registration statement. 2 9 In addition, all documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus/Information Statement and prior to the termination of this offering, or the reoffering of securities acquired pursuant to the Registration Statement of which this Prospectus/Information Statement is a part, shall be deemed to be incorporated by reference in this Prospectus/Information Statement and to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus/Information Statement to the extent that a statement contained herein or in any other subsequently filed document that also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any such statements so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus/Information Statement. Hillhaven hereby undertakes to provide without charge to each person to whom this Prospectus/Information Statement has been delivered, on the written or oral request of such person, or any beneficial owner, a copy of any or all of the documents referred to above which have been or may be incorporated into this Prospectus/Information Statement and deemed to be part hereof, other than exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents. 3 10 SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus/Information Statement or incorporated by reference herein. THE COMPANIES Hillhaven Hillhaven operates nursing centers, pharmacies and retirement housing communities. Based upon the number of beds in service and net operating revenues, the Company is the second largest long term care provider in the United States and believes that it is one of the leading providers of Alzheimer's care. Pharmacy operations are conducted through the Company's wholly-owned subsidiary, Medisave Pharmacies, Inc. The Company provides a wide range of diversified health care services, including long term care and subacute medical and rehabilitation services, such as wound care, oncology treatment, brain injury care, stroke therapy and orthopedic therapy. Subacute medical and rehabilitation services are offered at all of the Company's nursing centers and are the fastest growing component of the Company's nursing center operations. Hillhaven believes that it is also one of the largest providers of physical, occupational and speech therapies in the United States. In addition, the Company currently provides long term care to residents of the Company's nursing centers with Alzheimer's disease through 68 Alzheimer's care units. Unless the context otherwise requires, the terms "Hillhaven" and the "Company" refer to The Hillhaven Corporation and its consolidated subsidiaries. The Company was incorporated under the laws of the state of Nevada in May 1989. Its principal offices are located at 1148 Broadway Plaza, Tacoma, Washington 98402, and its telephone number is (206) 572-4901. NCI NCI operates long term health care centers located in Indiana, Ohio and Florida. NCI's operations include 23 nursing centers with a total of 3,257 licensed beds, two retirement centers with a total of 240 units, two assisted living centers totaling 162 units and 40 additional assisted living units located in one of the retirement centers. Of NCI's 27 centers, 14 are owned, 11 are leased and two are managed for other parties. Twenty-one of NCI's centers are located in Indiana, three are located in Ohio and three are located in Florida. NCI was incorporated on September 30, 1992 for the purpose of consummating a reorganization that took place on July 27, 1993 (the "Reorganization"). Under the Reorganization, several partnerships and corporations (the "Nationwide Businesses") owned or controlled by Dr. Thomas E. Phillippe, Sr. and his family (the "Phillippes") as well as certain entities which the Phillippes did not control (the "Non-Controlled Entities") were acquired and combined into NCI. Specifically, pursuant to the Reorganization: (i) each of the Nationwide Businesses that was a corporation was merged with and into NCI; (ii) each partner of a Nationwide Business that was a partnership contributed his or her partnership interest to NCI (except that less than one percent of the partnership interests in Camelot Care Centers, an Indiana general partnership, and Evergreen Woods, Ltd., a Florida limited partnership, remained outstanding and not owned by NCI); and (iii) each of the Non-Controlled Entities was merged with and into NCI. Each partner and shareholder of the Nationwide Businesses and the Non-Controlled Entities received common shares of NCI, plus cash in lieu of fractional shares, in exchange for their interests in the Nationwide Businesses and the Non-Controlled Entities. The purposes of the Reorganization were to reduce borrowing costs, increase access to capital markets, achieve economies of scale and reduce the administrative burdens associated with operating multiple separated entities. NCI provides a broad range of services through its nursing centers. All of NCI's nursing centers provide skilled nursing care and rehabilitation and ancillary services, such as physical, occupational, speech and respiratory therapies. In addition, ten of NCI's nursing centers have specialty care Alzheimer's units, and eight have subacute care units with an aggregate total of 173 dedicated beds. In addition to its nursing center 4 11 services, NCI provides more limited care services through its home health care agencies, assisted living centers and retirement centers. NCI was incorporated under the laws of the state of Indiana in September 1992. Its principal offices are located at 9200 Keystone Crossing, Suite 800, Indianapolis, Indiana, 46240, and its telephone number is (317) 848-5063. In connection with the Share Exchange, the outstanding Meadowvale Common Shares and PEI Common Shares will be exchanged for Hillhaven Common Shares. Meadowvale owns Meadowvale Care Center, which is currently leased to NCI. As a result, the fiancial results of Meadowvale are included in the financial results for NCI. Meadowvale was incorporated under the laws of the state of Indiana in July 1969. Meadowvale's principal offices are located at 1529 West Lancaster Street, Bluffton, Indiana 46714, and its telephone number is (317) 848-5063. PEI owns the Heritage at Hernando Assisted Living Center, which is currently managed by NCI. PEI was incorporated under the laws of the state of Indiana in November 1992. PEI's principal offices are located at 9200 Keystone Crossing, Suite 800, Indianapolis, Indiana 46240, and its telephone number is (317) 848-5063. Separate financial statements for Meadowvale and PEI are included with this Prospectus/Information Statement. See "INDEX TO FINANCIAL STATEMENTS." PARTIES TO THE SHARE EXCHANGE AGREEMENT The parties to the Share Exchange Agreement are Hillhaven, NCI, PEI, Meadowvale, the partners of Camelot Care Centers, an Indiana general partnership ("Camelot"), the partners of Shangri-La Partnership, an Indiana general partnership ("Shangri-La") and the limited partners of Evergreen Woods, Ltd., a Florida limited partnership ("Evergreen"); provided that if, prior to the Effective Time, the nursing center owned by Shangri-La (the "Shangri-La Facility") is purchased pursuant to an option to purchase such center exercised on March 1, 1995, the partners of Shangri-La shall not be considered parties to the original merger agreement or the Share Exchange Agreement, and such partners shall be released and discharged from any obligations under such agreements. Camelot, Shangri-La and Evergreen are sometimes collectively referred to herein as the "Partnership Targets." The partners of Camelot and Shangri-La and the limited partners of Evergreen are sometimes collectively referred to herein as the "Partners." The interests in the Partnerships held by the Partners are sometimes collectively referred to herein as the "Partnership Interests." The Corporate Targets and the Partnership Targets are collectively referred to herein as the "Nationwide Entities." The shareholders of the Corporate Targets and the partners and limited partners of the Partnership Targets are collectively referred to herein as the "Nationwide Shareholders." THE SHARE EXCHANGE Upon consummation of the Share Exchange, all outstanding Target Common Shares, except for shares for which statutory dissenters' rights are exercised, will be automatically converted into the right to receive a number of Hillhaven Common Shares as follows: (a) 0.564 multiplied by the number of shares of NCI common stock ("NCI Voting Common Shares") held; (b) 0.564 multiplied by the number of shares of nonvoting NCI common stock ("NCI Nonvoting Common Shares") (the NCI Voting Common Shares and the NCI Nonvoting Common Shares are sometimes collectively referred to herein as the "NCI Common Shares") held; (c) 41.67 multiplied by the number of shares of PEI common stock ("PEI Common Shares") held; and (d) 41.67 multiplied by the number of shares of Meadowvale common stock ("Meadowvale Common Shares") held, in each case rounded to the nearest whole share. The total number of Hillhaven Common Shares to be issued in connection with the Share Exchange may range from 5,000,000 to 5,500,000 shares, depending upon the average closing price of Hillhaven Common Shares as reported on the NYSE for the ten trading days immediately preceding the Closing Date, and are subject to certain escrow arrangements described herein. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Share Exchange Consideration and Mechanics" and "-- Escrow Agreement and Supplemental Escrow Agreement." 5 12 APPROVAL OF CORPORATE TARGET SHAREHOLDERS REQUIRED The Share Exchange must be approved and the Share Exchange Agreement must be approved and adopted by a majority of the respective shareholders of each of the Corporate Targets at duly convened special meetings of shareholders held for that purpose or by unanimous written consent. Under the Indiana Business Corporation Law ("IBCL"), holders of the NCI Voting Common Shares and NCI Nonvoting Common Shares are entitled to vote as separate groups with respect to such approval and adoption. Proxies will not be solicited by any of the Corporate Targets in connection with their respective special meetings of shareholders. As of April 1, 1995, there were 7,431,460 NCI Voting Common Shares and 76,592 NCI Nonvoting Common Shares outstanding, of which approximately 6,384,633 shares (85.9%) and -0- shares (0%), respectively, were beneficially owned by NCI's directors, executive officers and their affiliates. As of April 1, 1995, there were 3,000 Meadowvale Common Shares outstanding, of which approximately 2,404 shares (80.1%) were beneficially owned by Meadowvale's directors, executive officers and their affiliates. As of April 1, 1995, there were 2,000 PEI Common Shares outstanding, all of which were beneficially owned by PEI's directors, executive officers and their affiliates. Dr. Thomas E. Phillippe, Sr. and his son, Thomas E. Phillippe, Jr., who together own 80.9%, 0% and 100% of the outstanding NCI Voting Common Shares, Meadowvale Common Shares and PEI Common Shares, respectively, have contractually agreed to vote all such securities for approval of the Share Exchange and adoption of the Share Exchange Agreement. The other directors and executive officers of each of the Corporate Targets have also indicated that they intend to vote securities of the Corporate Targets over which they have voting power for such approval and adoption. See "CORPORATE TARGETS' SPECIAL MEETINGS." The Share Exchange and the Share Exchange Agreement do not require the approval of or adoption by the shareholders of Hillhaven. As of April 1, 1995, there were 32,848,863 Hillhaven Common Shares outstanding, of which approximately 806,212 shares (2.5%) were beneficially owned by Hillhaven's directors, executive officers and their affiliates. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Relationships and Related Party Transactions." REGULATORY APPROVALS REQUIRED The consummation of the Share Exchange is subject to obtaining or receiving all applicable material permits, authorizations, approvals and consents of, and filing all applicable notices with, all appropriate governmental entities, including, without limitation, the filing of all notifications required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the expiration or earlier termination of all applicable waiting periods with respect thereto. DISSENTERS' RIGHTS Shareholders of the Corporate Targets who do not vote to approve the Share Exchange and adopt the Share Exchange Agreement may elect to receive payment for the value of their shares in cash in accordance with Chapter 44 of the IBCL. Strict compliance with Chapter 44 of the IBCL is required in order to perfect such rights. See "CORPORATE TARGETS' SPECIAL MEETINGS -- Dissenters' Rights" and "ANNEX B -- CHAPTER 44 OF THE INDIANA BUSINESS CORPORATION LAW." CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS Nevada is the jurisdiction of incorporation of Hillhaven. Indiana is the jurisdiction of incorporation of each of the Corporate Targets. Upon consummation of the Share Exchange, the shareholders of the Corporate Targets will become shareholders of Hillhaven and their rights will be governed by the Nevada General Corporation Law ("NGCL"), and the Amended and Restated Articles of Incorporation and By-Laws of Hillhaven, which differ in certain material respects from the IBCL, and the Articles of Incorporation and By-Laws of each of the Corporate Targets. See "PRINCIPAL DIFFERENCES BETWEEN HILLHAVEN AND CORPORATE TARGETS' CAPITAL STOCK." 6 13 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The respective obligations of Hillhaven and the Corporate Targets to consummate the transactions contemplated by the Share Exchange Agreement are subject to Hillhaven's receipt of an opinion from its independent accountants and NCI's receipt of an opinion from its counsel that the Share Exchange will, under current law, constitute a tax-free reorganization under the Code and that Hillhaven and the Corporate Targets will be parties to the reorganization. As a tax-free reorganization, except for those shareholders receiving cash as a result of the exercise of dissenters' rights, none of the Corporate Targets, the shareholders of the Corporate Targets or Hillhaven will recognize gain or loss to the extent Hillhaven Common Shares are issued in exchange for Target Common Shares. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Federal Income Tax Consequences." ADVICE REGARDING ACCOUNTING TREATMENT REQUIRED Hillhaven's obligation to consummate the transactions contemplated by the Share Exchange Agreement is subject to receiving advice in writing from Hillhaven's independent accountants that the Share Exchange may be accounted for as a pooling of interests under generally accepted accounting principles ("GAAP"). See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Accounting Treatment." CLOSING AND EFFECTIVE TIME Assuming all of the conditions precedent to the Share Exchange are satisfied or waived prior thereto, it is anticipated that the Closing of the transactions contemplated by the Share Exchange Agreement will occur on or about June , 1995 and that the Effective Time of the Share Exchange will occur on or about 12:01 a.m., Eastern Standard Time, June , 1995. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Effective Time of the Share Exchange." 7 14 MARKET PRICE AND DIVIDEND DATA Hillhaven Common Shares have been listed and traded on the NYSE since November 2, 1993 and were previously listed and traded on the American Stock Exchange under the symbol "HIL." The stock prices below are the high and low sales prices as reported on the composite tape as adjusted to reflect a one-for-five reverse stock split effective November 1, 1993.
HIGH LOW -------- -------- FISCAL 1992 First quarter...................................................... $16.875 $10.00 Second quarter..................................................... 15.00 8.75 Third quarter...................................................... 16.875 11.25 Fourth quarter..................................................... 14.375 10.625 FISCAL 1993 First quarter...................................................... $13.75 $10.625 Second quarter..................................................... 16.875 10.00 Third quarter...................................................... 21.875 12.8125 Fourth quarter..................................................... 17.50 13.125 FISCAL 1994 First quarter...................................................... $18.75 $14.375 Second quarter..................................................... 20.3125 14.6875 Third quarter...................................................... 21.375 17.875 Fourth quarter..................................................... 22.875 18.50 FISCAL 1995 First quarter...................................................... $21.125 $17.375 Second quarter..................................................... 24.00 20.375 Third quarter...................................................... 27.00 18.625 Fourth quarter (through April 11, 1995)............................ 28.75 23.25
The Company has not paid a common dividend and does not anticipate declaring a common dividend in the near future. The reported closing sale price of Hillhaven Common Shares on the NYSE composite tape on February 27, 1995, the last full day of trading for Hillhaven Common Shares prior to the announcement by Hillhaven of its agreement to acquire NCI, was $24.875 per share. As of April 1, 1995, there were approximately 9,500 holders of record of Hillhaven Common Shares. Approximately 33,300 additional shareholders held shares under beneficial ownership in nominee name or within clearing house positions of brokerage firms and banks. NCI Voting Common Shares and NCI Nonvoting Common Shares are held by 24 and seven shareholders, respectively, as of the date of this Prospectus/Information Statement. No established public trading market exists for NCI Common Shares. In connection with the Reorganization, the NCI Voting Common Shares were valued at $6.67 per share. NCI has not paid dividends on the NCI Common Shares. During fiscal 1992, 1993, and 1994, the Nationwide Entities paid distributions to their partners and shareholders of approximately $2,483,000, $4,395,000 and $-0-, respectively. For further information regarding the NCI Common Shares, see "DESCRIPTION OF CAPITAL STOCK -- Description of NCI Capital Stock." Meadowvale Common Shares are held by eight shareholders as of the date of this Prospectus/Information Statement. No established public trading market exists for Meadowvale Common Shares. Meadowvale Common Shares have not been issued or transferred for consideration within the past five years. During fiscal 1992, 1993 and 1994, Meadowvale paid dividends to its shareholders of approximately $189,244, 8 15 $195,600, and $185,800, respectively. For further information regarding Meadowvale Common Shares, see "DESCRIPTION OF CAPITAL STOCK -- Description of Meadowvale Capital Stock." PEI Common Shares are held by two shareholders as of the date of this Prospectus/Information Statement. No established public trading market exists for PEI Common Shares. PEI Common Shares have not been transferred since the corporation's incorporation. PEI has not paid dividends to its shareholders since its formation. For further information regarding PEI Common Shares, see "DESCRIPTION OF CAPITAL STOCK -- Description of PEI Capital Stock." 9 16 COMPARISON OF HISTORICAL AND EQUIVALENT PER SHARE DATA (UNAUDITED) The following table summarizes certain unaudited selected financial information on a pro forma and pro forma equivalent per share basis and is derived from, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements included elsewhere in this Prospectus/Information Statement and the historical financial statements of Hillhaven and NCI which are included elsewhere in this Prospectus/Information Statement or incorporated herein by reference. Financial data related to PEI, Meadowvale and Shangri-La are included only in the pro forma and equivalent pro forma amounts. The information presented in this table does not purport to present the financial position or results of operations of the Company had the Share Exchange taken place on the dates specified, nor is such information necessarily indicative of the results of operations that may be achieved in the future.
NINE MONTHS YEARS ENDED ENDED MAY 31, FEBRUARY 28, ----------------------------- ---------------- 1992 1993 1994 1994 1995 ------ ------- ------ ----- ------ HILLHAVEN (1)(2) (1)(2) (1) (1) Historical net income (loss) before extraordinary items per common share, fully diluted(3)........................................... $(3.63) $ 1.58 $ 1.71 $1.34 $ 1.07 Pro forma combined income (loss) before extraordinary items per common share, fully diluted(3)(4)................................. (2.79) 1.49 1.62 1.26 1.01 Historical book value per common share(3)........................... 12.79 14.13 Pro forma combined book value per common share(5)................... 11.24 12.14 Historical cash dividends per common share(6)....................... -- -- -- -- --
NINE MONTHS YEARS ENDED ENDED SEPTEMBER 30, FEBRUARY 28, ----------------------------- ---------------- 1992 1993 1994 1994 1995 ------ ------- ------ ----- ------ NCI Historical net income before extraordinary items per common share, fully diluted(7).................................................. -- -- $ .58 -- $ .32 Equivalent pro forma income before extraordinary items per common share, fully diluted(7)(8)........................................ .95 .59 Historical book value per common share(9)........................... 1.48 1.69 Equivalent pro forma book value per common share(8)................. 6.61 7.22
- --------------- (1) Prior year and interim period information has been restated to reflect the October 1994 acquisitions of CPS Pharmaceutical Services, Inc. ("CPS") and Advanced Infusion Services, Inc., ("AIS") which were each accounted for as a pooling of interests. (2) Hillhaven reported only primary income (loss) per share in 1992 and 1993. (3) Reflects the one-for-five reverse stock split effective November 1, 1993. (4) This calculation is based on the weighted average number of Hillhaven Common Shares outstanding for each period, excluding 4,179,520 Common Shares held in trust at February 28, 1995, plus 5,000,000 Hillhaven Common Shares which may be issued pursuant to the Share Exchange Agreement. (5) This calculation is based on the number of outstanding Hillhaven Common Shares at the end of each period, excluding 4,179,520 Common Shares held in trust at February 28, 1995, plus 5,000,000 Hillhaven Common Shares which may be issued pursuant to the Share Exchange Agreement. (6) Hillhaven has not paid a common dividend and does not anticipate paying a common dividend in the near future. (7) NCI was incorporated in September 1992 and commenced operations in July 1993 following the Reorganization. (8) Equivalent pro forma data were calculated by multiplying the pro forma combined per share data of Hillhaven by the weighted average conversion ratio of .5882 for the Nationwide Entities. This conversion ratio assumes that 5,000,000 Hillhaven Common Shares will be issued in connection with the Share Exchange of the Nationwide Entities' securities. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Share Exchange Consideration and Mechanics." (9) NCI's historical book value is comprised of the NCI Warrants (as defined herein) and Other Shareholders' Equity. This calculation is based on the number of outstanding NCI Common Shares at the end of each period plus shares to be issued upon exercise of the NCI Warrants. 10 17 SELECTED FINANCIAL DATA HILLHAVEN SELECTED FINANCIAL DATA The following selected financial data have been derived from the Consolidated and Combined Financial Statements of Hillhaven and its predecessor. The data set forth below should be read in conjunction with the Consolidated and Combined Financial Statements and related notes thereto and Hillhaven's "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in certain documents incorporated by reference herein.
EIGHT FOUR NINE MONTHS MONTHS MONTHS ENDED ENDED ENDED YEARS ENDED MAY 31, FEBRUARY 28, JAN. 31, MAY 31, ------------------------------------------------- ----------------------- 1990(1) 1990(1) 1991(1) 1992(1) 1993(1) 1994(1) 1994(1) 1995 -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) INCOME STATEMENT DATA(2) Net revenues.................. $750,390 $392,636 $1,271,266 $1,330,007 $1,394,472 $1,484,825 $1,107,155 $1,177,640 Expenses: Operating and administrative............ 646,300 335,102 1,094,456 1,144,390 1,180,974 1,255,332 938,732 999,460 Interest.................... 43,170 13,707 43,800 56,863 63,600 56,178 41,677 36,664 Depreciation and amortization.............. 28,448 10,087 33,650 46,698 53,651 54,395 40,738 42,646 Rent........................ 39,570 35,648 101,604 71,665 56,687 56,280 41,829 40,648 Restructuring............... -- -- -- 92,529 5,769 (20,225) (20,225) -- Adjustment to carrying value of properties previously reported as discontinued operations................ -- -- -- 20,736 -- -- -- -- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Net expenses.................. 757,488 394,544 1,273,510 1,432,881 1,360,681 1,401,960 1,042,751 1,119,418 -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations.................. (7,098) (1,908) (2,244) (102,874) 33,791 82,865 64,404 58,222 Income tax (expense) benefit on income (loss) from operations.................. 3,049 (266) (136) (543) 7,116 (23,385) (18,165) (19,248) Reinstatement of discontinued operations.................. 5,785 2,647 4,379 24,743 -- -- -- -- Extraordinary charge -- early extinguishment of debt, net of income taxes............. -- -- -- -- (565) (1,062) (1,013) (222) Cumulative effect of change in accounting for income taxes....................... -- -- -- -- (1,103) -- -- -- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)............. $ 1,736 $ 473 $ 1,999 $ (78,674) $ 39,239 $ 58,418 $ 45,226 $ 38,752 ======== ======== ========== ========== ========== ========== ========== ========== Net income (loss) per common share -- primary.................. -- $ .02 $ .09 $ (3.63) $ 1.51 $ 1.96 $ 1.57 $ 1.17 -- fully diluted............ -- -- -- -- -- $ 1.68 $ 1.31 $ 1.06 BALANCE SHEET DATA (at end of period) Working capital............... $ 45,058 $ 90,577 $ 78,771 $ 59,619 $ 78,886 $ 37,673 $ 34,490 $ 61,926 Total assets.................. 561,294 683,707 817,823 1,178,909 1,224,012 1,192,493 1,181,251 1,233,582 Long-term debt................ 250,824 337,476 443,095 834,452 819,202 579,035 599,902 589,619 Shareholders' equity.......... 446,921 172,209 182,204 141,274 181,602 363,747 350,292 404,688 Book value per common share(3).................... -- 7.89 8.26 6.38 8.17 12.79 12.33 14.13 OTHER INFORMATION (unaudited) NURSING CENTERS (at end of period) Number of nursing centers..... 343 343 342 334 284 272 272 271 Number of licensed beds....... 42,367 42,409 42,239 41,089 35,139 34,162 34,143 34,074 Average occupancy rate for the year........................ 90.8% 90.4% 90.6% 91.6% 93.4% 93.4% 93.5% 93.0% Nursing centers managed for others...................... 18 19 19 17 17 16 16 15 PHARMACY OUTLETS.............. 127 121 118 131 88 77 85 58 RETIREMENT HOUSING COMMUNITIES................. 24 24 27 27 21 19 20 19
- --------------- (1) On October 31, 1994, Hillhaven acquired closely-held CPS and AIS in a business combination accounted for as a pooling of interests. Accordingly, prior year information has been restated to reflect these acquisitions. (2) Income statement data for Hillhaven are not necessarily comparable to those of its predecessor for periods prior to January 31, 1990 due to the spin-off from Tenet Healthcare, Corporation (formerly National Medical Enterprises, Inc.). (3) Computed based on the actual number of Hillhaven Common Shares outstanding at the balance sheet date, excluding 4,179,250 Common Shares held in trust at February 28, 1995, and including 1,262,062 Hillhaven Common Shares issued in connection with the acquisitions of CPS and AIS. 11 18 NCI SELECTED FINANCIAL DATA The following selected financial data have been derived from the Nationwide Care, Inc. financial statements. The information set forth below should be read in conjunction with the discussion contained in "NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" as well as the Nationwide Care, Inc. financial statements and notes thereto contained elsewhere in this Prospectus/Information Statement.
YEARS ENDED FIVE MONTHS ENDED SEPTEMBER 30, FEBRUARY 28, ---------------------------------------------------- ------------------ 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT STATISTICAL DATA) (UNAUDITED) STATEMENT OF OPERATIONS DATA(1)(2): Revenue, net.................................... $30,718 $36,075 $43,348 $66,161 $120,724 $48,929 $53,196 Expenses: Health care services.......................... 20,122 24,124 28,417 45,907 90,384 36,700 40,341 Selling, general and administrative........... 2,292 2,645 2,775 4,307 5,971 2,128 2,887 Leases and rental............................. 1,309 1,419 1,353 2,671 7,085 2,955 3,017 Depreciation and amortization................. 2,086 2,281 2,308 2,738 2,947 1,071 1,179 ------- ------- ------- ------- -------- ------- ------- Income from operations.......................... 4,909 5,606 8,495 10,538 14,337 6,075 5,772 Interest expense, net........................... 4,080 3,839 3,540 3,669 4,778 1,853 2,083 Other income.................................... 22 -- -- -- -- -- -- ------- ------- ------- ------- -------- ------- ------- Income before income taxes and extraordinary items......................................... 851 1,767 4,955 6,869 9,559 4,222 3,689 Income taxes(3)................................. -- -- 380 1,744 4,600 2,015 1,750 ------- ------- ------- ------- -------- ------- ------- Income before extraordinary items............... 851 1,767 4,575 5,125 4,959 2,207 1,939 Extraordinary items............................. -- -- 380 (1,652) -- -- -- ------- ------- ------- ------- -------- ------- ------- Net income...................................... $ 851 $ 1,767 $ 4,955 $ 3,473 $ 4,959 $ 2,207 $ 1,939 ======= ======= ======= ======= ======== ======= ======= BALANCE SHEET DATA (period ended): Working capital (deficit)....................... $(1,315) $(1,205) $ 530 $ 2,281 $ 2,830 $ 5,008 $ 7,255 Total assets.................................... 38,501 38,036 41,287 69,132 75,939 71,464 83,359 Long-term debt.................................. 39,192 37,119 37,716 42,404 43,045 43,598 48,163 Stock warrants and redeemable preferred stock... -- -- -- 7,254 7,169 7,371 7,261 Other shareholders' and partners' equity (deficit)(4).................................. (6,104) (6,224) (3,717) 1,667 6,621 3,997 8,468 STATISTICAL DATA (UNAUDITED): Total nursing center beds....................... 2,127 2,127 2,067 3,357 3,257 3,357 3,257 Total assisted living/retirement center units... 277 277 277 370 370 370 442 Percentage of nursing center revenue, period ended Private pay................................... 41.0% 41.1% 38.6% 32.5% 29.2% 29.7% 29.3% Medicare...................................... 6.1% 4.9% 7.3% 13.9% 22.7% 19.6% 27.5% Indiana skilled Medicaid...................... 11.7% 13.0% 19.3% 21.1% 14.7% 17.5% 9.8% Intermediate Medicaid......................... 41.2% 41.0% 34.8% 32.5% 33.4% 33.2% 33.4% Overall nursing center occupancy rate, period ended......................................... 88.5% 91.1% 93.6% 92.6% 90.4% 90.4% 91.0%
- --------------- (1) As a result of the Royal Oaks Acquisition, the Regency Center leases and the Reorganization, the statement of operations data prior to the dates of the aforementioned transactions are not comparable to statement of operations data subsequent to the aforementioned transactions. (2) The selected financial data set forth above includes only NCI. Three other entities contemplated in the business combination, Shangri-La, Meadowvale and PEI, are not included in the above data. The three entities are not included because (1) Shangri-La is anticipated to be sold by closing; (2) Meadowvale's operations are already included in Nationwide's financial statements; only the real estate is being acquired in connection with the Share Exchange; and (3) PEI is immaterial (less than 1% of NCI's total revenues). (3) Prior to the Reorganization, certain of the businesses now comprising Nationwide Care, Inc. were taxed as S Corporations and certain of the businesses were partnerships; therefore, income was not subject to federal or state income taxes. (4) Prior to the Reorganization, shareholders' and partner's equity (deficit) consists of the combined capital structure of separate corporations and partnerships. As of the date of the Reorganization, the retained earnings (deficit) of the S Corporations and partnerships was transferred to Common Stock of the Company. 12 19 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following table sets forth certain summary pro forma financial information after giving effect to the Share Exchange as if it had been consummated, with respect to the statements of operations, at the beginning of the periods presented, or, with respect to the balance sheet, as of February 28, 1995. The following table presents such information as if the Share Exchange had been accounted for as a pooling of interests. The summary pro forma information is derived from, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements contained elsewhere in this Prospectus/Information Statement. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "SELECTED FINANCIAL DATA," "BACKGROUND OF AND REASONS FOR THE SHARE EXCHANGE," "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Accounting Treatment," and "NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Unaudited Pro Forma Condensed Combined Financial Statements do not purport to present the financial position or results of operations of the Company had the Share Exchange taken place on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The information presented does not include certain cost savings that management believes may be realized following the Share Exchange, currently estimated to be approximately $4 million annually beginning in fiscal 1996 (before any severance or other costs of implementing efficiencies). There can be no assurance as to the amount of cost savings, if any, that may be realized as a result of the transactions contemplated by the Share Exchange Agreement. 13 20 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED MAY 31, FEBRUARY 28, -------------------------------------- ----------------------- 1992 1993 1994 1994 1995 ------------ ---------- ---------- ---------- ---------- Net revenues......................... $1,373,714 $1,461,629 $1,606,953 $1,187,496 $1,272,919 Expenses: Operating and administrative....... 1,175,607 1,231,812 1,352,625 1,001,144 1,077,339 Interest........................... 60,513 67,412 61,106 45,127 40,553 Depreciation and amortization...... 49,160 56,570 57,533 42,856 45,103 Rent............................... 73,044 59,393 63,411 46,597 46,094 Restructuring...................... 92,529 5,769 (20,225) (20,225) -- Adjustment to carrying value of properties previously reported as discontinued operations...... 20,736 -- -- -- -- ----------- ---------- ---------- ---------- ---------- Net expenses......................... 1,471,589 1,420,956 1,514,450 1,115,499 1,209,089 ----------- ---------- ---------- ---------- ---------- Income (loss) from operations........ (97,875) 40,673 92,503 71,997 63,830 Income tax (expense) benefit......... (923) 5,372 (27,985) (21,924) (21,946) Reinstatement of discontinued operations......................... 24,743 -- -- -- -- ----------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of accounting change.................. $ (74,055) $ 46,045 $ 64,518 $ 50,073 $ 41,884 ========== ========== ========== ========== ========== Income (loss) before extraordinary items and cumulative effect of accounting change per share(1)..... $ (2.79) $ 1.49 $ 1.62 $ 1.26 $ 1.01 Weighted average Common Shares and equivalents outstanding(1)......... 27,073 29,394 39,326 38,831 41,800
AS OF FEBRUARY 28, 1995 ------------ Balance sheet data: Working capital...................... $ 65,582 Total assets......................... 1,315,751 Long-term debt....................... 647,472 Shareholders' equity................. 408,479 Book value per common share.......... 12.14
- --------------- (1) Calculated on a primary basis in 1992 and 1993 and on a fully diluted basis in subsequent periods. 14 21 RISK FACTORS The following risk factors and the information provided elsewhere in this Prospectus/Information Statement should be considered carefully in connection with evaluating the Share Exchange. RECENT DEVELOPMENTS On January 25, 1995, Horizon Healthcare Corporation ("Horizon") made a proposal to acquire Hillhaven in a stock merger valued by Horizon at $28.00 per share. On February 5, 1995, a Special Committee of Hillhaven's Board of Directors (the "Special Committee") considered the proposal with its advisors and concluded that the proposal was inadequate. On March 7, 1995, Horizon made another offer to acquire Hillhaven in a stock merger valued by Horizon at $31.00 per share. This offer was contingent on Hillhaven consummating its acquisition of NCI. In light of the March 7, 1995, Horizon proposal and expressions of interest received by Hillhaven from other parties desiring to explore an acquisition transaction, on March 20, 1995, the Special Committee instructed Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") to explore strategic alternatives, including the possible sale of Hillhaven to a third party. The Special Committee has established a process to evaluate all alternatives available to Hillhaven. As part of this process, Hillhaven is engaged in discussions with parties interested in acquiring Hillhaven. Following completion of this process, the Special Committee will evaluate all alternatives, including whether any proposal to acquire Hillhaven is in the best interest of Hillhaven, its shareholders and other constituents. The Special Committee may conclude that the best available alternative for Hillhaven is to remain a publicly-owned company pursuing its existing strategy for enhancing value and serving its constituents. As a result of the Special Committee's decision to explore and evaluate all alternatives, the Special Committee has not taken a position with respect to Horizon's March 7, 1995, proposal at this time. Horizon announced that its proposal expired on March 21, 1995. It also announced a major acquisition on March 31, 1995. There can be no assurance that Horizon will continue to participate in the process; however, the Special Committee intends to invite Horizon to participate in the process. Tenet Healthcare Corporation (formerly National Medical Enterprises, Inc.) ("Tenet"), which owns approximately 27% of Hillhaven's outstanding stock, announced at the time of the January 25 Horizon proposal that it wants Hillhaven to maximize the value of all shareholders' investments in Hillhaven through the immediate sale or merger of Hillhaven and announced on April 3, 1995, that it had filed definitive proxy materials for Hillhaven's 1995 annual meeting of shareholders soliciting support for a nonbinding resolution urging the Board of Directors of Hillhaven to take such action. There can be no assurance that a sale of Hillhaven to a third party or any other transaction will result from the Special Committee's exploration of alternatives. If a sale were to occur, there can be no assurance as to what the terms of the transaction would be. VOLATILITY OF SHARE PRICE The market price of Hillhaven Common Shares has increased significantly during the past several months due in part to the offer made by Horizon to acquire Hillhaven and Hillhaven's announced intention to explore strategic alternatives, including the possible sale of the Company. The Company expects that these and related factors, including the market's assessment of the likelihood that a sale of Hillhaven will be consummated, will continue to have an impact on the market price of the Hillhaven Common Shares during the foreseeable future, and such impact could be materially adverse. CERTAIN LITIGATION On February 6, 1995, the Company filed a complaint against Horizon in the United States District Court for the District of Nevada seeking injunctive and declaratory relief that a business combination between Horizon and the Company is prohibited by the Nevada statute regarding business combinations with interested shareholders (NRS Sections 78.411 through 78.444) by reason of Horizon's arrangements with 15 22 Tenet. On February 27, 1995, Horizon filed an answer and a counterclaim alleging that, among other things, the Company and all of its directors (other than Messrs. Peter de Wetter and Maris Andersons) have breached their fiduciary duties to the Company's shareholders in connection with their consideration of Horizon's acquisition proposal and certain actions recently taken by the Company, including the formation of a grantor trust, the amendment of the Company's rights plan and the filing of a shelf registration statement with the SEC. The counterclaim seeks injunctive and declaratory relief and compensatory and punitive damages in unspecified amounts. The Company has answered the counterclaim and believes Horizon's claims are without merit. By stipulation among the parties, all proceedings in this action have been stayed until May 8, 1995. The Company and its directors are named as defendants in a number of putative class action complaints filed on behalf of the Company's shareholders in Nevada state court and California state court. These complaints raise virtually identical allegations that the Company and its directors have breached their fiduciary duties to the Company's shareholders in connection with the consideration of Horizon's acquisition proposal and certain recent corporate actions also cited in Horizon's counterclaim. These actions seek declaratory and injunctive relief and money damages in unspecified amounts. The Service Employees International Union (AFL-CIO) and Joann Sforza, a Company employee and union member, are seeking to intervene as party plaintiffs in one of the putative class actions brought on behalf of the Company's shareholders, alleging that their interests as shareholders and employees of the Company are not adequately represented. The Company has opposed this intervention. In addition, Tenet filed a complaint against the Company and two of its directors, Bruce Busby and Christopher Marker, in state court in California seeking declaratory and injunctive relief and alleging, among other things, that the directors have breached their fiduciary duties to Tenet and the Company's other shareholders in connection with their consideration of Horizon's acquisition proposal and certain of the other corporate actions cited in the Horizon and putative class action complaints. The Company believes these actions are without merit. By stipulation of the parties, all proceedings in these actions have been stayed until May 8, 1995. SUBSTANTIAL LEVERAGE The Company and its subsidiaries are highly leveraged. The degree to which the Company is leveraged could materially adversely affect the Company's ability to obtain additional financing for working capital, expansion into new or existing markets or other purposes and could make the Company more vulnerable to changes in the health care marketplace, economic downturns and competitive pressures. The Company's high degree of leverage could also materially adversely affect its ability to refinance existing indebtedness. REIMBURSEMENT BY THIRD PARTY PAYORS For the nine months ended February 28, 1995, the Company derived 47.0% of its net patient revenues from Medicaid, 26.6% from private and other sources and 26.4% from Medicare. Both governmental and private third party payors have employed cost containment measures designed to limit payments made to health care providers such as the Company. Furthermore, government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially increase or decrease the rate of program payments to the Company for its services. There can be no assurance that payments under governmental and private third party payor programs will be sufficient to cover the costs allocable to patients eligible for reimbursement. Hillhaven believes that at present the payments under many Medicaid programs are not sufficient on an overall basis to cover the costs of serving residents participating in these programs. In addition, there can be no assurance that the Company's facilities, or the provision of services and supplies by the Company, will initially meet or continue to meet the requirements for participation in such programs. There have been, and the Company expects that there will continue to be, a number of proposals to further limit Medicare and Medicaid reimbursement for health care services. The Company cannot at this time predict whether any of these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals might have on the Company's operations. 16 23 GOVERNMENTAL REGULATION The federal government and all states in which the Company operates regulate various aspects of the Company's business. In particular, the development and operation of long term care facilities and retirement communities and the provision of health care services are subject to federal, state and local statutes and administrative oversight relating to the adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, rate-setting and other matters. The failure to obtain or renew certain required regulatory approvals or licenses, the delicensing of certain facilities owned, leased or operated by the Company or the disqualification of the Company from participation in certain federal and state reimbursement programs could have a material adverse effect upon the Company's operations. A number of legislative proposals have been introduced in Congress and state legislatures in recent years that would effect major reforms of the health care system. The Company believes that reform legislation will continue to be proposed at both federal and state levels. No assurance can be given as to what elements will be included in any such new proposals. The Company cannot predict whether any of the proposed or other legislation will be adopted or the form of any legislation that may be adopted, and no assurance can be given that any such legislation, if adopted, will not have a material adverse effect on the Company's operations. Many states have adopted certificate of need or similar laws which generally require that the appropriate state agency approve expansion of the Company's long term care facility operations, through facility acquisitions or expansion, provision of new services or other changes. The Company is also subject to federal and state laws which govern financial and other arrangements between health care providers. In addition, some states restrict certain business relationships between physicians and pharmacies, and many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. These laws vary from state to state and have seldom been interpreted by the courts or regulatory agencies. LIMITED AVAILABILITY OF LABOR In the past, the long term care industry has periodically experienced shortages of nurses. Although the Company currently does not have a staffing shortage, a shortage of nurses in geographic areas in which the Company operates could adversely affect the ability of the Company to attract and retain qualified nursing personnel and could increase its operating costs. The Company competes with other health care providers for the services of nurses and other professional and non-professional employees. The Company expects that its labor costs will increase in the future, and there can be no assurance that such cost increases will be matched by timely corresponding reimbursement rate increases. CORPORATE TARGETS' SPECIAL MEETINGS THE NCI SPECIAL MEETING A special meeting of the shareholders of NCI (the "NCI Special Meeting") is scheduled to be held on June , 1995, at 10:00 a.m. (local time) at , Indianapolis, Indiana 46240. The purpose of the NCI Special Meeting is to consider and vote upon the approval of the Share Exchange and the approval and adoption of the Share Exchange Agreement, and the transactions contemplated thereby, and also to approve certain payments pursuant to employment agreements between NCI and certain members of NCI management and certain option vesting schedules. See "OTHER MATTERS TO BE VOTED UPON BY NCI VOTING COMMON SHAREHOLDERS." Only shareholders of record as of June , 1995 (the "Record Date") will be entitled to vote at the NCI Special Meeting. In accordance with the IBCL, holders of the NCI Voting Common Shares and NCI Nonvoting Common Shares will vote on the approval of the Share Exchange and the approval and adoption of the Share Exchange Agreement as separate voting groups. On the Record Date there were 7,431,460 NCI Voting Common Shares outstanding and 76,592 NCI Nonvoting Common Shares outstanding. Each NCI Voting Common Share and NCI Nonvoting Common Share is entitled to one vote on the approval of the Share Exchange and approval and adoption of the Share Exchange Agreement. The Share Exchange must be approved and the Share Exchange Agreement must be approved and adopted by the holders of a majority of the outstanding NCI Voting Common Shares, or 3,715,731 shares, 17 24 and by the holders of a majority of the outstanding NCI Nonvoting Common Shares, or 38,297 shares. Of the NCI Voting Common Shares entitled to vote on such approval and adoption, 6,384,633 shares representing approximately 85.9% of the outstanding NCI Voting Common Shares entitled to vote at the NCI Special Meeting are held by directors and executive officers of NCI and their affiliates. The directors and executive officers of NCI intend to vote such shares FOR approval of the Share Exchange and approval and adoption of the Share Exchange Agreement. In addition, Dr. Thomas E. Phillippe, Sr. and Thomas E. Phillippe, Jr., who together hold approximately 80.9% of the outstanding NCI Voting Common Shares, have contractually agreed to vote all such NCI Voting Common Shares FOR such approval and adoption. NCI has entered into employment agreements (the "Employment Agreements") with each of the following members of its management: Phillip W. Caldwell -- Vice President of Operations; J. Mark Mutz -- Vice President and General Counsel; Charles Cooper -- Vice President of Marketing; James Burkhart -- Chief Financial Officer; and John Lines -- Controller. The Employment Agreements generally provide for NCI to pay to the applicable employees a base salary and an incentive bonus if a "Change in Control Transaction," as defined in the Employment Agreements, occurs during the term of such agreements (the "Incentive Bonuses"). Also, under the Employment Agreements, if the applicable employee terminates his employment with NCI for "good reason," as defined in the Employment Agreements, or if NCI terminates the employee without cause, and following a Change in Control Transaction, the employee is entitled to a payment (the "Severance Payments") (the Incentive Bonuses and Severance Payments are collectively referred to herein as the "Employment Agreement Payments") calculated as the greater of the employee's base salary for the remainder of the term (the "Remainder Amount") or a specified multiple of the employee's base salary (the "Severance Multiple"). In addition, pursuant to the terms of two restricted stock grant agreements, 3,000 NCI Voting Common Shares previously granted to both Philip W. Caldwell and Charles Cooper will vest and become unrestricted at the Effective Time (the "Accelerated Vestings"). In order to avoid treatment of the Employment Agreement Payments and the Accelerated Vestings as "excess parachute payments" under the Code, and thereby precluding a deduction for compensation expense by NCI and subjecting each employee to a 20% excise tax, NCI is submitting the payment of the Employment Agreement Payments and the Accelerated Vestings to the holders of NCI Voting Common Shares for approval. The presence at the NCI Special Meeting, in person or by proxy, of the holders of a majority of all the issued and outstanding NCI Voting Common Shares will constitute a quorum for purposes of voting upon the Employment Agreement Payments and Accelerated Vestings. Each NCI Voting Common Share is entitled to one vote with respect to the approval and adoption of the Employment Agreement Payments and Accelerated Vestings. The vote in favor of the Employment Agreement Payments and Accelerated Vestings of 75% of the outstanding NCI Voting Common Shares, or 5,573,595 shares, is required for the approval of the Employment Agreement Payments and Accelerated Vestings on behalf of the shareholders of NCI. RECOMMENDATION OF THE NCI BOARD OF DIRECTORS THE BOARD OF DIRECTORS OF NCI HAS APPROVED THE SHARE EXCHANGE AGREEMENT AND RECOMMENDS THAT THE NCI SHAREHOLDERS VOTE FOR APPROVAL OF THE SHARE EXCHANGE AND APPROVAL AND ADOPTION OF THE SHARE EXCHANGE AGREEMENT. THE MEADOWVALE SPECIAL MEETING A special meeting of the shareholders of Meadowvale (the "Meadowvale Special Meeting") is scheduled to be held on June , 1995, at 10:00 a.m. (local time) at , Indianapolis, Indiana 46240. The purpose of the Meadowvale Special Meeting is to consider and vote upon the approval of the Share Exchange and the approval and adoption of the Share Exchange Agreement and the transactions contemplated thereby. Only shareholders of record as of the Record Date will be entitled to vote at the Meadowvale Special Meeting. On the Record Date there were 3,000 Meadowvale Common Shares outstanding. Each Meadowvale Share is entitled to one vote on such adoption and approval. The Share Exchange must be approved and the Share Exchange Agreement must be approved and adopted by the holders of a majority of the outstanding 18 25 Meadowvale Common Shares, or 1,501 shares. Of the Meadowvale Common Shares entitled to vote on such approval and adoption, 2,404 shares representing approximately 80.1% of the outstanding Meadowvale Common Shares entitled to vote at the Meadowvale Special Meeting are held by directors and officers of Meadowvale and their affiliates. The officers and directors of Meadowvale intend to vote such shares FOR approval of the Share Exchange and approval and adoption of the Share Exchange Agreement. RECOMMENDATION OF MEADOWVALE BOARD OF DIRECTORS THE BOARD OF DIRECTORS OF MEADOWVALE HAS APPROVED THE SHARE EXCHANGE AGREEMENT AND RECOMMENDS THAT THE MEADOWVALE SHAREHOLDERS VOTE FOR APPROVAL OF THE SHARE EXCHANGE AND APPROVAL AND ADOPTION OF THE SHARE EXCHANGE AGREEMENT. CONSENT OF PEI SHAREHOLDERS Dr. Thomas E. Phillippe, Sr. and Thomas E. Phillippe, Jr. own all of the outstanding PEI Common Shares and are the only members of the Board of Directors of PEI. They have each contractually agreed to vote all such PEI Common Shares FOR approval of the Share Exchange and approval and adoption of the Share Exchange Agreement, and each will execute a written consent, in lieu of a special meeting, to that effect. EXPENSES OF SPECIAL MEETINGS All expenses incurred in connection with the NCI Special Meeting will be borne by NCI. All expenses incurred in connection with the Meadowvale Special Meeting will be borne by Meadowvale. DISSENTERS' RIGHTS Any Corporate Target shareholder who does not vote in favor of the approval of the Share Exchange and the approval and adoption of the Share Exchange Agreement may elect to receive payment of the value of his or her Target Common Shares in cash in accordance with the procedures set forth in Chapter 44 of the IBCL ("Chapter 44") as described below. Holders of Hillhaven Common Shares are not entitled to dissenters' rights in connection with the Share Exchange. Any holder of Target Common Shares contemplating the exercise of his or her right to dissent is urged to review carefully the provisions of Chapter 44 attached as Annex B to this Prospectus/Information Statement. Set forth below, to be read in conjunction with the full text of Chapter 44, is a summary of the principal steps to be taken if the right to dissent is to be exercised. EACH STEP MUST BE TAKEN IN STRICT COMPLIANCE WITH THE APPLICABLE PROVISIONS OF CHAPTER 44 IN ORDER FOR HOLDERS OF TARGET COMMON SHARES TO PERFECT DISSENTERS' RIGHTS. Written Notice to Corporation Written notice of a shareholder's intent to demand payment for his or her Target Common Shares pursuant to Chapter 44 in the event the shareholders of NCI and Meadowvale approve the Share Exchange must be received by NCI or Meadowvale, as the case may be, before the shareholders vote on approval and adoption of the Share Exchange Agreement at their respective Special Meetings. Such written notice should state the number of Target Common Shares as to which dissenters' rights are being asserted (the "Dissenting Shares") and, if for NCI, should be sent to the attention of J. Mark Mutz, Suite 800, 9200 Keystone Crossing, Indianapolis, Indiana, 46240; and, if for Meadowvale, to the attention of Donald Cheesman, 1529 West Lancaster Street, Bluffton, Indiana, 46714. DISSENTERS' RIGHTS ARE NOT AVAILABLE UNLESS THIS NOTICE REQUIREMENT IS FULFILLED. Meadowvale shareholders electing to exercise dissenters' rights are also requested to send a courtesy copy to J. Mark Mutz, Suite 800, 9200 Keystone Crossing, Indianapolis, Indiana, 46240. 19 26 Voting Holders of NCI Common Shares or Meadowvale Common Shares who deliver notice of their intent to dissent from the proposed transactions ("Dissenting Shareholders") must not vote in favor of the approval of the Share Exchange or the approval and adoption of the Share Exchange Agreement, but such shareholders need not vote against such approval and adoption. BECAUSE A PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED FOR ADOPTION OF THE SHARE EXCHANGE AGREEMENT, A HOLDER OF SHARES WHO VOTES BY PROXY AND WHO WISHES TO EXERCISE HIS DISSENTERS' RIGHTS MUST (I) VOTE AGAINST, OR (II) ABSTAIN FROM VOTING ON SUCH APPROVAL AND ADOPTION. A shareholder who fails to deliver the notice or who votes in favor of the approval of the Share Exchange and the approval and adoption of the Share Exchange Agreement is not entitled to demand payment for his or her Target Common Shares under Chapter 44. Differing Record and Beneficial Owners A record shareholder may assert dissenters' rights as to fewer than all NCI Common Shares or Meadowvale Common Shares registered in that shareholder's name only if the shareholder dissents (in accordance with the provisions of Chapter 44) with respect to all the NCI Common Shares or Meadowvale Common Shares beneficially owned by any one person and notifies NCI or Meadowvale in writing of the name and address of each person on whose behalf the record shareholder is asserting dissenters' rights. A person owning a beneficial interest in NCI Common Shares or Meadowvale Common Shares (a "Beneficial Owner") may assert dissenters' rights as to the NCI Common Shares or Meadowvale Common Shares held on such Beneficial Owner's behalf only if (i) the Beneficial Owner submits to NCI or Meadowvale the record shareholder's written consent to such dissent no later than the time the Beneficial Owner asserts dissenters' rights, and (ii) the Beneficial Owner asserts rights (in accordance with the provisions of Chapter 44) with respect to all the Beneficial Owner's NCI Common Shares or Meadowvale Common Shares or all those NCI Common Shares or Meadowvale Common Shares over which the Beneficial Owner has power to direct the vote. Notice to Dissenters If the Share Exchange is approved and the Share Exchange Agreement is approved and adopted, NCI or Meadowvale, as the case may be, will send a written notice (the "Dissenters' Notice") to each Dissenting Shareholder within ten days of such approval. The Dissenters' Notice must (i) supply a form for demanding payment which includes the date of the first announcement to news media or to shareholders of the terms of the Share Exchange or the Share Exchange Agreement and that requires the Dissenting Shareholder to certify whether or not beneficial ownership of his or her NCI Common Shares or Meadowvale Common Shares was acquired before such date; (ii) state where the payment demand and certificates for the shares must be sent and where and when the certificates for the Dissenting Shares must be deposited; (iii) set a date by which NCI or Meadowvale, as the case may be, must receive the payment demand and certificates representing the Dissenting Shareholder's shares; and (iv) be accompanied by a copy of Chapter 44. Payment Demand The Dissenting Shareholder must demand payment by completing the form for demanding payment and by depositing the certificates formerly representing his or her NCI Common Shares or Meadowvale Common Shares in accordance with the terms of the Dissenters' Notice, in order to preserve his or her statutory dissenters' rights. A Dissenting Shareholder who demands payment and deposits stock certificates in accordance with the terms of the Dissenters' Notice retains all other rights as a shareholder until the rights are canceled or modified by the effectuation of the Share Exchange. A Dissenting Shareholder who fails to demand payment or deposit stock certificates as required by the Dissenters' Notice by the respective dates set forth therein is not entitled to payment for his or her shares under Chapter 44 and is considered to have voted in favor of the Share Exchange. 20 27 Payment of NCI or Meadowvale Upon the consummation of the Share Exchange, NCI or Meadowvale, as the case may be, will pay Dissenting Shareholders who have met all statutory conditions their respective estimates of the fair value of the Dissenting Shares as determined by NCI or Meadowvale and will provide additional information specified in Chapter 44. However, NCI or Meadowvale may elect to withhold such payment from Dissenting Shareholders who acquired beneficial ownership of NCI Common Shares or Meadowvale Common Shares after the date set forth in the Dissenters' Notice as the date of the first announcement to news media or shareholders of the terms of the Share Exchange or the Share Exchange Agreement ("Post Announcement Shareholders"). If NCI or Meadowvale elects to withhold payment from such shareholders, it will send each Post Announcement Shareholder an offer accompanied by certain information specified in Chapter 44 to pay NCI's or Meadowvale's estimate of the fair value of the Dissenting Shares; provided such holders agree to accept the payment offered in full satisfaction of their dissenters' demands. Optional Secondary Payment Demand Within 30 days after (i) NCI or Meadowvale, as the case may be, pays the Dissenting Shareholders its estimate of the fair value of their Dissenting Shares or (ii) NCI or Meadowvale offers to pay the Post Announcement Shareholders its estimate of the fair value of their Dissenting Shares, each such shareholder may notify NCI or Meadowvale, as the case may be, of the shareholder's own estimate of the value of his or her Dissenting Shares (if it differs from NCI's or Meadowvale's estimate) and demand payment of the shareholder's estimate of the fair value of the shares less any payment received from NCI or Meadowvale or reject the offer and demand payment of the Dissenting Shareholder's estimate of the fair value of the shares, as the case may be. Petition for Determination of Value If a demand for payment (whether an original demand or a secondary demand) by a Dissenting Shareholder remains unsettled 60 days after the receipt by NCI or Meadowvale of such demand, NCI or Meadowvale, as the case may be, will commence a proceeding in the Circuit Court of Marion County, Indiana (if the proceeding involves an NCI Dissenting Shareholder) or Wells County, Indiana (if the proceeding involves a Meadowvale Dissenting Shareholder), to petition the court to determine the fair value of the Dissenting Shares. All Dissenting Shareholders whose claims remain unsettled at such time will be made parties to those proceedings. A Dissenting Shareholder will be entitled to judgment for an amount, if any, by which the court finds the fair value of his or her shares, plus interest, exceeds any amount paid by NCI or Meadowvale. A Post Announcement Shareholder will be entitled to judgment for the fair value, plus accrued interest, of such holder's shares. The court, in an appraisal proceeding, will determine and assess costs against all parties in such amounts as the court finds equitable. The court may assess fees and expenses of counsel and experts against either NCI or Meadowvale or a Dissenting Shareholder if the court finds that the party against whom the fees and expenses are assessed did not comply with the requirements of Chapter 44 or acted arbitrarily, vexatiously or not in good faith. In addition, if the court finds that the services of counsel for any dissenter were of substantial benefit to other Dissenting Shareholders similarly situated and that the fees for those services should not be assessed against NCI or Meadowvale, the court may award to such counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. Effect on Dividends and Voting Rights A Dissenting Shareholder will retain his or her rights, if any, to vote and receive dividends until the Share Exchange is consummated. Upon the consummation of the Share Exchange, a Dissenting Shareholder who has given proper notice and made a valid demand will cease to be a shareholder and will have no rights with respect to his or her NCI Common Shares or Meadowvale Common Shares except as provided in Chapter 44. 21 28 BACKGROUND OF AND REASONS FOR THE SHARE EXCHANGE BACKGROUND OF THE SHARE EXCHANGE Since its incorporation, NCI has considered various strategies for stimulating the growth and improving the profitability of its business. In early October of 1994, these considerations led the Board of Directors of NCI to explore the possibility of causing NCI to enter into a business combination with another company. It was believed that such a combination could be in the best interests of NCI and NCI's shareholders because it could (i) make additional capital available to fund growth; (ii) provide access to greater expertise in the areas in which NCI wanted to expand; (iii) maximize shareholder value generally; and (iv) create a market for NCI shares. In pursuit of this possibility, NCI's senior management interviewed several investment banking firms. These firms confirmed NCI's belief that a business combination could be very beneficial to NCI and its shareholders. On October 25, 1994, NCI retained Smith Barney, Inc. ("Smith Barney"), an international investment banking firm, to assist NCI in exploring the possibility of a business combination. With Smith Barney's assistance, NCI initiated a process to determine the extent to which other companies would be interested in a business combination with NCI. To facilitate this process, a confidential memorandum regarding NCI was prepared and distributed to a number of companies, including Hillhaven. Such companies were required to enter into confidentiality agreements with NCI. Hillhaven and NCI executed a confidentiality agreement on November 7, 1994. Those companies that were interested in a possible transaction were requested to indicate their interest in writing by November 21, 1994. Seven companies responded to this request, including Hillhaven. None of these companies indicated an interest in a transaction that was acceptable to NCI. Nonetheless, the Board of Directors decided to continue the process of exploring a transaction that was acceptable to NCI by providing additional information to the interested companies. In December of 1994, NCI conducted due diligence presentations for six of these companies, including Hillhaven. In addition, each of these six companies received a first draft of a proposed merger agreement. These companies were asked to comment on the proposed merger agreement and provide a second indication of their interest in a possible transaction by December 21, 1994. Hillhaven responded to this request on December 20, 1994. After reviewing the responses to this request, NCI limited its further discussions to two parties, including Hillhaven. NCI invited these parties to perform additional due diligence and provide additional information regarding a possible transaction. In January and February 1995, management of Hillhaven performed additional due diligence, including an on-site inspection of substantially all of NCI's facilities. In early February, NCI began exclusive negotiations with Hillhaven. At a special meeting held on February 27, 1995, the Board of Directors of Hillhaven authorized Hillhaven management to enter into a merger agreement with NCI and affiliated entities. The Board of Directors of NCI, PEI and Meadowvale had previously approved the merger agreement on February 27, 1995. Later in the day on February 27, 1995, a merger agreement (the "Merger Agreement") was executed by the parties. In late March and early April of 1995, Hillhaven and NCI discussed restructuring the transaction as a statutory share exchange. The Boards of Directors of NCI, Meadowvale and PEI each approved the Share Exchange Agreement on April 12, 1995. At a special meeting held on April 12, 1995, the Board of Directors of Hillhaven authorized Hillhaven management to enter into the Share Exchange Agreement. The Share Exchange Agreement was executed by the parties on April , 1995. HILLHAVEN'S REASONS FOR THE SHARE EXCHANGE Following its recapitalization in September 1993, Hillhaven announced that it would aggressively pursue strategic acquisitions in target markets that add both short- and long-term value to the Company and its shareholders. Hillhaven believes that the acquisition of NCI is in furtherance of this strategy. As a result of the Share Exchange, Hillhaven management believes that the Company can leverage its higher margin subacute care services by extending them across a larger group of nursing centers; that the addition of NCI's 23 nursing centers will complement Hillhaven's 286 nursing centers, which include nine centers in Indiana, 11 in Ohio and 14 in Florida; that the increased presence in these markets will allow Hillhaven to provide a broad array of low-cost, high-quality skilled nursing and subacute care services to 22 29 enhance its competitive position in the rapidly evolving health care industry; and that operating synergies and cost savings anticipated from the elimination of overlapping operating costs, decreased workers compensation charges and utilization of Hillhaven's lower borrowing and purchasing costs can be achieved. The Board of Directors of Hillhaven believes that the Share Exchange and the terms of the Share Exchange Agreement are in the best interests of its shareholders. In evaluating the transaction, the Board considered, among other things, the financial performance, condition, business operations and prospects of the Nationwide Entities (as defined herein); information with respect to the prospects of Hillhaven and the Nationwide Entities as combined entities; the proposed structure of the transaction, including its being accounted for as a "pooling of interests"; and the opinion of Merrill Lynch. The Board did not quantify or otherwise attempt to assign relative weights to the specific factors considered. On February 27, 1995, Merrill Lynch delivered its opinion (the "Merrill Lynch Opinion") to the Board of Directors of the Company to the effect that, as of February 27, 1995, and based on the assumptions made, matters considered and limits of the review, as set forth in such opinion, the proposed consideration to be paid by the Company pursuant to the Merger Agreement is fair to the Company from a financial point of view. After the transaction was restructured, at the Company's request, Merrill Lynch reviewed a draft of the Share Exchange Agreement dated April 7, 1995, and delivered a letter to the Board of Directors of the Company dated April 12, 1995, confirming that nothing contained in the draft Share Exchange Agreement would have altered the conclusions set forth in the Merrill Lynch Opinion. A COPY OF THE MERRILL LYNCH OPINION IS ATTACHED TO THIS PROSPECTUS/INFORMATION STATEMENT AS ANNEX A. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS PROSPECTUS/INFORMATION STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things, reviewed the Nationwide Entities' unaudited financial information for the three fiscal years ended September 30, 1994 and for the quarterly period ending December 31, 1994; reviewed the Company's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended May 31, 1994, the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ended August 31, 1994 and November 30, 1994 and certain other filings with the SEC made by the Company, including proxy statements and registration statements during the last three years; reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Nationwide Entities and the Company, furnished to Merrill Lynch by the Nationwide Entities and the Company; conducted discussions with members of senior management of the Nationwide Entities and the Company concerning their respective businesses and prospects and potential synergies which might be realized following the transaction; compared the results of the operations of the Nationwide Entities with those of certain companies which Merrill Lynch deemed to be reasonably similar to the Nationwide Entities; compared the proposed financial terms of the transaction with the financial terms of certain other acquisitions which Merrill Lynch deemed to be relevant; considered the pro forma effect of the acquisition on the combined company's capitalization ratios and earnings per share; reviewed a draft of the acquisition agreement dated February 25, 1995; and reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as Merrill Lynch deemed necessary, including an assessment of general economic, market and monetary conditions. In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy and completeness of all information supplied or otherwise made available to it by the Nationwide Entities and the Company, and did not independently verify such information or undertake an independent appraisal of the assets or liabilities of the Nationwide Entities or the Company or conduct a physical inspection of the Nationwide Entities' or the Company's properties or facilities. With respect to the financial forecasts and estimates of potential synergies furnished by the Nationwide Entities and the Company, Merrill Lynch assumed that they were reasonably prepared and reflected the best available estimates and judgment of the Nationwide Entities' or the Company's management as to the expected future financial performance of the Nationwide Entities or the Company, as the case may be. 23 30 In arriving at the Merrill Lynch Opinion, Merrill Lynch performed a variety of financial analyses, including discounted cash flow analysis, comparable public company analysis, comparable acquisition transaction analysis and contribution analysis. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors considered by it, without considering all such factors and analyses, could create a misleading view of the process underlying its analyses set forth in the Merrill Lynch Opinion. The matters considered by Merrill Lynch in arriving at the Merrill Lynch Opinion are based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the Company's or the Nationwide Entities' control. Any estimates incorporated in the analyses performed by Merrill Lynch are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than such estimates. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and such estimates are inherently subject to uncertainty. Arriving at a fairness opinion is a complex process not necessarily susceptible to partial or summary description. No public company utilized as a comparison is identical to the Company, the Nationwide Entities' or the business segment for which a comparison is being made, and none of the comparable acquisitions utilized as a comparison is identical to the proposed Share Exchange. Accordingly, an analysis of publicly traded comparable companies and comparable business combinations concerning differences in financial and operating characteristics of the comparable business combinations and other factors that could affect the public trading value of the comparable companies or company to which they are being compared. The Board of Directors of the Company selected Merrill Lynch to render a fairness opinion because Merrill Lynch is an internationally recognized investment banking firm with substantial experience in transactions similar to the Share Exchange and because it is familiar with the Company and its business. Merrill Lynch has from time to time rendered, and is currently rendering, other investment banking, financial advisory and other services to the Company for which it has received or will receive customary compensation. The Company has agreed to pay Merrill Lynch a fee of $850,000, $100,000 of which was payable upon Merrill Lynch's engagement by the Company, $325,000 of which was payable upon the delivery of the Merrill Lynch Opinion and the remainder of which will be payable upon consummation of the Share Exchange. The Company has also agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including fees and expenses of its legal counsel, and to indemnify Merrill Lynch and certain related persons against certain liabilities in connection with its engagement, including certain liabilities under the federal securities laws. THE NATIONWIDE ENTITIES' REASONS FOR THE SHARE EXCHANGE AND RECOMMENDATIONS OF THE BOARDS OF DIRECTORS The Boards of Directors of NCI, PEI and Meadowvale, with the assistance of outside financial and legal advisors, have evaluated the strategic financial, legal and market considerations bearing on the Share Exchange which they deemed relevant, including an assessment of potential combinations of the Nationwide Entities with other parties. Based on this evaluation, the Boards of Directors of NCI, PEI and Meadowvale believe that the terms of the Share Exchange Agreement are in the best interests of their respective shareholders and recommend that shareholders of NCI, PEI and Meadowvale each vote FOR approval of the Share Exchange and approval and adoption of the Share Exchange Agreement and the transactions contemplated thereby. In their respective evaluations of the Share Exchange and the terms of the Share Exchange Agreement, the Boards of Directors of NCI, PEI and Meadowvale each considered, among other things, the following: (i) the consideration offered by Hillhaven in connection with the Share Exchange; (ii) information concerning the financial condition, results of operations and prospects of the Nationwide Entities and Hillhaven; (iii) the competitive position of the Nationwide Entities and Hillhaven in the long term health care industry; (iv) the possible effects of the Share Exchange on the businesses of the Nationwide Entities and the shareholders, partners, employees, and patients of the Nationwide Entities; (v) alternatives to the Share Exchange identified by the respective Boards; (vi) the needs of the respective Corporate Targets for additional capital to implement their respective business plans; (vii) the fact that the terms of the Share Exchange and 24 31 the Share Exchange Consideration (as defined herein) were the result of a competitive bidding process; (viii) the expertise in specialty care areas which would become available upon consummation of the Share Exchange; and (ix) other factors considered relevant by the Boards. Each of the foregoing factors was considered by the Boards of NCI, PEI and Meadowvale during the course of their respective deliberations prior to entering into the Share Exchange Agreement, in light of their respective knowledge of the Nationwide Entities, their respective businesses and each director's business judgment. In their deliberations, the Boards did not quantify or otherwise attempt to assign relative weights to the specific factors considered in determining to approve and adopt (and recommend that their respective shareholders approve and adopt) the Share Exchange and the Share Exchange Agreement. The Boards of Directors of NCI, PEI and Meadowvale, upon review of the time and expense involved and the circumstances surrounding the Share Exchange, determined that obtaining a fairness opinion with respect to the Share Exchange and the terms of the Share Exchange Agreement would not be cost-beneficial to their respective shareholders. TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT The following is a brief summary of the Share Exchange Agreement. This summary is qualified in its entirety by reference to the Share Exchange Agreement. EFFECTIVE TIME OF THE SHARE EXCHANGE If all of the conditions precedent to the Share Exchange are satisfied or waived and the Share Exchange Agreement is not terminated prior to closing, the Share Exchange will become effective (the "Effective Time") as of 12:01 a.m., Eastern Standard Time, on the date following the date that Hillhaven and the Corporate Targets file the Certificates of Share Exchange with the Secretary of State of the State of Indiana and the Secretary of State of the State of Nevada pursuant to the provisions of and with the effect provided in the IBCL and the NGCL. Assuming all of the conditions precedent to the Share Exchange are satisfied or waived prior thereto, it is anticipated that the closing of the transactions contemplated by the Share Exchange Agreement will occur on or about June , 1995 (the "Closing") and that the Effective Time of the Share Exchange will occur on or about 12:01 a.m., June , 1995. SHARE EXCHANGE CONSIDERATION AND MECHANICS The shares of each of the Corporate Targets issued and outstanding immediately prior to the Effective Time (the "Target Common Shares") will, as of the Effective Time, be automatically exchanged for Hillhaven Common Shares as follows: NCI Shareholders Each holder of NCI Voting Shares shall receive a number of Hillhaven Common Shares equal to the product of (i) 0.564 multiplied by (ii) the number of NCI Voting Shares held in such shareholder's name, rounded to the nearest whole share. Each holder of NCI Nonvoting Common Shares shall receive a number of Hillhaven Common Shares equal to the product of (i) 0.564 multiplied by (ii) the number of shares of NCI Nonvoting Common Shares held in such shareholder's name, rounded to nearest whole share. PEI Shareholders Each shareholder of PEI shall receive a number of Hillhaven Common Shares equal to the product of (i) 41.67 multiplied by (ii) the number of shares of PEI held in such shareholder's name, rounded to the nearest whole share. 25 32 Meadowvale Shareholders Each shareholder of Meadowvale shall receive a number of Hillhaven Common Shares equal to the product of (i) 41.67 multiplied by (ii) the number of shares of Meadowvale held in such shareholder's name, rounded to the nearest whole share. The total consideration to be received by the holders of the Target Common Shares in connection with the Share Exchange is referred to herein as the "Share Exchange Consideration." The aggregate Share Exchange Consideration will consist of 5,000,000 Hillhaven Common Shares, provided the average closing price of one Hillhaven Common Share as reported on the NYSE for the ten trading days immediately preceding the Closing Date (the "Trading Price") is greater than or equal to $24.00. If the Trading Price is less than $24.00, the Share Exchange Consideration shall consist of the number (the "Consideration Number") of Hillhaven Common Shares equal to the quotient of $120,000,000, divided by the Trading Price; provided, however, that the Consideration Number shall not be greater than 5,500,000 Hillhaven Common Shares. In the event of such an adjustment in the Share Exchange Consideration, the number of Hillhaven Common Shares to be received in exchange for each Target Common Share shall be multiplied by a fraction, the numerator of which is the number of Hillhaven Common Shares which comprise the Share Exchange Consideration as adjusted pursuant to the formula described above, and the denominator of which is 5,000,000. The Boards of Directors of each of the Corporate Targets and the Partners determined the allocation of the Share Exchange Consideration among themselves and executed an Allocation Agreement whereby they agreed to such allocation. In allocating the Share Exchange Consideration among the Corporate Targets, the Board of Directors of each of the Corporate Targets and the Partners considered the following: (i) the aggregate amount of Hillhaven Common Shares to be issued in connection with the Share Exchange; (ii) the market value of the Hillhaven Common Shares; (iii) the separate negotiations between Dr. Phillippe, Chairman of the Board of NCI, and Donald Cheesman, President of Meadowvale, as to the allocation of the Share Exchange Consideration to Meadowvale; (iv) the fact that NCI already owned 99% or more of the partnership interests of Camelot and Evergreen; (v) the recent financial results and prospects for each of the Targets; (vi) projected income statements for each of the Targets; (vii) an appraisal of "The Heritage at Hernando," the assisted living facility owned by PEI; (viii) the number of beds/units involved in the Share Exchange; and (ix) other information involved in the Share Exchange, as the respective Boards of Directors and Partners deemed appropriate. Based upon the capitalization of Hillhaven as of April 1, 1995, and assuming no adjustment of the Share Exchange Consideration as described above, the owners of NCI Common Shares will own Hillhaven Common Shares representing approximately 13.2% of the Hillhaven Common Shares outstanding immediately after the consummation of the Share Exchange. At the Closing, the Partners will assign to NCI, free and clear of all liens, security interests and encumbrances, their Partnership Interests. The Partners will not receive any Share Exchange Consideration therefor. At the Closing, each holder of Target Common Shares shall deliver to Hillhaven each certificate (a "Certificate") for such shares held of record by such holder. Promptly following the Effective Time, Hillhaven will deliver (i) to each holder so delivering his, her or its Certificate(s) representing the number of Hillhaven Common Shares such holder is entitled to receive, less the number of Hillhaven Common Shares to be delivered to the escrow agent, and (ii) to the escrow agent, certificates of Hillhaven Common Shares representing the balance of the shares otherwise deliverable to such holders. See "Escrow Agreement and Supplemental Escrow Agreement." No certificates or scrip representing fractional Hillhaven Common Shares shall be issued as consideration for the Share Exchange, and holders of any such fractional share interests shall not be entitled to any voting, dividend, distribution or other rights as a Hillhaven shareholder with respect to such fractional share interest. Following the Effective Time, all certificates formerly representing an equity interest in the Corporate Targets' Common Shares shall be deemed canceled and of no further effect. If, after the Effective Time, Certificates 26 33 previously representing Target Common Shares are not delivered to Hillhaven or the payment of the Share Exchange Consideration therefor is not claimed prior to the date on which such payments would otherwise escheat or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and any other applicable law, become the property of Hillhaven, free and clear of all claims or interest of any person previously entitled to such claims. CERTIFICATES AND INSTRUMENTS REPRESENTING EQUITY INTERESTS IN THE NATIONWIDE ENTITIES SHOULD NOT BE SURRENDERED TO HILLHAVEN UNTIL THE EFFECTIVE TIME OF THE SHARE EXCHANGE. REDEMPTION OF NCI SUBORDINATED NOTES AND NCI PREFERRED STOCK At the Closing, the Senior Subordinated Notes of NCI (the "NCI Subordinated Notes") shall be prepaid by Hillhaven (without payment of any "Additional Premium" as that term is defined in that certain Subordinated Note Purchase Agreement dated as of July 27, 1993 between NCI and Continental Bank, N.A.) and the NCI preferred stock (the "NCI Preferred Stock") shall be redeemed by NCI, each in accordance with the respective terms thereof. ESCROW AGREEMENT AND SUPPLEMENTAL ESCROW AGREEMENT As security for, and as the sole source for satisfaction of, certain indemnification obligations provided for under the Share Exchange Agreement, 10% of the number of Hillhaven Common Shares that comprise the Share Exchange Consideration (the "Escrow Shares") will be placed in escrow by the Target shareholders with Bank One, Indianapolis, N.A. (the "Escrow Agent"), to remain in escrow until Hillhaven's independent accountants have completed the first audit following the Effective Time of Hillhaven's and the Nationwide Entities' combined operations, but not later than one year after the Closing Date. In addition, as security for the indemnification obligations with respect to certain litigation, 5% of the number of Hillhaven Common Shares that comprise the Share Exchange Consideration shall be transferred by the shareholders of NCI (the "Supplemental Escrow Shares") to be placed in escrow by the Target shareholders with Bank One, Indianapolis, N.A. (the "Supplemental Escrow Agent"), to remain in escrow until the earlier of the date certain litigation has been finally settled or otherwise finally resolved or the date that an unappealable summary judgment to the effect that punitive damages will not be allowed in such litigation has been granted. Pursuant to each of the escrow agreements described above, Thomas E. Phillippe, Jr. is appointed as attorney-in-fact (the "Shareholder Agent") to act as the agent of the shareholders in the performance of all of their obligations and exercise all of their rights under such agreements. All voting and dividend rights with respect to the Escrow Shares and Supplemental Escrow Shares remain with such shareholders. The Shareholder Agent may also direct the Escrow Agent and Supplemental Escrow Agent to sell one or more of the Escrow Shares or Supplemental Escrow Shares on the NYSE and deposit the proceeds into the appropriate escrow account, which proceeds shall be distributed, designated, withheld and otherwise subject to the terms of such agreements. REPRESENTATIONS AND WARRANTIES Each of the Corporate Targets, Partners and Hillhaven made various representations and warranties in the Share Exchange Agreement relating to, among other things, (a) organization, power and similar corporate or partnership matters; (b) capital structure and partnership interests; (c) authorization, execution, delivery, no violation and enforceability of the Share Exchange Agreement and related matters; (d) consents and approvals; (e) compliance with laws and no defaults; (f) tax representations; (g) brokers' or finder's fees; and (h) accuracy of information supplied in connection with this Prospectus/Information Statement. In addition, the Corporate Targets and Partners jointly and severally made various additional customary representations and warranties relating to, among other things, (a) transactions with certain persons; (b) books and records; (c) financial statements; (d) absence of undisclosed liabilities; (e) actions pending; 27 34 (f) outstanding debt and related matters; (g) tax matters; (h) absence of changes or events; (i) property; (j) material contracts; (k) licenses and permits; (l) proprietary information; (m) title to assets and related matters; (n) environmental matters; (o) labor relations and employees; (p) employee benefit plans; (q) insurance; (r) life care contracts; (s) survey reports; (t) payment programs; and (u) gratuitous payments. Hillhaven also made various customary representations and warranties relating to, among other things, filing of SEC reports and due authorization and qualification for trading of Hillhaven Common Shares to be issued as Share Exchange Consideration. All of the representations and warranties made by the Corporate Targets, Partners and Hillhaven in the Share Exchange Agreement shall survive until the date Hillhaven's independent accountants have completed the first audit following the Effective Time of Hillhaven's and the Nationwide Entities' combined operations, but not later than one year after the Closing Date, except for certain indemnification obligations which shall survive until the release of the Escrow Shares and Supplemental Escrow Shares. CERTAIN COVENANTS Under the Share Exchange Agreement, until Closing the Corporate Targets and the Partners have made certain customary covenants relating to, among other things, (a) the conduct of their operations in the ordinary course of business; (b) the maintenance of their corporate status; (c) no change in the number of issued and outstanding Target Common Shares, other than as a result of the exercise of outstanding warrants or options; (d) cooperation with Hillhaven and its agents in the preparation of this Prospectus/Information Statement and the consummation of the transactions contemplated by the Share Exchange Agreement; (e) the recommendation to each of their shareholders by each of their Boards of Directors to approve and adopt the Share Exchange Agreement and the Share Exchange at shareholders' meetings called for such purpose, which meetings shall be held as soon as practicable (but not earlier than 20 business days) following effectiveness of the Registration Statement of which this Prospectus/Information Statement is a part; (f) the timely filing and/or payment of all required tax reports, returns or assessments; (g) reasonable access by Hillhaven and its agents to their respective books and records; (h) the maintenance of the types and levels of insurance currently in effect; (i) the provision of monthly unaudited financial statements; (j) notice of any material adverse change in the assets or financial condition, results of operations, business or properties of the Nationwide Entities taken as a whole; (k) the filing of all forms, applications and reports, including all filings required by the HSR Act, and the taking of such other action which is required to be taken or filed in connection the transactions contemplated by the Share Exchange Agreement; and (l) taking no actions that would prevent the Share Exchange from qualifying for pooling of interests accounting treatment. The Corporate Targets and Partners have also agreed that, unless and until the Share Exchange Agreement is terminated pursuant to its terms, the Corporate Targets and Partners shall not, and shall cause its officers, directors, partners, employees and other agents not to, directly or indirectly, take any action to solicit, initiate or encourage the making of any offer or proposal for, or any indication of interest in, a merger or other business combination involving any of the Nationwide Entities or the acquisition of a majority of the equity interest in, or a majority of the assets of, any of the Nationwide Entities, other than the transactions contemplated by the Share Exchange Agreement (an "Acquisition Proposal"). Further, the Corporate Targets and Partners have agreed to promptly notify Hillhaven after receipt of any Acquisition Proposal or any request for nonpublic information relating to any Acquisition Proposal. The Corporate Targets have agreed to use their best efforts to obtain the necessary shareholder approvals of the Share Exchange Agreement and the Share Exchange. The Corporate Targets and the Partners have also agreed to use their best efforts to cause their "affiliates" (as defined in Rule 145 under the Securities Act) to (a) deliver written agreements not to offer to sell, sell or otherwise dispose of the Hillhaven Common Shares received as the Share Exchange Consideration except pursuant to an effective registration statement or in compliance with Rule 145 under the Securities Act or in a transaction that, in the opinion of legal counsel satisfactory to Hillhaven, is exempt from the registration requirements of the Securities Act, and (b) not take any action that would impair Hillhaven's ability to account for the Share Exchange as a pooling of interests. Additionally, NCI has agreed to use its best efforts to terminate that certain option of a third party to purchase 28 35 the Marietta nursing facility; provided that the terms of such termination will be reasonably acceptable to Hillhaven and Hillhaven shall assist NCI as considered necessary in negotiating such termination. Finally, to the extent that it is within their control, the Corporate Targets and Partners have agreed to use their best efforts to cause the conditions precedent to the performance of their obligations under the Share Exchange Agreement to be satisfied. Hillhaven has made certain customary covenants relating to, among other things, (a) the filing of all forms and other documents necessary to be filed pursuant to the HSR Act as promptly as practicable and to cooperate with the Nationwide Entities to allow early termination of the waiting period provided by the HSR Act; (b) to promptly prepare and file with the SEC a Registration Statement of which this Prospectus/ Information Statement is part and use its reasonable efforts to cause such Registration Statement to be declared effective as promptly as practicable; (c) to qualify the Hillhaven Common Shares to be issued as the Share Exchange Consideration for trading on the NYSE effective upon notice of issuance; (d) to approve the Share Exchange Agreement and the Share Exchange; (e) notice of any material adverse change in the assets or financial condition, results of operations, business or properties of Hillhaven and its subsidiaries taken as a whole; (f) taking no actions that would prevent the Share Exchange from qualifying for pooling of interests accounting treatment; (g) to cause its independent accountants to deliver to Hillhaven a letter with respect to whether the Share Exchange will qualify for pooling of interests treatment; and (h) to make certain tax representations and warranties. In addition, Hillhaven has agreed to use its best efforts to obtain all necessary consents from its principal lenders by April 28, 1995, and to use its reasonable efforts to (i) obtain all other consents and approvals necessary to enable it to consummate the transactions contemplated by the Share Exchange Agreement and (ii) cause to have performed by April 28, 1995, at Hillhaven's expense, Phase I environmental surveys of all long term health care facilities currently operated by but not owned by the Nationwide Entities and to be operated by the Nationwide Entities following Closing. CONDITIONS TO THE SHARE EXCHANGE The obligations of the Corporate Targets and Partners to consummate the Share Exchange are subject to the satisfaction, at the Closing, of a number of conditions, including, but not limited to, the following: (a) the truth and correctness in all material respects at the Closing of the representations and warranties made by Hillhaven in the Share Exchange Agreement; (b) the due authorization and approval, and the performance, compliance and fulfillment by Hillhaven of all covenants, agreements, obligations and conditions required by the Share Exchange Agreement to be performed, complied with or fulfilled by it at or prior to the Closing; (c) all material permits, authorizations, approvals and consents of and notices to any governmental entity or third party necessary for the consummation of the transactions by the Share Exchange Agreement shall have been obtained or made; (d) the Registration Statement of which this Prospectus/Information Statement is a part shall have become effective under the Securities Act and the Hillhaven Common Shares to be issued as the Share Exchange Consideration shall have become qualified or registered (or shall be exempt from such qualification or registration) under comparable state securities laws, and at or prior to the Effective Time, no stop order suspending such effectiveness, qualification or registration shall have been issued and no proceeding seeking such a stop order shall have been initiated, threatened or contemplated, and such Hillhaven Common Shares shall be eligible for trading on the NYSE upon notice of issuance; (e) no order, decree, writ or ruling of any governmental authority or court shall have been entered that restrains, enjoins or otherwise prohibits the consummation of the transactions contemplated by the Share Exchange Agreement; (f) in the reasonable judgment of the Nationwide Entities, there has been no material adverse change and no event likely to result in any material adverse change in the assets, business, financial condition or results of operations of Hillhaven and its subsidiaries, taken as a whole; (g) all notifications required by the HSR Act shall have been filed by the Nationwide Entities, and the applicable waiting periods with respect thereto shall have expired or been terminated; (h) each of the Nationwide Entities shall have received from Hillhaven all of the instruments, documents and considerations required to be delivered pursuant to the Share Exchange Agreement; (i) NCI shall have received an opinion from its counsel regarding certain tax matters; and (j) certain personal guarantees by shareholders of the Corporate Targets and/or Partners of the Partnership Targets shall have been released or NCI shall have agreed to indemnify such shareholders and/or Partners for any losses resulting from such guarantees. 29 36 The obligation of Hillhaven to consummate the Share Exchange is subject to the satisfaction, at the Closing, of a number of conditions, including, but not limited to, the following: (a) the truth and correctness in all material respects at the Closing of the representations and warranties made by the Corporate Targets and Partners in the Share Exchange Agreement; (b) the performance, compliance and fulfillment by the Corporate Targets and Partners of all covenants, agreements, obligations and conditions required by the Share Exchange Agreement to be performed, complied with or fulfilled by them at or prior to the Closing; (c) the applicable waiting period under the HSR Act relating to the Share Exchanges shall have expired or been terminated; (d) all material permits, authorizations, approvals and consents of and notices to any governmental entity or third party necessary for the consummation of the transactions by the Share Exchange Agreement shall have been obtained or made; (e) no order, decree, writ or ruling of any governmental authority or court shall have been entered that restrains, enjoins or otherwise prohibits the consummation of the transactions contemplated by the Share Exchange Agreement; (f) in the reasonable judgment of Hillhaven, there has been no material adverse change and no event likely the Nationwide Entities to result in any material adverse change in the assets, business, financial condition or results of operations of and their subsidiaries, taken as a whole; (g) Hillhaven shall have received from the Nationwide Entities all of the instruments, documents and considerations required to be delivered pursuant to the Share Exchange Agreement; (h) holders in excess of 5% of the Target Common Shares shall not have exercised dissenters' rights under applicable law; (i) Hillhaven shall have received a letter and an opinion from its independent accountants regarding certain tax matters; (j) all warrants issued by NCI shall have been exercised prior to the Closing; and (k) the lease of one of the Nationwide Entities' facilities shall have been renewed for an additional five year term, and the Nationwide Entities shall have used their reasonable efforts to modify the lease for a different facility to provide for a five-year extension; and (1) the option of certain third parties to purchase the Cambridge and Parkwood facilities shall have been terminated in return for certain consideration. INDEMNIFICATION AND SUPPLEMENTAL INDEMNIFICATION Pursuant to the Share Exchange Agreement, Hillhaven shall be indemnified and held harmless from and against any damages, loss, cost, liability or expense ("Losses") that may be incurred by or suffered by or asserted against Hillhaven or any of its subsidiaries (collectively, the "Indemnified Party"), but without duplication, arising out of or related to, directly or indirectly, the incorrectness of any of the representations or warranties made by the Corporate Targets and Partners, or the breach prior to the Effective Time of any of the covenants or agreements of any of the Corporate Targets or Partners contained in the Share Exchange Agreement or in any other instrument executed and delivered by the Corporate Targets or Partners. Notwithstanding the foregoing, the Indemnified Party shall generally be entitled to indemnification only when the aggregate Losses exceed $250,000. Except in certain specified cases, all Losses shall be paid or satisfied only by distribution to Hillhaven of the Escrow Shares and cash, if any, held by the Escrow Agent. Except with respect to Supplemental Losses (defined below), such payment and satisfaction shall be the exclusive remedy for any breach of a representation or warranty by or a covenant of any Corporate Target or Partner. See "Escrow Agreement and Supplemental Escrow Agreement." In addition to the indemnification described above, pursuant to the Share Exchange Agreement, any Indemnified Party shall be indemnified and held harmless from and against any Losses that may be incurred by or suffered by or asserted against any such Indemnified Party, but without duplication, arising out of or related to, directly or indirectly, certain pending litigation (such Losses, "Supplemental Losses"). All Supplemental Losses shall be paid or satisfied only by distribution to Hillhaven of the Supplemental Escrow Shares and cash, if any, held by the Escrow Agent. Such payment and satisfaction shall be the exclusive remedy of Hillhaven for the occurrence of Supplemental Losses. See "Escrow Agreement and Supplement Escrow Agreement." NONCOMPETITION AGREEMENTS Pursuant to the Share Exchange Agreement, the Nationwide Entities shall deliver or cause to be delivered to Hillhaven at the Closing, two noncompetition agreements, one by and between Hillhaven and Dr. Thomas E. Phillippe, Sr., Chairman of the Board of NCI, and the other by and between Hillhaven and 30 37 Thomas E. Phillippe, Jr., President and Chief Executive Officer of NCI (together, the "Noncompetition Agreements"). The Noncompetition Agreements describe the business activities (the "Business Activities") currently conducted by the Corporate Targets and the Partnership Targets. Pursuant to the Noncompetition Agreements, Dr. Phillippe and Mr. Phillippe will each individually agree that, for a period of five years from the Effective Time, neither will, directly or indirectly: (a) have an interest in, own, manage, operate, control, be connected with as a shareholder (other than as a shareholder of less than 5% of the issued and outstanding stock of a publicly held corporation), joint venturer, partner, limited liability company member or manager, or consultant, or otherwise engage or invest or participate in, or enjoy a financially beneficial relationship with, any business which conducts any of the Business Activities within a five mile radius of any facility or location at or from which Hillhaven or any of its affiliates conducts any of the Business Activities; (b) solicit, recruit or hire any employee of Hillhaven, or any of its affiliates or any person who has worked for such entities within the six months preceding such solicitation, recruitment or hire; or (c) solicit or encourage any employee of Hillhaven, or any of its affiliates to leave such employment. The Noncompetition Agreements provide for binding arbitration to resolve any claim or controversy relating to the breach, interpretation or enforcement of such Agreements, and are enforceable by specific performance. No consideration will be paid or allocated to Dr. Phillippe or Mr. Phillippe in connection with the Noncompetition Agreements. AGREEMENT AMONG CORPORATE TARGET SHAREHOLDERS Pursuant to the Share Exchange Agreement, the Nationwide Entities shall deliver or cause to be delivered to Hillhaven, at the Closing, certain Agreements Among Shareholders (the "Shareholders' Agreements") by and among all of the shareholders of each of the Corporate Targets (each a "Shareholder" and collectively the "Shareholders"). In order to facilitate the delivery of certain legal opinions to be delivered at Closing concerning the tax treatment of the Share Exchange, under the Shareholders' Agreements each Shareholder shall severally represent, warrant and covenant to the other Shareholders that he, she or it has no plan, intention or arrangement to sell, exchange or otherwise dispose of a number of the Hillhaven Common Shares received as Share Exchange Consideration that would reduce such person's ownership of such Hillhaven Common Shares to a number having a value, determined at the Effective Time, of less than 50% of the value of Corporate Target stock held by such person immediately before the Share Exchange. Further, pursuant to the Shareholders' Agreements, a Shareholder may sell, exchange or otherwise dispose of any of the Hillhaven Common Shares received as Share Exchange Consideration provided such disposition would not reduce the fair market value of the Hillhaven Common Shares, determined as of the Effective Time, by such Shareholder to an amount less than 50% of the fair market value of the Corporate Target stock held by such Shareholder immediately before the Share Exchange. A Shareholder may not sell more than 50% of such Shareholder's Hillhaven Common Shares within the two-year period immediately following the Effective Time unless: (a) such Shareholder obtains and delivers to Thomas E. Phillippe, Jr., acting as a representative of all the Shareholders (the "Representative"), an unqualified opinion of counsel (from counsel reasonably acceptable to the Representative, and in a form acceptable to the Representative) to the effect that such sale, exchange or disposition would not adversely affect the tax-free status of the Share Exchange; and (ii) the Representative and Dr. Thomas E. Phillippe, Sr. (the "Phillippes"), jointly consent in writing to such sale, exchange or disposition. The Phillippes shall use reasonable efforts to reply to a request for a disposition of shares pursuant to clause (b) above within 30 days of receipt of a written notice of a Shareholder's request to sell shares pursuant to such clause. ADDITIONAL AGREEMENTS Pursuant to the Share Exchange Agreement, Hillhaven has agreed to continue in full force and effect the employee benefit plans of the Nationwide Entities existing at the Effective Time until those employees of the Nationwide Entities who continue as employees of the Nationwide Entities or Hillhaven in the Share Exchange become eligible to participate in the employee benefit plans of Hillhaven. In addition, Hillhaven has agreed to recognize such transferred employees' service with any of the Nationwide Entities for purposes of eligibility and vesting under such Hillhaven plans. Hillhaven has also agreed that prior to any termination of certain named employees, Hillhaven will give such employees thirty days notice and will pay such terminated employees one week's salary for each year such employee has been employed by NCI or its affiliates, less 31 38 applicable withholdings. Hillhaven has specifically agreed it will cause NCI to honor and perform after the Effective Time the obligations of NCI pursuant to the Employment Agreements. See "CORPORATE TARGETS' SPECIAL MEETINGS -- The NCI Special Meeting" and "OTHER MATTERS TO BE VOTED UPON BY NCI VOTING COMMON SHAREHOLDERS." Prior to the Effective Time, Meadowvale will transfer to Donald Cheesman ("Cheesman") certain real property including land and a home built thereon which is owned by Meadowvale. Meadowvale will also pay to Cheesman all amounts owing by Meadowvale to Cheesman pursuant to that certain Promissory Note dated February 1, 1986 executed by Meadowvale in favor of Cheesman. After the Effective Time, Hillhaven shall cause NCI to honor and pay the debt in the amount of $313,408 owed to Dr. Thomas E. Phillippe, Sr. by Shangri-La. The parties to the Share Exchange Agreement have agreed that none of the transactions described in this paragraph will affect the amount of Share Exchange Consideration to be paid pursuant to the Share Exchange Agreement. Hillhaven has also agreed that it will not take or cause to be taken any action, and will not permit its affiliates to take or cause to be taken any action within Hillhaven's control, whether before or after the Effective Time, which would disqualify any of the transactions contemplated by the Share Exchange Agreement as a "reorganization" for tax purposes. In connection therewith, Hillhaven has agreed not to participate in any tax-free reorganization or share exchange without first obtaining an unqualified opinion of its independent accountants, such opinion to be acceptable to the Representative, that such transaction will not disqualify the Share Exchange as a tax-free reorganization and providing such opinion to the Representative. In addition, to permit the sale of Hillhaven Common Shares received as Share Exchange Consideration and to preserve certain accounting treatment of the transactions contemplated by the Share Exchange Agreement, Hillhaven has agreed to publish the financial results of the combined operations of Hillhaven and the Nationwide Entities, covering at least 30 days of such combined operations, no later than the last to occur of (a) 60 days following the end of the month in which the Closing occurs or (b) 10 days following delivery of such financial information with respect to the operations previously owned by the Nationwide Entities as Hillhaven considers reasonably necessary to prepare such combined financial results. The Shangri-La Facility is subject to a purchase option which was exercised on March 1, 1995. If the Shangri-La Facility is purchased prior to the Effective Time, (a) the partners of Shangri-La shall not be considered parties to the Original Agreement or the Share Exchange Agreement, and such partners shall be released and forever discharged from all obligations thereunder or hereunder, including without limitation, any obligation to assign their partnership interests to NCI and any representation or warranty in the Share Exchange Agreement, and (b) Hillhaven and NCI shall be released and forever discharged from all obligations to the partners of Shangri-La pursuant to the Original Agreement and the Share Exchange Agreement, and the obligation of Acquiror to cause NCI to pay $313,408 to Thomas E. Phillippe, Sr. shall be releases. At the Closing, the officers and directors of each of the Corporate Targets shall deliver their resignations, and Hillhaven shall receive evidence of redemption of the NCI Preferred Stock. Hillhaven and the Nationwide Entities entered into a Confidentiality Agreement dated November 7, 1994, which will remain in full force and effect at all times prior to the Effective Time and after termination, if any, of the Share Exchange Agreement. TERMINATION The Share Exchange Agreement provides that it may be terminated by mutual agreement of the parties at any time prior to the Closing. Hillhaven, on the one hand, and the Corporate Targets and Partners, on the other hand, may terminate the Share Exchange Agreement and any of their respective obligations thereunder (other than those respecting confidentiality) at any time prior to the Closing by written notice if, in any of their respective judgments, (a) there has been a breach or failure to perform in any material respect any of the other parties' covenants or obligations under the Share Exchange Agreement; (b) any representation or warranty made by the other party in the Share Exchange Agreement is false or misleading in any material respect and cannot be cured prior to July 31, 1995; or (c) any other material condition precedent to the 32 39 performance of their respective obligations under the Share Exchange Agreement is not capable of being met. In addition, the Corporate Targets and Partners may terminate the Share Exchange Agreement by written notice if the average closing price of one Hillhaven Common share as reported on the NYSE for the 10 trading days immediately preceding the Closing Date is less than $21.82 or the Share Exchange is not consummated by July 31, 1995. SUPPLEMENT, MODIFICATION OR AMENDMENT OF THE SHARE EXCHANGE AGREEMENT No supplement, modification or amendment of the Share Exchange Agreement shall be binding unless executed in writing by the parties to the Share Exchange Agreement. The party for whose benefit a warranty, representation, covenant or condition is intended may, in writing, waive any inaccuracies in the warranties and representations contained in the Share Exchange Agreement or waive compliance with any of the covenants or conditions contained therein and so waive performance of any of the obligations of the other party thereto, and any defaults thereunder. Any such waiver shall not, however, affect or impair the waiving party's rights with respect to any other warranty, representation or covenant or any default under the Share Exchange Agreement, nor shall any waiver constitute a continuing waiver. SHARE EXCHANGE EXPENSES Except as otherwise expressly provided for in the Share Exchange Agreement, each of the parties to the Share Exchange Agreement has agreed to pay all costs and expenses incurred or to be incurred by such parties in negotiating and preparing the Share Exchange Agreement and in closing and carrying out the transactions contemplated by the Share Exchange Agreement. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Various interrelationships exist among the Corporate Targets with respect to their respective owners, Board members and officers. Dr. Thomas E. Phillippe, Sr. serves as: (1) Chairman of the Board of Directors of NCI; (2) a member of the Board of Directors of Meadowvale; and (3) President and one of the two Board members of PEI. Thomas E. Phillippe, Jr., Dr. Phillippe's son, serves as: (1) a member of the Board of Directors of NCI and NCI's President and Chief Executive Officer; and (2) the other member of the Board of Directors of PEI and PEI's Secretary. Dr. Phillippe and Thomas E. Phillippe, Jr. own or control 61% and 20% of the issued and outstanding NCI Common Shares, respectively, and they each own 50% of the issued and outstanding PEI Common Shares. Joan Phillippe, Dr. Phillippe's wife, and certain members of her family own all of the Meadowvale Common Shares. Donald Cheesman, Joan Phillippe's father, owns Meadowvale Common Shares and serves as the President and a member of the Board of the Directors of Meadowvale. NCI leases the Meadowvale nursing center from Meadowvale, which is owned by Joan Phillippe, who is Dr. Phillippe's wife, and members of her family. The lease term will continue until March 2001, unless either the lessor or lessee elects to terminate the lease prior to the beginning of the final five year term, which begins in 1996. Rental expense is approximately $241,000 ($2,008 per bed) per year. See "THE NATIONWIDE ENTITIES -- Description of NCI Business." The terms of the Share Exchange Agreement provide that Hillhaven will cause NCI to honor and perform after the Effective Time the obligations of NCI pursuant to the Employment Agreements with the following officers of NCI: Philip W. Caldwell -- Vice President of Operations; J. Mark Mutz -- Vice President and General Counsel; Charles Cooper -- Vice President of Marketing; and James Burkhart -- Chief Financial Officer. For description of the Employment Agreements, see "OTHER MATTERS TO BE VOTED UPON BY NCI VOTING COMMON SHAREHOLDERS." In addition, Hillhaven will cause NCI, which will assume the obligations of Shangri-La in connection with the Share Exchange, to honor and pay the debt in the amount of $313,408 owed to Dr. Thomas E. Phillippe, Sr., Chairman of the Board of Directors of NCI. The terms of the Share Exchange also provide that prior to the Effective Time, Meadowvale will transfer to Donald Cheesman real property including land and a home built thereon located at 1529 Lancaster Street, Bluffton, Indiana and owned by Meadowvale. In addition, Meadowvale will repay to Cheesman all amounts 33 40 owing by Meadowvale to Cheesman pursuant to that certain promissory note dated February 1, 1986 executed by Meadowvale in favor of Cheesman. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes certain U.S. Federal income tax consequences of the Share Exchange of Hillhaven Common Shares for the outstanding common stock of NCI, PEI and Meadowvale. This summary is based upon the Code, Treasury Regulations, judicial authority and administrative rulings and pronouncements of the Internal Revenue Service ("IRS") now in effect, all of which are subject to change at any time, possibly on a retroactive basis. This discussion does not address all aspects of Federal income taxation that may be relevant to particular shareholders and other parties to the transactions and may not be applicable to shareholders who are not citizens or residents of the United States, or who will acquire their Hillhaven Common Shares pursuant to the exercise or termination of employee stock options or otherwise as compensation, nor does the discussion address the effect of any applicable foreign, state, local or other tax laws. Additionally, this discussion does not address the taxability of any party resulting from the assignment by the minority partners of their partnership interests in certain Partnership Targets (as defined herein) pursuant to the terms of the Share Exchange Agreement. This discussion also does not address the taxability of the redemption of the NCI Preferred Stock (as defined herein) to the preferred shareholders prior to the Share Exchange, or any other distributions by the Corporate Targets prior to the Share Exchange. This discussion assumes that shareholders of the Corporate Targets hold their Target Common Shares (as defined herein) as capital assets within the meaning of Section 1221 of the Code. See "SUMMARY -- Parties to the Share Exchange Agreement," and "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Redemption of NCI Subordinated Notes and NCI Preferred Stock" and "-- Share Exchange Consideration and Mechanics." EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE SHARE EXCHANGE, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS. It is a condition to the Share Exchange Agreement that Hillhaven shall have received the opinion of KPMG Peat Marwick LLP ("KPMG"), tax advisor to Hillhaven, that the exchange of common stock of each of the Corporate Targets for Hillhaven Common Shares, will, under current law, constitute a tax-free reorganization under Code Section 368(a)(1)(B) of the Code, and that Hillhaven and each of the Corporate Targets will be a party to the reorganization within the meaning of Code Section 368(b). Additionally, it is a condition to the Share Exchange Agreement that NCI, PEI and Meadowvale shall have received the opinion of Ice Miller Donadio & Ryan ("Ice Miller"), counsel to NCI, that the exchange of common stock of each of the Corporate Targets for Hillhaven Common Shares will, under current law, constitute a tax-free reorganization under Code Section 368(a)(1)(B), and that Hillhaven and each of the Corporate Targets will be a party to the reorganization within the meaning of Code Section 368(b). In rendering such opinion, KPMG and Ice Miller will rely upon written representations and covenants of Hillhaven, the Corporate Targets and the controlling shareholders of the Corporate Targets. No ruling will be requested from the IRS as to the Federal income tax consequences of the Share Exchange, and the opinion of KPMG and Ice Miller is not binding on the IRS or any court. As a tax-free reorganization, each Share Exchange will have the following Federal income tax consequences for the shareholders of the Corporate Targets, the Corporate Targets and Hillhaven: 1. No gain or loss will be recognized by shareholders of the Target Common Shares as a result of the exchange of such shares for Hillhaven Common Shares pursuant to the Share Exchange Agreement to the extent of Hillhaven Common Shares received. 2. The tax basis of the shares of Hillhaven Common Shares received by each shareholder of each Corporate Target for Target Common Shares will equal the tax basis of such shareholder's Target Common Shares exchanged for such Hillhaven Common Shares in the Share Exchange. 34 41 3. The holding period of the shares of Hillhaven Common Shares received by each shareholder of the Corporate Targets for Target Common Shares will include the holding period of such Shareholders' Target Common Shares exchanged for such Hillhaven Common Shares in the Share Exchange. 4. Neither Hillhaven nor the Corporate Targets will recognize gain or loss as a result of the Share Exchange. ACCOUNTING TREATMENT Hillhaven intends to treat the Share Exchange as a pooling of interests for accounting purposes. Consequently, in accordance with GAAP, Hillhaven will restate its consolidated financial statements to include the assets, liabilities, shareholders' equity and results of operations of the Nationwide Entities, subject to appropriate adjustments to conform the accounting principles of the Nationwide Entities, if necessary. A condition precedent to Hillhaven's obligation to consummate the Share Exchange Agreement is that KPMG, independent auditors for Hillhaven, shall have advised Hillhaven in writing that the Share Exchange may be accounted for as a pooling of interests under GAAP. OTHER MATTERS TO BE VOTED UPON BY NCI VOTING COMMON SHAREHOLDERS APPROVAL OF EMPLOYMENT AGREEMENT PAYMENTS The Share Exchange will constitute a "Change of Control Transaction," as defined under the Employment Agreements, entitling the applicable employee to an Incentive Bonus and making the employee eligible for the Severance Payment. The Employment Agreement Payments under each of the Employment Agreements due or which may become due as a result of a Change of Control Transaction would potentially constitute "excess parachute payments" as defined in Code Section 280G(b)(1). If the Employment Agreement Payments are classified as "excess parachute payments," no deduction will be allowed to NCI for such payments, and each such employee would be subject to a 20% excise tax upon receipt of such payments under Code Section 4999(a). The Employment Agreement Payments will not be "excess parachute payments" if they are approved by a separate vote of the persons who own, immediately before the Change of Control Transaction, more than 75% of the voting power of all outstanding NCI Voting Common Shares. The vote must determine the right of the employee to receive the payment. The vote of the holders of the NCI Voting Common Shares is therefore necessary so that the Employment Agreement Payments qualify for an exemption under Code Section 280G. See "CORPORATE TARGETS' SPECIAL MEETINGS -- The NCI Special Meeting." The Employment Agreements define a Change of Control Transaction as follows: (1) the sale or other transfer, directly or indirectly, of substantially all of the assets of NCI to another person or entity, except a person or entity that is controlled by the Family (as defined below), (2) any sale or exchange of stock or other transaction by which a corporation, person, other entity or group (other than the group consisting of Dr. Thomas E. Phillippe, Sr. and the members of his immediate family (collectively, the "Family") becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) of more than 50% of the then outstanding voting stock of NCI; or (3) any merger of NCI with or into another corporation in a transaction in which NCI is not the surviving corporation, other than a merger which will result in the Family holding at least fifty percent (50%) of the combined voting power of the voting securities of the corporation surviving the merger. The Incentive Bonuses to be paid in the event of a Change of Control Transaction are in each case the greater of a base amount (the "Base Amount") or a percentage of the "Equity Value," defined as the total proceeds and other consideration paid or received by or to be paid or received in connection with a Change of Control Transaction (which consideration shall be deemed to include amounts in escrow), including without limitation: (i) cash; (ii) notes, securities and other property; (iii) payments made in installments; (iv) amounts payable under consulting agreements, agreements not to compete, incentive or similar arrangements (including such payments to management, but excluding any amounts payable pursuant to subsection 4(b) of the Employment Agreements or the same subsection of any other similar employment agreement between NCI and any executive who is not a member of the Family); (v) contingent payments 35 42 (whether or not related to future earnings or operations); and (vi) if the Change of Control Transaction involves the disposition of assets, the net value of current assets not sold. The Base Amount for each employee under the Employment Agreements is as follows: Philip W. Caldwell -- $125,000; J. Mark Mutz -- $225,000; Charles Cooper -- $100,000; James Burkhart -- $150,000; and John Lines -- $100,000. The Equity Value percentage for each employee under the Employment Agreements is as follows: Philip W. Caldwell -- .00098; J. Mark Mutz; -- .001765; Charles Cooper -- .000784; James Burkhart -- .001176; and John Lines -- .000784. Assuming a current price for Hillhaven Common Shares of per share, the Incentive Bonus to be paid to each of the employees under the Employee Agreements upon closing of the Share Exchange would be as follows: Phillip W. Caldwell -- $ ; J. Mark Mutz -- $ ; Charles Cooper -- $ ; James Burkhart -- $ ; and John Lines -- $ . Also under the Employment Agreements, if the employee terminates his employment with NCI for "good reason," as defined in the Employment Agreements, or if NCI terminates the employee without cause, and following a Change of Control Transaction, the employee is entitled to a Severance Payment calculated as the greater of the employee's base salary for the remainder of the term (the "Remainder Amount") or the applicable Severance Multiple multiplied by the employee's base salary. The base annual salaries for these employees as set forth in the Employment Agreements are as follows: Philip W. Caldwell -- $123,000; J. Mark Mutz -- $120,000; Charles Cooper -- $105.000; James Burkhart -- $100,000; and John Lines -- $65,000. The Severance Multiple for each of these employees is as follows: Philip W. Caldwell -- 1.5; J. Mark Mutz -- 1.5; Charles Cooper -- 1.5; James Burkhart -- 1.5; and John Lines -- 2.0. In addition to the provisions dealing with the Incentive Bonuses and Severance Payments, the Employment Agreements include terms describing the following: (1) the position and duties of the employee; (2) base salary; (3) reimbursement of business expenses incurred on behalf of NCI; and (4) participation by the employee in the benefit plans of NCI. The terms of the Employment Agreements expire on May 7, 1996, although NCI may terminate the employee for "good cause," as defined in the Employment Agreements, prior to expiration. APPROVAL OF ACCELERATED VESTINGS Upon the Effective Date of the Share Exchange, 3,000 restricted NCI Voting Common Shares each owned by Philip W. Caldwell and Charles Coopers will vest pursuant to the terms of their respective grant agreements. Similar to the Incentive Bonuses, these Accelerated Vestings would potentially constitute "excess parachute payments" as defined in Code Section 280G(b)(1). As indicated above, if the Accelerated Vestings are classified as "excess parachute payments," no deduction will be allowed to NCI for such payment, and such employee would be subject to a 20% excise tax upon receipt of such payment under Code Section 4999(a). The Accelerated Vestings will not be "excess parachute payments," if they are approved by a separate vote of the persons who own, immediately before the Change of Control Transaction, more than 75% of the voting power of all outstanding stock of NCI. The vote must determine the right of the employee to receive the "payment" in the form of the Accelerated Vestings. The vote of the holders of the NCI Voting Common Shares is therefore necessary so Accelerated Vestings will qualify for an exemption under Code Section 280G. See "CORPORATE TARGETS SPECIAL MEETINGS -- The NCI Special Meeting." THE NATIONWIDE ENTITIES DESCRIPTION OF NCI BUSINESS NCI operates long-term health care centers located in Indiana, Ohio and Florida. NCI's operations include 23 nursing centers with a total of 3,257 licensed beds, two retirement centers with a total of 240 units, two assisted living centers totaling 162 units and 40 additional assisted living units located in one of the retirement centers. Of NCI's 27 centers, 14 are owned, 11 are leased and two are managed for other parties. Twenty-one of NCI's centers are located in Indiana, three are located in Ohio, and three located in Florida. NCI was incorporated on September 30, 1992 for the purpose of the Reorganization that took place on July 27, 1993. Under the Reorganization, the Nationwide Businesses owned by the Phillippes as well as 36 43 certain Non-Controlled Entities were acquired and combined into NCI. Specifically, pursuant to the Reorganization: (i) each of the Nationwide Businesses that was a corporation was merged with and into NCI; (ii) each partner of a Nationwide Business that was a partnership contributed his or her partnership interest to NCI (except that less than one percent of the partnership interests in Camelot and Evergreen remained outstanding and not owned by NCI) and (iii) each of the Non-Controlled Entities was merged with and into NCI. Each partner and shareholder of the Nationwide Businesses and the Non-Controlled Entities received common shares of NCI, plus cash in lieu of fractional shares, in exchange for their interests in the Nationwide Businesses and the Non-Controlled Entities. The purposes of the Reorganization were to reduce borrowing costs, increase access to capital markets, achieve economies of scale and reduce the administrative burdens associated with operating multiple separate entities. NCI provides a broad range of services through its nursing centers. All of NCI's nursing centers provide skilled nursing care, and rehabilitation and ancillary services, such as physical occupational, speech and respiratory therapies. In addition, ten of NCI's nursing centers have specialty care Alzheimer's units, and eight have subacute care units with an aggregate total of 173 dedicated beds. In addition to its nursing center services, NCI provides more limited care services through its home health care agencies, assisted living centers and retirement centers. CENTERS The following table summarizes certain information with respect to each of NCI's long term health care centers.
TOTAL BEDS/ OWNED/LEASED/ NAME LOCATION OWNED MANAGED ---- ---------- ----------- ------------- INDIANA Camelot Care Center..................................... Logansport 75 Owned The Heritage at Wildwood Assisted Living Center......... Indianapolis 72 Owned Muncie Health Care and Rehabilitation Center............ Muncie 160 Owned Parkwood Health Care Center(1).......................... Lebanon 133 Owned Rolling Hills Health Care Center........................ New Albany 115 Owned Royal Oaks Health Care and Rehabilitation Center........ Terre Haute 200 Owned Southwood Health Care Center............................ Terre Haute 119 Owned Valley View Health Care Center.......................... Elkhart 140 Owned Wildwood Health Care Center............................. Indianapolis 155 Owned Colonial Oaks Health Care Center(2)..................... Marion 120 Leased Markle Health Care...................................... Markle 66 Leased Meadowvale Care Center.................................. Bluffton 120 Leased Ossian Health Care...................................... Ossian 100 Leased Regency Place-Castleton................................. Indianapolis 160 Leased Regency Place-Dyer...................................... Dyer 150 Leased Regency Place-Fort Wayne................................ Fort Wayne 160 Leased Regency Place-Greenfield................................ Greenfield 230 Leased Regency Place-Greenwood................................. Greenwood 231 Leased Regency Place-Lafayette................................. Lafayette 160 Leased Regency Place-South Bend................................ South Bend 150 Leased Colonial Oaks Retirement Apartments..................... Marion 63 Managed ----- INDIANA TOTAL(3) 2,879
37 44
TOTAL BEDS/ OWNED/LEASED/ NAME LOCATION OWNED MANAGED ---- ---------- ----------- ------------- OHIO Cambridge Health Care Center(4)......................... Cambridge 159 Owned Coshocton Health Care Center............................ Coshocton 110 Owned Marietta Convalescent Center(5)......................... Marietta 120 Owned ----- OHIO TOTAL 389 FLORIDA Evergreen Woods Health Care Center...................... Spring Hill 120 Owned Evergreen Woods Retirement Center....................... Spring Hill 217 Owned The Heritage at Hernando Assisted Living Center......... Brooksville 90 Managed ----- FLORIDA TOTAL 427 ----- TOTAL 3,695 =====
- --------------- (1) Parkwood Health Care Center ("Parkwood") is subject to an option to purchase agreement as an alternate site in the event the optionee is unable to purchase the Cambridge Health Care Center. Until such time as the option is exercised or expires, Parkwood is subject to a right of first refusal. See footnote (3) below. (2) The Colonial Oaks Health Care Center is licensed for 124 beds, but the facility will accommodate only 120 beds. (3) Excludes the Shangri-La facility, which is anticipated to be sold prior to the Effective Time. (4) Cambridge Health Care Center is subject to an option to purchase agreement. The option period commences September 1, 1997 and expires March 31, 1998. See footnote (1) above. (5) NCI leases the Marietta Convalescent Center. The lease expires September 30, 1998, at which time the lessee has the option to purchase the facility. NCI leases 11 nursing centers according to terms described below. NCI also leases approximately 24,000 square feet of executive office space in Indianapolis, Indiana. This lease, which expires in March 2000, required rental payments of approximately $398,000 in fiscal 1994. The Colonial Oaks nursing center is leased for approximately $486,000 ($4,046 per bed) per year from an independent non-profit corporation. The current lease term expires in September 2001. NCI leases the Markle nursing center from an independent third party. The lease expires in 1997, but may be renewed by NCI until July 2002. Rental expense for Markle is approximately $305,000 ($4,616 per bed) per year, and upon renewal this amount will be adjusted for inflation. NCI leases the Meadowvale nursing center from Meadowvale, which is owned by Joan Phillippe, who is Dr. Phillippe's wife, and members of her family. The lease term will continue until March 2001, unless either the lessor or lessee elects to terminate the lease prior to the beginning of the final five-year term, which begins in 1996. Rental expense is approximately $241,000 ($2,008 per bed) per year. NCI leases the Ossian nursing center from an independent third party pursuant to a ten-year lease ending in July 1997. NCI has an option to purchase this nursing center at the end of the lease term for an appraised value of not less than $4.0 million. Rental expense is approximately $476,000 ($4,755 per bed) per year. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Relationships and Related Party Transactions." The seven Regency Centers are leased for approximately $6,036,000 ($4,864 per bed) per year, with future adjustments to be made based upon changes in the consumer price index. The current lease term will expire in June 2003. Pursuant to the terms of the lease for each Regency Center, the lessor has granted NCI the right of first refusal to purchase the nursing center, or to lease the nursing center for a period subsequent to the lease term, on the same terms and conditions as are offered by any other bona fide offeror during the term 38 45 of the lease and which the lessor proposes to accept. The right of first refusal expires six months prior to the end of the scheduled lease term as well as upon certain events of default, even if such defaults do not result in a termination of the lease. REVENUE SOURCES NCI's revenues vary among centers based on various factors, including the mix of beds licensed as skilled and/or intermediate care, total capacity, occupancy rates, reimbursement methodologies and rates among the payor categories, the relative proportion of revenues represented by payor categories and the scope and utilization of NCI's rehabilitation and ancillary services. Although the cost reimbursement level for Medicare patients generates the highest revenue per patient day, profitability is not always increased due to the additional costs associated with the higher level of care required for such patients. In general, private pay sources are more profitable to NCI than governmental reimbursement sources for comparable services. Likewise, NCI derives a higher profit margin from its rehabilitation and ancillary services than it does from its basic nursing services. Quality Payor Mix. NCI derives revenues from nursing centers, assisted living and retirement centers, management services and other sources; however, the revenues from its nursing centers far exceed the total revenues from the other sources. NCI derives nursing center revenues from private pay sources, Medicare and Medicaid. NCI receives higher revenues from private pay patients and is reimbursed at higher rates for services to Medicare and Indiana skilled Medicaid patients relative to the reimbursement rates available for intermediate care Medicaid patients. Revenues from NCI's assisted living centers and retirement centers are derived almost exclusively from private payment sources, as are its daytime child care revenues. Private Pay. NCI classifies payments from individuals who pay for services without governmental assistance as private pay revenues. This classification also includes revenues received from commercial insurers, workers' compensation, health maintenance organizations and other charge-based payment sources. Medicare. Medicare is a federally funded and administered health insurance program primarily designed for individuals who are age 65 or over and are entitled to receive Social Security benefits. The Medicare program consists of two parts. The first part (Part A) covers in-patient hospital services and services furnished by other institutional health care providers, such as long term care facilities. The second part (Part B) covers the services of doctors, suppliers of medical items and services and various types of outpatient services. Part B services include physical, occupational and speech therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation and psychiatric services and ancillary diagnostic and other services of the type provided by long term care or acute care facilities. Part A coverage is limited to a specified term (generally 100 days in a long term care facility) and requires beneficiaries to share some of the cost of covered services through the payment of a deductible and a co-insurance payment. There are no limits on the duration of coverage for Part B services, but there is a co-insurance requirement for most services covered by Part B. Except for one rural Indiana nursing center, all of NCI's nursing centers are certified to participate in the Medicare program. Generally, NCI's Medicare participating nursing centers receive monthly reimbursement payments during the year at interim rates based on historical costs. These rates are later adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of the year. Actual costs incurred and reported by each facility are subject to retrospective audits which can result in upward or downward adjustment of payments received. Medicaid. Medicaid refers to the various state-administered reimbursement programs that are eligible for matching federal funds. Each of NCI's nursing centers participates in the Medicaid program of the state in which it is located. Under the federal Medicaid statute and regulations, state Medicaid programs must provide reimbursement rates that are reasonable and adequate to cover the costs that would be incurred by efficiently and economically operated facilities in providing services in conformity with state and federal laws, regulations and quality and safety standards. Furthermore, payments must be sufficient to enlist enough providers so that services under the state's Medicaid plan are available to recipients at least to the extent that those services are available to the general population. Substantially all of NCI's nursing center beds are certified for Medicaid services. The Medicaid programs in which NCI nursing centers participate pay a per diem rate based on the centers' reasonable allowable costs 39 46 incurred in providing services, subject to cost ceilings applicable to both operating and fixed costs, plus a return on equity. Reimbursement rates are typically determined by the state, on a prospective or retrospective basis, from "cost reports" filed by each center. Under a prospective system, per diem rates are established (generally on an annual basis) based on certain historical costs of providing services during the prior year, adjusted to reflect factors such as inflation and any additional services required to be performed; no subsequent adjustment is made to reflect variations in actual costs from the rates established. Under a retrospective system, reimbursement rates are based on allowable costs for that year; an interim rate is calculated from previously filed cost reports which is then adjusted (generally on an annual basis) upward or downward to reflect actual allowable costs. Such adjustments may result in an additional payment to the facility by, or repayment by the facility to, the state Medicaid program. Except for NCI's nursing centers in Ohio, which are reimbursed under a case mix prospective pricing system, all of NCI's nursing centers are reimbursed on a prospective rate system. Providers must accept reimbursement from Medicaid as payment in full for the services rendered, since the provider may not bill the patient for more than the amount of the Medicaid payment for services covered by the Medicaid program. The Indiana and Ohio Medicaid programs currently include incentive allowances for providers whose costs are less than certain ceilings and who meet other requirements. GOVERNMENT REGULATION NCI's long term health care centers are subject to compliance with various federal, state and local statutes and regulations. In particular, the development and operation of long term health care centers and the provision of long term health care services are subject to federal, state and local licensure and certification laws which regulate, among other things, the number of beds, services provided, distribution of pharmaceuticals, equipment and staffing requirements, condition and use of medical equipment, operating policies, relationships with other long term health care providers, fire prevention and compliance with building codes and environmental laws. Compliance with state licensing requirements imposed upon all long term health care centers is a prerequisite for the operation of, and for participation in, government-sponsored health care assistance programs, such as Medicare and Medicaid. PERSONNEL At December 31, 1994, NCI employed approximately 4,500 people, of which approximately 4,000 were full-time and 500 were part-time employees. Each nursing center employs a licensed administrator and a director of nursing who supervises a staff of registered nurses, licensed practical nurses and nurses' aides. NCI engages third party contractors to provide most of its rehabilitation services. Each nursing center also has a medical director who is an independent contractor. Although NCI historically has been able to employ sufficient personnel to staff its centers adequately, a shortage of nurses in key geographic areas could affect the ability of NCI to attract and retain qualified health care personnel. NCI competes with other health care providers for both professional and non-professional employees and with non-health care providers for non-professional employees. Other personnel include the admissions or marketing director, dietary staff, housekeeping, laundry and maintenance staff, social activities staff and business office staff. AFFILIATED ENTITIES In connection with the Share Exchange, the outstanding Meadowvale Common Shares and PEI Common Shares will be exchanged for Hillhaven Common Shares. Meadowvale owns the Meadowvale Care Center, which is currently leased to NCI. As a result, the financial results of the Meadowvale are included in the results for NCI. PEI owns the Heritage at Hernando Assisted Living Center, which is currently managed by NCI. PEI's gross revenues represent less than 1% of the gross revenues of NCI. Separate financial statements for Meadowvale and PEI are included with this Prospectus/Information Statement. See "INDEX TO FINANCIAL STATEMENTS." NCI currently owns 99.8% and 99% of the partnership interests of Camelot and Evergreen, respectively. In connection with the Share Exchange, each of the partners of Camelot and Evergreen (except NCI) will assign to NCI the remaining partnership interests of these partnerships, so that, upon the consummation of the Share Exchange and these assignments, NCI will own all of the partnership interests of Camelot and 40 47 Evergreen. Since NCI currently owns 99.8% and 99% of the partnership interests of Camelot and Evergreen, the financial results for NCI already include all but an insignificant portion of the results of the facilities owned by these partnerships. In connection with the Share Exchange, the partners of ShangriLa will also assign all of their partnership interests to NCI. ShangriLa owns an 81-bed long term care center, known as Rolling Meadows Health Care Center (the "Rolling Meadows Facility"), located in LaFountaine, Indiana. Shangri-La has leased the Rolling Meadows Facility to a third party pursuant to a lease that grants the lessee the option to purchase the facility from Shangri-La. On March 1, 1995, the lessee notified Shangri-La of its intention to exercise this option. As a result, it is expected that the Rolling Meadows Facility will be sold to this lessee prior to the consummation of the Share Exchange. LEGAL PROCEEDINGS NCI is a party to litigation arising in the ordinary course of business. NCI does not believe the results of any pending litigation, even if the outcome were unfavorable to NCI, would have a material adverse effect on its financial condition. CORPORATE TARGETS' PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of NCI Common Shares, by (i) each person who is the beneficial owner of more than five percent of outstanding NCI Voting Common Shares, (ii) each director and executive officer of NCI and (iii) all directors and officers of NCI as a group. The table does not give effect to any conversion of NCI Nonvoting Common Shares for NCI Voting Common Shares.
SHARES PERCENTAGE BENEFICIALLY BENEFICIALLY NAME OWNED(1) OWNED ---- ------------ ------------ Dr. Thomas E. Phillippe, Sr. 9200 Keystone Crossing, Suite 800 Indianapolis, Indiana 46240................................. 4,532,967 61.0% Thomas E. Phillippe, Jr. 9200 Keystone Crossing, Suite 800 Indianapolis, Indiana 46240................................. 1,475,812 19.8% Gregory O. Mervine(2) 9200 Keystone Crossing, Suite 800 Indianapolis, Indiana 46240................................. 368,354 4.9% Stacy Mervine(2) 9668 Farragut Circle Indianapolis, Indiana 46256................................. 368,354 4.9% Philip W. Caldwell.......................................... 3,750 0.1% Charles Cooper.............................................. 3,750 0.1% J. Mark Mutz................................................ -- -- James Burkhart.............................................. -- -- All directors and officers as a group (seven persons)........................................... 6,384,633 85.9%
- --------------- (1) The Securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the rules and regulations of the SEC and accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person living in the same household as well as other securities as to which the person possesses exclusive voting or investment power, or shares such power, or which the person has the right to acquire within 60 days. The same shares may be beneficially owned by more than one person. Beneficial ownership may be disclaimed as to certain of the securities. (2) Gregory O. Mervine and Stacy Mervine are husband and wife. Mr. Mervine holds 3,750 shares directly and they hold 364,604 shares jointly. 41 48 The following table sets forth the names of those individuals who beneficially own greater than five percent of the outstanding NCI Nonvoting Common Shares. This table assumes no exercise of the outstanding NCI Warrants (as defined herein). As of April 1, 1995, the Company has 76,592 NCI Nonvoting Common Shares issued and outstanding. The outstanding NCI Warrants are beneficially owned by Continental Illinois Commercial Corporation and Pacific Mutual Life Insurance Company, which have the right under the NCI Warrants to acquire 561,676 and 425,512 NCI Nonvoting Common Shares, respectively.
SHARES PERCENTAGE BENEFICIALLY BENEFICIALLY NAME OWNED OWNED(1) ---- ------------ ------------ Christopher J. Perry.......................................... 32,710 42.7% 231 South LaSalle Street Chicago, Illinois 60697 Robert F. Perille............................................. 18,350 24.0% 231 South LaSalle Street Chicago, Illinois 60697 M. Ann O'Brien................................................ 16,754 21.9% 231 South LaSalle Street Chicago, Illinois 60697 All directors and officers as a group (seven persons)............................................. -- --
The following table sets forth certain information with respect to the beneficial ownership of Meadowvale Common Shares by: (i) each person who is the beneficial owner of more than five percent of the Meadowvale Common Shares, (ii) each director and executive officer and (iii) all directors or officers of Meadowvale as a group. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Relationships and Related Party Transactions" for a description of certain relationships among Meadowvale shareholders.
SHARES PERCENTAGE BENEFICIALLY BENEFICIALLY NAME OWNED(1) OWNED ---- ------------ ------------ Joan Phillippe................................................ 778 25.9% 11721 San Star Drive Indianapolis, Indiana 46256 Joyce Greeno.................................................. 778 25.9% 1624 Sheldon Drive Clearwater, Florida 33546 Donald Cheesman............................................... 666 22.2% 22399 Pasture Lane Brooksville, Florida 34601 David Cheesman................................................ 182 6.1% 1030 Oakdale Street Corona, California 91720 Darla Mitchener............................................... 182 6.1% 2822 North Fourth Street Terra Haute, Indiana Debbie Showalter.............................................. 182 6.1% 1800 Thornwood Court Troy, Ohio 45373 Dawn Robertson................................................ 182 6.1% Meadowvale Skilled Care Center 1529 West Lancaster Street Bluffton, Indiana 46714 All directors and officers as a group......................... 2,404 80.1%
42 49 NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW NCI generates revenues primarily from the following sources: nursing centers, assisted living and retirement centers, home health care services and management fees. Approximately 93.9% of NCI's revenues for fiscal 1994 were generated from the operation of nursing centers. Nursing center revenues include all room and board charges (including such charges related to Alzheimer's and subacute care patients) and rehabilitation and ancillary services charges at NCI's owned and leased centers. Revenues and profitability of nursing centers are affected in large part by statutes and regulations under Medicare and Medicaid as well as the reimbursement policies of insurance companies and other private payors. Of NCI's nursing center revenues for fiscal 1994, approximately 51.9% were generated by private pay and Medicare patients. The balance was Medicaid revenues. Approximately 14.7% of nursing center revenues for fiscal 1994 were generated by Indiana skilled care Medicaid patients (for whom NCI receives higher revenue per patient day than for Indiana intermediate care Medicaid patients). NCI's revenues vary among centers based on various factors, including the mix of beds licensed as skilled and/or intermediate care Medicaid, total capacity, occupancy rates, reimbursement methodologies and rates among the payor categories, the relative proportion of revenues represented by payor categories and the scope and utilization of NCI's rehabilitation and ancillary services. Although Medicare patients generate the highest revenue per patient day, profitability is not always increased due to the additional costs associated with providing the higher level of care required by such patients. In general, private pay sources are more profitable to NCI than governmental reimbursement sources. NCI generally derives a higher profit margin from rehabilitation and ancillary services than from basic nursing services. The long term care industry is undergoing significant changes as providers respond to cost containment, regulatory and other pressures. In recent years there have been, and NCI expects that there will continue to be, a number of federal and state proposals to limit Medicare and Medicaid reimbursement for long term health care services. In 1994, the state of Indiana promulgated a regulatory change that, effective August 1, 1994, reduced reimbursement rates for certain services provided to Medicaid patients. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of revenues represented by certain items in NCI's statements of operations. The percentages for fiscal 1993 include the results of (i) the Nationwide Entities for the full year; (ii) Royal Oaks Health Care and Rehabilitation Center from January 1, 1993 to September 30, 1993, (iii) the leasing of the Regency Centers from July 1, 1993 to September 30, 1993 and (iv) the nursing center operations of the Non-Controlled Entities from July 27, 1993 to September 30, 1993.
PERCENTAGE OF REVENUES ----------------------------------------------- FIVE MONTHS YEARS ENDED ENDED SEPTEMBER 30, FEBRUARY 28, ------------------------- ----------------- 1992 1993 1994 1994 1995 ----- ----- ----- ----- ----- Revenue, net............................. 100.0% 100.0% 100.0% 100.0% 100.0% Expenses: Health care services................... 65.6 69.4 74.9 75.0 75.8 Selling, general and administrative.... 6.4 6.5 4.9 4.4 5.4 Leases and rental...................... 3.1 4.0 5.9 6.0 5.7 Depreciation and amortization.......... 5.3 4.2 2.4 2.2 2.2 ----- ----- ----- ----- ----- Income from operations................... 19.6 15.9 11.9 12.4 10.9 Interest expense, net.................... 8.2 5.5 4.0 3.8 4.0 ----- ----- ----- ----- ----- Income before income taxes and extraordinary items.................... 11.4% 10.4% 7.9% 8.6% 6.9% ===== ===== ===== ===== =====
43 50 Five Months Ended February 28, 1994 Compared to Five Months Ended February 28, 1995 Revenues increased 8.7%, or $4.3 million, from $48.9 million in 1994 to $53.2 million in 1995. This increase was primarily attributable to an increase in nursing center revenues, which increased $3.4 million. The increase in nursing center revenues was attributable to an increase in total census days, certain patient rate increases (including the effect of an increasing proportion of patients requiring skilled care) and an increase in rehabilitation and ancillary services provided. Revenue also increased due to additional home health care services. These increases were partially offset by a decline in revenue due to lower Indiana Medicaid rates. The total of private pay, Medicare and Indiana skilled care Medicaid patient revenues as a percent of total nursing center revenues decreased from 66.8% in 1994 to 66.6% in 1995. Health care services expenses increased by 9.9%, or $3.6 million, from $36.7 million in 1994 to $40.3 million in 1995, due primarily to NCI's increasing proportion of higher acuity patients and the increased level of rehabilitation and ancillary services provided. Health care services expenses as a percent of revenues increased from 75.0% in 1994 to 75.8% in 1995. Selling, general and administrative expenses increased by 35.7% or $0.8 million, from $2.1 million in 1994 to $2.9 million in 1995, due primarily to staffing increases in connection with the addition of subacute care services. Selling, general and administrative expenses as a percent of revenues increased from 4.4% in 1994 to 5.4% in 1995. Leases and rental expenses increased by 2.1%, or $62,000, from $3.0 million in 1994 to $3.0 million in 1995, due primarily to ordinary lease rate increases. Leases and rental expenses as a percent of revenues decreased from 6.0% in 1994 to 5.7% in 1995. Depreciation and amortization expenses increased by 10.1%, or $0.1 million, from $1.1 million in 1994 to $1.2 million in 1995, due primarily to normal capital expenditures. Depreciation and amortization expenses as a percent of revenues remained constant at 2.2% from 1994 to 1995. Income from operations decreased 5.0%, or $0.3 million, from $6.1 million in 1994 to $5.8 million in 1995, as a result of the net negative impact of the factors noted above. Net interest expense increased 12.4%, or $0.2 million, from $1.9 million in 1994 to $2.1 million in 1995, due to an increase in outstanding indebtedness during 1995, principally with respect to a new term loan and because of rising interest rates based upon a commercial bank's Prime Rate. Net interest expense as a percent of revenues increased from 3.8% in 1994 to 4.0% in 1995. Income before income taxes and extraordinary items decreased 12.6%, or $0.5 million, from $4.2 million in 1994 to $3.7 million in 1995. Income before income taxes and extraordinary items as a percent of revenues decreased from 8.6% in 1994 to 6.9% in 1995, due primarily to the lower Indiana Medicaid rates. Year Ended September 30, 1993 Compared to Year Ended September 30, 1994 Revenues increased 82.5%, or $54.5 million, from $66.2 million in 1993 to $120.7 million in 1994. This increase was primarily attributable to an increase in nursing center revenues, which increased $55.2 million due to the inclusion in the 1994 amounts of the results of operations of 11 additional nursing centers (the "Additional Nursing Centers") as a result of (i) the acquisition of the Non-Controlled Entities in connection with the Reorganization, (ii) the Royal Oaks Acquisition, (iii) the leasing of the Regency Centers, (iv) patient rate increases (including the effect of the increasing proportion of patients requiring skilled care) and (v) an increase in rehabilitation and ancillary services provided. These increases were partially offset by a decrease in management fees and lease revenues due to the acquisition of the Non-Controlled Entities. The total of private pay, Medicare and Indiana skilled Medicaid patient revenues as a percent of total nursing center revenues decreased from 67.5% in 1993 to 66.6% in 1994. Health care services expenses increased by 96.9%, or $44.5 million, from $45.9 million in 1993 to $90.4 million in 1994. The increase in health care services expenses was primarily attributable to the Additional Nursing Centers and as a result of NCI's increasing proportion of higher acuity patients and the increased level of rehabilitation and ancillary services provided. Health care services expenses as a percent of revenues 44 51 increased from 69.4% in 1993 to 74.9% in 1994 due primarily to wage increases and the higher level of rehabilitation and ancillary services provided. Selling, general and administrative expenses increased by 38.6% or $1.7 million, from $4.3 million in 1993 to $6.0 million in 1994, due primarily to staffing increases in connection with the Additional Nursing Centers, modest wage increases and costs associated with a failed initial public offering. Selling, general and administrative expenses as a percent of revenues decreased from 6.5% in 1993 to 4.9% in 1994. Leases and rental expenses increased by 165.3%, or $4.4 million, from $2.7 million in 1993 to $7.1 million in 1994, due primarily to the Additional Nursing Centers. Leases and rental expenses as a percent of revenues increased from 4.0% in 1993 to 5.9% in 1994, primarily as a result of the leases of the Regency Centers. Depreciation and amortization expenses increased by 7.6%, or $0.2 million, from $2.7 million in 1993 to $2.9 million in 1994, due primarily to the Additional Nursing Centers. Depreciation and amortization expenses as a percent of revenues decreased from 4.2% in 1993 to 2.4% in 1994. Income from operations increased 36.1%, or $3.8 million, from $10.5 million in 1993 to $14.3 million in 1994, due primarily to the Additional Nursing Centers and the increase in census days and rehabilitation and ancillary services provided at NCI's other centers. Net interest expense increased 30.2%, or $1.1 million, from $3.7 million in 1993 to $4.8 million in 1994, due primarily to an increase in outstanding indebtedness, principally with respect to a line of credit and the Senior Subordinated Notes. Net interest expense as a percent of revenues decreased from 5.5% in 1993 to 4.0% in 1994. Income before income taxes and extraordinary items increased 39.2%, or $2.7 million, from $6.9 million in 1993 to $9.6 million in 1994. Income before income taxes and extraordinary items as a percent of revenues decreased from 10.4% in 1993 to 7.9% in 1994, due primarily to the elimination of management fees and lease revenues due to the acquisition of the Non-Controlled Entities. Year Ended September 30, 1992 Compared to Year Ended September 30, 1993 Revenues increased 52.6%, or $22.8 million, from $43.3 million in 1992 to $66.1 million in 1993. This increase was primarily attributable to the Additional Nursing Centers, which accounted for $14.7 million of the increase. The remaining increase was attributable to an increase in total census days, patient rate increases (including the effect of an increasing proportion of patients requiring skilled care) and an increase in rehabilitation and ancillary services provided. These increases were partially offset by a decrease in management fees and lease revenues due to the acquisition of the Non-Controlled Entities. The total of private pay, Medicare and Indiana skilled care Medicaid patient revenues as a percent of total nursing center revenues increased from 65.2% in 1992 to 67.5% in 1993. Health care services expenses increased by 61.5%, or $17.5 million, from $28.4 million in 1992 to $45.9 million in 1993. The increase in health care services expenses was primarily attributable to the Additional Nursing Centers, which accounted for $11.3 million of the increase. Health care services expenses related to the operations of NCI's other centers increased, due primarily to NCI's increasing proportion of higher acuity patients and the increased level of rehabilitation and ancillary services provided. Health care services expenses as a percent of revenues increased from 65.6% in 1992 to 69.4% in 1993 due primarily to wage increases and the higher level of rehabilitation and ancillary services provided. Selling, general and administrative expenses increased by 55.2% or $1.5 million, from $2.8 million in 1992 to $4.3 million in 1993. This increase was due primarily to staffing increases in connection with the Additional Nursing Centers and modest wage increases. Selling, general and administrative expenses as a percent of revenues increased from 6.4% in 1992 to 6.5% in 1993. Leases and rental expenses increased by 97.4%, or $1.3 million, from $1.4 million in 1992 to $2.7 million in 1993, due primarily to the leases of the Regency Centers. Leases and rental expenses as a percent of revenues increased from 3.1% in 1992 to 4.0% in 1993. 45 52 Depreciation and amortization expenses increased by 18.6%, or $0.4 million, from $2.3 million in 1992 to $2.7 million in 1993, due primarily to the Additional Nursing Centers. Depreciation and amortization expenses as a percent of revenues decreased from 5.3% in 1992 to 4.2% in 1993. Income from operations increased 24.0%, or $2.0 million, from $8.5 million in 1992 to $10.5 million in 1993, due primarily to the Additional Nursing Centers and the increase in total census days and rehabilitation and ancillary services provided at NCI's other centers. Net interest expense increased 3.6%, or $0.2 million, from $3.5 million in 1992 to $3.7 million in 1993, due primarily to an increase in outstanding indebtedness related to the operations of the Additional Nursing Centers. Net interest expense as a percent of revenues decreased from 8.2% in 1992 to 5.5% in 1993. Income before income taxes and extraordinary items increased 38.6%, or $1.9 million, from $5.0 million in 1992 to $6.9 million in 1993. Income before income taxes and extraordinary items as a percent of revenues decreased from 11.4% in 1992 to 10.4% in 1993, due primarily to the elimination of management fees and lease revenues due to the acquisition of the Non-Controlled Entities. LIQUIDITY AND CAPITAL RESOURCES NCI has historically financed its operations and growth, including acquisitions, with cash flow from operations, issuance of the Senior Subordinated Notes and Redeemable Preferred Stock and borrowings under various credit facilities. Prior to the closing of the Share Exchange, NCI plans to finance its operations by continuing to utilize its cash flow from operations and borrowings under its current credit agreements. Capital expenditures in fiscal year 1992 and 1993 consisted primarily of computer system additions and upgrades, the remodeling of existing facilities and a 15-bed addition. Capital expenditures were $2.0 million in fiscal year 1992, $2.4 million in fiscal year 1993 and $8.3 million in fiscal year 1994. Capital expenditures in 1994 have been for the construction of a 200-bed nursing center on a site adjacent to its Royal Oaks Health Care and Rehabilitation Center ($3.5 million), additional subacute care units having a total of approximately 135 dedicated beds ($0.8 million), a 72-unit assisted living center to be named The Heritage at Wildwood and located adjacent to NCI's Wildwood Health Care Center ($1.9 million), a 15-bed addition to the Wildwood Health Care Center ($0.7 million) and normal capital expenditures in existing long-term health care centers ($1.4 million). Net cash provided by operations was $7.3 million, $5.9 million and $9.1 million in fiscal years 1992, 1993 and 1994, respectively. For the five months ended February 28, 1995, net cash provided by operations was $4.1 million. Accounts receivable (net of allowances) were $1.9 million, $9.1 million, $9.4 million and $10.5 million at September 30, 1992, 1993 and 1994 and February 28, 1995, respectively, and estimated settlements due from third party payors aggregated $0, $1.4 million, $2.3 million and $1.3 million at September 30, 1992, 1993 and 1994 and February 28, 1995, respectively. The number of days in accounts receivable and estimated settlements due from third party payors was approximately 22 days at September 30, 1992, 35 days at September 30, 1993 (based upon pro forma revenues of $110.9 million), 36 days at September 30, 1994 and 34 days at February 28, 1995. NCI has outstanding $25.7 million of Notes, which are collateralized by an irrevocable direct pay letter of credit issued by a commercial bank (the "Letter of Credit"). The Notes amortize over a 15-year period, with a final maturity in August 2008 and the interest rate resets every seven days. The effective interest rate on the Notes at February 28, 1995 was approximately 8.0%. NCI has negotiated a cap on its effective interest rate on the Notes at 9.0% through November 1996. NCI is required to deposit $950,000 on a semi-annual basis in a sinking fund to provide for periodic repayment of the Notes. The sinking fund payments commenced in February 1994. NCI also has outstanding two term loans in the amount of $9.4 million and $4.3 million, respectively. Both term loans bear interest at prime plus 0.75%, with the $9.5 million loan being amortized over 15 years and the $4.3 million loan being amortized over 10 years. Both loans mature in January 2000. Principal and interest payments began January 1995. 46 53 NCI also has outstanding $12 million of its Senior Subordinated Notes and $3 million of Redeemable Preferred Stock. The Senior Subordinated Notes are payable in quarterly principal installments of $1.5 million beginning November 1998 with the final installment due in August 2000. The Senior Subordinated Notes bear interest at an annual rate of 12.5%. The Redeemable Preferred Stock has no coupon rate and is redeemable in eight equal quarterly installments of $375,000 commencing November 1998 and is mandatorily redeemable in certain circumstances. The Senior Subordinated Notes will be prepaid and the Redeemable Preferred Stock will be redeemed in connection with the Share Exchange. Credit agreements for NCI's outstanding loans contain certain covenants which, without the prior consent of the lenders, limit certain activities of NCI and its subsidiaries. Such covenants contain limitations relating to the merger or consolidation of NCI and its subsidiaries and NCI's and its subsidiaries' ability to secure indebtedness, make guarantees, grant security interests and declare dividends. In addition, NCI and certain subsidiaries must maintain certain minimum levels of tangible net worth, interest coverage and debt service coverage and must maintain certain liabilities to net worth and working capital ratios. Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which could have an adverse impact on NCI. The changes have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints; in recent years, the time period between submission of claims and payment has increased. Additionally, implementation of NCI's strategy to expand specialty medical services to independent providers should reduce the impact of changes in the Medicare and Medicaid reimbursement programs on NCI as a whole. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under those programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of health care facilities. SEASONALITY NCI's earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, seasonal census cycles and the number of calendar days in a given quarter. NEW ACCOUNTING STANDARDS NCI does not offer any post-employment benefits or post-retirement benefits other than pensions. Accordingly, Statement of Financial Accounting Standards No. 112, "Employers Accounting for Post-Employment Benefits," and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions," are not applicable to NCI. IMPACT OF INFLATION The long term health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicare and Medicaid generally lag behind actual cost increases. MEADOWVALE AND PEI BUSINESSES In connection with the Share Exchange, the outstanding Meadowvale Common Shares and PEI Common Shares will be exchanged for Hillhaven Common Shares. Meadowvale owns the Meadowvale Care Center, which is currently leased to NCI. As a result, the financial results of the Meadowvale are included in the results for NCI. PEI owns the Heritage at Hernando Assisted Living Center, which is currently managed by NCI. PEI's gross revenues represent less than 1% of the gross revenues of NCI. Separate financial statements for Meadowvale and PEI are included with this Prospectus/Information Statement. See "INDEX TO FINANCIAL STATEMENTS." 47 54 DESCRIPTION OF CAPITAL STOCK DESCRIPTION OF HILLHAVEN CAPITAL STOCK The summary of the attributes of the Company's capital stock set forth below does not purport to be complete and is subject to and qualified in its entirety by reference to the Amended and Restated Articles of Incorporation of Hillhaven (the "Hillhaven Articles") and the By-Laws of Hillhaven (the "Hillhaven By-Laws"), copies of which are exhibits to documents incorporated by reference herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Authorized Capital Stock Under the Hillhaven Articles, the total number of shares of all classes of stock that the Company has authority to issue is 85 million shares, of which 25 million are preferred stock, par value $0.15 per share (the "Hillhaven Preferred Stock"), and 60 million are shares of Common Stock. Common Stock Subject to the limitations provided pursuant to Sections 78.378 through 78.3793 (the "Control Shares Acquisition Statute") of the Private Corporation Law of the State of Nevada, the holders of Hillhaven Common Stock will be entitled to one vote for each share on all matters voted on by shareholders, including elections of directors, and, except as otherwise required by law or provided in any resolution adopted by the Board with respect to any series or class of Preferred Stock, the holders of such shares will exclusively possess all voting power. The Hillhaven Articles do not provide for cumulative voting for the election of directors. Subject to any preferential rights of any outstanding series of Preferred Stock designated by the Board from time to time, the holders of Common Stock will be entitled to such dividends as may be declared from time to time by the Board, and upon liquidation will be entitled to receive all assets of Hillhaven available for distribution to such holders. Preferred Stock The Board of Directors of the Company is authorized to issue Preferred Stock, in one or more series or classes, and to fix for each such series or class such voting powers, designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions, as are stated in the resolution or resolutions adopted by the Board providing for the issue of such series or class and as are permitted by Nevada law. The Board could issue preferred stock having terms which could discourage a takeover or other transaction that some, or a majority, of the shareholders might believe to be in their best interests or in which shareholders might receive a premium for their stock over the then market price of such stock. The Board of Directors has authorized the issuance of Series A Preferred Stock pursuant to a preferred stock purchase rights plan and Series B Convertible Preferred Stock in connection with a Performance Investment Plan. As of the date hereof, no shares of Series A or Series B Preferred Stock are outstanding. As of February 28, 1995, there were 35,000 shares of Series C Preferred Stock outstanding, all of which are owned by Tenet. The Series C Preferred Stock entitles the holder to receive a cash dividend of 8 1/4% per annum on the liquidation value thereof ($1,000 per share), payable quarterly, which dividend currently aggregates $2,887,500 per annum. The Series C Preferred Stock is redeemable at the option of the Company at any time, in whole or in part, at a price of $1,000 per share, plus accrued dividends. Certain of Hillhaven's credit agreements and debt instruments, however, restrict the ability of the Company to redeem the Series C Preferred Stock. As of February 28, 1995, there were 63,402 shares of Series D Preferred Stock outstanding, all of which are owned by Tenet. The Series D Preferred Stock entitles the holder to receive cumulative quarterly dividends at the annual rate of 6.5% on the liquidation value thereof ($1,000 per share), payable quarterly. Such dividends are payable in additional shares of Series D Preferred Stock in lieu of cash until the earlier to 48 55 occur of (i) the sixth anniversary of the closing of the "Bank Financing" as defined in the Series D Preferred Stock certificate of designation, or (ii) three months after the stated maturity of the Bank Financing; thereafter, such dividends will be payable in cash. The Series D Preferred Stock is redeemable at the option of the Company at any time, in whole or in part, at a price of $1,000 per share, plus accrued dividends. Certain of Hillhaven's credit agreements and debt instruments restrict the ability of the Company to redeem the Series D Preferred Stock. Pre-Emptive Rights No holder of any stock of any class has any pre-emptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class of stock or any authorized securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class of stock. Transfer Agent and Registrar The transfer agent and registrar for the Common Stock is Chemical Trust Company of California. DESCRIPTION OF NCI CAPITAL STOCK The summary of the attributes of capital stock described below does not purport to be complete and is subject to and qualified in its entirety by reference to the applicable law and the respective corporations' articles of incorporation and by-laws. The authorized capital stock of NCI consists of 48,000,000 shares of NCI Common Stock of which 7,431,460 are issued and outstanding; 2,000,000 shares of Nonvoting Common Stock, without par value (the "NCI Nonvoting Common Stock") of which 76,592 shares are issued and outstanding; and 2,000,000 shares of Preferred Stock, without par value (the "NCI Preferred Stock") of which 300,000 shares of Redeemable Preferred Stock (the "NCI Redeemable Preferred Stock") are issued and outstanding. NCI also has outstanding warrants to purchase 987,188 shares of NCI Nonvoting Common Stock (the "NCI Warrants"), which will be exercised prior to the closing of the Share Exchange. NCI Common Stock Each holder of NCI Common Stock is entitled to one vote for each share held on matters voted upon by Shareholders, subject to limitations discussed below. Holders of NCI Common Stock have no pre-emptive rights to acquire additional shares of NCI Common Stock which may be subsequently issued. Under Indiana law and pursuant to NCI's Amended and Restated Articles of Incorporation (the "NCI Articles"), the holders of the Common Stock possess exclusive voting power in NCI, and will continue to possess exclusive voting power unless a new class of Preferred Stock is issued and voting rights are granted to the holders thereof or unless the Articles are amended as provided therein and pursuant to Indiana law. Certain Business Combinations. The Articles require that certain business combinations between NCI (or any majority-owned subsidiary thereof) and a 10% or greater shareholder either (i) be approved by at least 80% of the total number of outstanding voting shares of NCI or (ii) either be approved by a majority of certain directors unaffiliated with such 10% or greater shareholder or involve consideration per share generally equal to the higher of (A) the highest amount paid by such 10% shareholder or its affiliates in acquiring any shares of the Common Stock or (B) the "Fair Market Value" (generally, the highest closing sale price of the Common Stock during the 30 days preceding the date of the announcement of the proposed business combination or on the date the 10% or greater shareholder became such, whichever is higher). NCI Nonvoting Common Stock Holders of the NCI Nonvoting Common Stock are entitled to the same rights and privileges and subject to the same limitations and restrictions as the holders of the NCI Common Stock, except that the holders of NCI Nonvoting Common Stock shall not be entitled to vote on any matter submitted to a vote of Shareholders of NCI, except as otherwise provided under Indiana law. Each share of NCI Nonvoting 49 56 Common Stock is convertible, at the option of the holder thereof subject to certain limitations, into one share of NCI Common Shares. NCI Warrants NCI Warrant holders receive NCI Nonvoting Common Stock upon the exercise of their NCI Warrants, but are entitled to convert each share of NCI Nonvoting Common Stock into one share of NCI Common Stock, provided that applicable law does not prohibit such holder's ownership of Common Stock. The NCI Warrants are exercisable at any time prior to expiration, which occurs on the later of (i) July 27, 2000, (ii) the day upon which the Senior Subordinated Notes are paid in full, and (iii) the day upon which the NCI Redeemable Preferred Stock is fully redeemed. The currently outstanding NCI Warrants give the holders the right to receive up to 987,188 shares of NCI's Nonvoting Common Stock, subject to certain antidilution provisions. The NCI Warrants will be exercised prior to the closing of the Share Exchange. NCI Preferred Stock The Board of Directors of Nationwide is authorized to issue additional shares of Preferred Stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. NCI Preferred Stock may rank prior to the NCI Common Stock and NCI Nonvoting Common Stock as to dividend rights, liquidation preferences or both, and may have full or limited voting rights. The holders of Preferred Stock will be entitled to vote as a separate class or series under certain circumstances, regardless of any other voting rights which such holders may have. NCI Redeemable Preferred Stock The NCI Redeemable Preferred Stock has no coupon rate and is redeemable in eight equal quarterly installments of $375,000 commencing November 1998 and is mandatorily redeemable for $3.0 million in the event of an initial public offering, a change in control or an optional redemption of certain indebtedness of NCI. The NCI Redeemable Preferred Stock will be redeemed according to its terms, at the closing. Liquidation and Redemption In the event of liquidation or dissolution of NCI, the holders of the NCI Common Stock and NCI Nonvoting Common Stock are entitled to receive (after payment or provision for payment of all debts and liabilities of NCI) all assets of NCI available for distribution, in cash or in kind. The NCI Redeemable Preferred Stock is entitled to a priority in the event of liquidation or dissolution at the rate of $10.00 per share. If other classes of Preferred Stock are issued, the holders thereof may have priority over the holders of NCI Common Stock and NCI Nonvoting Common Stock in the event of liquidation or dissolution. Senior Subordinated Notes NCI has senior subordinated notes with outstanding principal in the amount of $12,000,000 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are payable in quarterly principal installments of $1,500,000 beginning November 1998 with the final installment due in August 2000. The Senior Subordinated Notes bear interest at an annual rate of 12.5%. Pursuant to the Share Exchange Agreement, Hillhaven will repay the Senior Subordinated Notes at the closing of the Share Exchange. DESCRIPTION OF MEADOWVALE CAPITAL STOCK The authorized capital stock of Meadowvale consists of 3,000 shares of Meadowvale common stock, without par value (the "Meadowvale Common Stock") of which 3,000 shares are issued and outstanding. Under Indiana law, each holder of Meadowvale Common Stock is entitled to one vote for each share held on matters voted upon by shareholders. Holders of Meadowvale Common Stock have no pre-emptive rights to acquire additional shares of Meadowvale Common Stock which may be subsequently issued. Under Indiana law and pursuant to Meadowvale's Amended and Restated Articles of Incorporation (the "Meadowvale 50 57 Articles"), the holders of Meadowvale Common Stock possess exclusive voting power in Meadowvale. Pursuant to Indiana law, in the event of liquidation or dissolution of Meadowvale, the holders of Meadowvale Common Stock are entitled to receive (after payment or provision for payment of all debts and liabilities of Meadowvale) all assets of Meadowvale available for distribution, in cash or in kind. DESCRIPTION OF PEI CAPITAL STOCK The authorized capital stock of PEI consists of 10,000 shares of PEI common stock, without par value (the "PEI Common Stock"), of which 2,000 shares are issued and outstanding. Under Indiana law, each holder of PEI Common Stock is entitled to one vote for each share held on matters voted upon by Shareholders. Pursuant to the PEI Articles of Incorporation, holders of PEI Common Stock have pre-emptive rights to acquire additional shares of PEI Common Stock which may be subsequently issued. In the event of liquidation or dissolution of PEI, the holders of PEI Common Stock are entitled to receive (after payment or provision for payment of all debts and liabilities of PEI) all assets of PEI available for distribution, in cash or in kind. 51 58 PRINCIPAL DIFFERENCES BETWEEN HILLHAVEN AND CORPORATE TARGETS' CAPITAL STOCK GENERAL Upon consummation of the Share Exchange, the shareholders of the Corporate Targets will become shareholders of Hillhaven and their rights will be governed by the NGCL, the Hillhaven Articles and the Hillhaven By-Laws, which differ in certain material respects from the IBCL, the Amended and Restated Articles of Incorporation of NCI (the "NCI Articles"), the Amended and Restated By-Laws of NCI (the "NCI By-Laws") and the Articles of Incorporation and By-Laws of Meadowvale and PEI, respectively. Nevada is the jurisdiction of incorporation of Hillhaven and Indiana is the jurisdiction of incorporation of each Corporate Target. The following comparison of the IBCL and the Articles of Incorporation and By-Laws of each respective Corporate Target, on the one hand, and the NGCL and the Hillhaven Articles and the Hillhaven By-Laws, on the other, is not intended to be complete and is qualified in its entirety by reference to the Articles of Incorporation and By-Laws of each respective Corporate Target and the Hillhaven Articles and By-Laws. Copies of the Hillhaven Articles and Hillhaven By-Laws are available for inspection at the principal executive offices of Hillhaven, and copies will be sent to the holders of the Target Common Shares upon request. Copies of the Articles of Incorporation and By-Laws of each respective Corporate Target are available for inspection at the principal executive offices of the respective Corporate Target, and copies will be sent to holders of the Target Common Shares upon request. Reference is also directed to the discussion below respecting certain contractual arrangements affecting the sale, exchange or other disposition of the Share Exchange Consideration under the heading "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Agreement Among Corporate Target Shareholders." BOARD OF DIRECTORS Both the IBCL and the NGCL provide that a corporation's board of directors shall consist of at least one member and that the authorized number of directors may be fixed in either the corporation's certificate of incorporation or articles of incorporation, as the case may be, or in the bylaws. The NCI Articles provide that the authorized number of directors constituting the NCI Board shall not be less than three nor more than fifteen, as specified from time to time by resolution adopted by a majority of the total number of directors. The NCI Board has fixed the number of directors at three. The Meadowvale Board adopted a bylaw providing that the Meadowvale Board shall consist of four members until changed by adoption of a bylaw fixing a different number of directors, but not less than three members. The By-Laws of PEI fix the number of directors at two members which may be changed from time to time by a resolution of the board of directors. The Hillhaven Articles provide that the authorized number of directors constituting the Hillhaven Board shall be not less than three nor more than twenty-one directors, as fixed from time to time exclusively by the Hillhaven Board pursuant to a resolution adopted by a majority of the total number of authorized directors. The Hillhaven Board has fixed the number of directors at eight directors. The NCI Articles provide that the NCI Board will be divided into three classes, and each class will generally serve for a term of three years. Each year the term of one class of directors expires, so it is only possible to elect one class of the NCI Board of Directors (or approximately one-third) in any one year. Neither Meadowvale nor PEI has a classified board of directors. The Hillhaven Articles provide that the Hillhaven Board will be divided into three classes, and each class will generally serve for a term of three years. Each year the term of one class of directors expires, so it is only possible to elect one class of the Hillhaven Board of Directors (or approximately one-third) in any one year. The classification provisions could have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of Hillhaven, even though such an attempt might be beneficial to Hillhaven and its shareholders. The classification of the Board of Directors of Hillhaven could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of Hillhaven's stock by 52 59 purchasers whose objective is to take control of Hillhaven and remove a majority of the Board of Directors of Hillhaven, the classification of the Board of Directors could tend to reduce the likelihood of fluctuations in the market price of the Hillhaven Common Stock that might result from accumulations of large blocks of stock. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of Hillhaven Common Stock at a higher market price than otherwise might be the case. REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS Under the IBCL, any director or the entire board of directors generally may be removed, with or without cause, by the holders of a majority of the shares entitled to vote at an election of directors. The NCI Articles provide that a director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of at least 80% of the shares eligible to vote generally in the election of directors and limits the causes for which a director may be removed. The Articles of Incorporation and By-Laws of Meadowvale and PEI, respectively, contain no special provisions regarding removal of directors. Under the NGCL and the Hillhaven Articles, any director may be removed from office upon the vote of shareholders representing not less than two-thirds of the outstanding voting stock of the corporation. The IBCL and NGCL generally provide that all vacancies on the board of directors, including vacancies caused by an increase in the number of authorized directors, may be filled by a majority of the remaining directors even if they are less than a quorum. The NCI Articles provide that all vacancies shall be filled only by the majority vote of those directors who were serving on September 30, 1992, or who were recommended for appointment or election by a majority of the directors on the board at the time of the director's appointment or election. The By-Laws of Meadowvale and PEI, respectively, provide that vacancies may be filled by a majority of the remaining directors, provided that the By-Laws of Meadowvale state that if the vacancy was caused by an increase in the number of directorships, the shareholders alone may fill the vacancy. The Hillhaven Articles provide that the Board of Directors shall fill all vacancies, however created, and the Hillhaven By-Laws provide that the affirmative vote of a majority of the remaining directors is required to fill such vacancies. LIMITATION ON DIRECTORS' LIABILITY Both the IBCL and the NGCL provide that the liability of directors and officers may be limited by a provision in a corporation's articles. In accordance with the IBCL, the NCI Articles provide that a director, officer and certain other persons are not liable unless the person failed to act in good faith, with ordinary care and in a manner which the person reasonably believed in the corporation's best interest and such failure constituted willful misconduct or recklessness. Although the Articles of Incorporation of Meadowvale and PEI, respectively, do not contain any provision specifically limiting the liability of their directors or officers, the IBCL itself limits the liability of directors and officers in the same manner as set forth in the NCI Articles. As permitted under the NGCL, the Hillhaven Articles provide that no director or officer shall be personally liable to Hillhaven or its shareholders for damages for breach of fiduciary duty as a director or officer, except for liability for acts or omissions which involve intentional misconduct, fraud, or a knowing violation of the law or for the unlawful payment of dividends. INDEMNIFICATION Under the IBCL, a corporation must indemnify its officers, directors, employees or agents for expenses, judgments, or settlements, actually and reasonably incurred by them in connection with suits and other legal proceedings, if an individual is wholly successful in the defense of any proceeding to which he was a party because he was an officer or director of the corporation unless limited by the corporation's articles of incorporation. In addition, the IBCL permits, but does not require, indemnification against any liability if the individual acted in good faith and reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interest and (ii) in all other cases, that his conduct was at least not opposed to its best interest. In the case of any criminal proceeding, the individual must either have had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful. The IBCL also permits a corporation to expand upon the statutory indemnification provisions 53 60 through additional provisions in its articles of incorporation or bylaws, or through resolutions adopted by its board of directors or shareholders. In accordance with its authority, the NCI Articles provide for, among other things, mandatory indemnification in situations where the standards for permissive indemnification under the Indiana law are met. The Articles of Incorporation and By-Laws of Meadowvale do not contain special provisions as to indemnification rights of directors and officers and such indemnification will therefore be governed by the IBCL. The Articles of Incorporation of PEI mandate indemnification only if the director or officer is successful on the merits, and require the advancement of expenses. The PEI Articles of Incorporation contain no other special provisions dealing with indemnification, and therefore the provisions of the IBCL will otherwise govern. Under the NGCL, a corporation may, and in certain circumstances must, indemnify its officers, directors, employees or agents for expenses, judgments, or settlements, actually and reasonably incurred by them in connection with suits and other legal proceedings, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to criminal proceedings, had no reasonable cause to believe their conduct was unlawful. A corporation may adopt procedures for advancing expenses to directors and officers prior to final adjudication, as long as they undertake to repay the amounts advanced if it is ultimately determined that they were not entitled to be indemnified. While the Hillhaven Articles are silent as to indemnification, the Hillhaven By-Laws mandate indemnification and, pursuant to certain procedures, mandate advancement of expenses to the fullest extent permitted by the NGCL, unless the person seeking indemnification initiated the proceeding without approval of the Hillhaven Board. RESTRICTIONS ON BUSINESS COMBINATIONS The IBCL contains provisions restricting the ability of a corporation to engage in business combinations with an interested shareholder for a five-year period following the date such shareholder became an interested shareholder, unless the combination complies with certain fair price provisions or unless the board of directors of the corporation approved of the interested shareholder's acquisition of shares. The IBCL defines an interested shareholder generally as a person who owns 10% or more of the outstanding shares of such corporation's voting stock. The NGCL contains substantially similar provisions except that a corporation is not permitted to engage in a business combination with any interested shareholder for a more limited three-year period following the date such shareholder became an interested shareholder. The NCI Articles contain provisions which further restrict business combinations with an interested shareholder, or unless certain continuing directors of NCI approve of the business combination, or with certain business combinations, unless the combination complies with certain fair price provisions. An interested shareholder is defined generally to include a person who owns 10% or more of the outstanding shares of NCI's voting stock. The Articles of Incorporation of Meadowvale and PEI do not contain any similar provision. The Hillhaven Articles contain provisions which prevent a related person from effecting or approving certain transactions unless certain continuing directors of Hillhaven approve of the transaction or the transaction is approved by two-thirds of the shareholders. A related person is defined generally to include a person who owns 5% or more of the outstanding shares of Hillhaven's voting stock. RESTRICTIONS ON VOTING RIGHTS Both the IBCL and the NGCL contain control share acquisition provisions which provide that, except in certain limited exceptions such as mergers, any person or group of persons that acquires more than one-fifth of certain corporation's shares shall not have the right to vote those shares until voting rights have been conferred on the shares as provided in the respective statute. Under the IBCL, voting rights may be conferred by a resolution adopted by each voting group entitled to vote separately on the proposal and by a majority of the votes entitled to be cast, excluding "interested shares." Under the NGCL, voting rights may be conferred by a resolution adopted by a majority of votes entitled to be cast, excluding the shares held by an "interested shareholder," but the corporation's articles may require a different requirement. Under both the IBCL and the NGCL, the provisions of the control share acquisition statute do not apply if the issuing corporation's articles of incorporation or bylaws (under the NGCL in effect on the tenth day following acquisition of a controlling 54 61 interest by an acquiring person, and under the IBCL in effect prior to such acquisition) state that such provisions do not apply to the acquisition. Under the IBCL, if the control share acquisition statute does apply, and either the acquiring person fails to follow required procedures or the shareholders do not confer the right to vote, the issuing corporation may redeem the shares at the fair value of the shares as determined by the corporation. The shares may be redeemed at any time ending 60 days after the last acquisition of the shares. Under the NGCL in the same circumstances, the issuing corporation must redeem the shares at the average price paid for the shares and must call for redemption within thirty days of the event and redeem the shares within sixty days after the call for redemption. The Hillhaven Articles specifically make the control share acquisition statute applicable to any acquisition of such shares and increases the required shareholder vote from a majority vote of the shareholders to a two-thirds vote of the shareholders, excluding the shares held by any interested shareholder. Unless otherwise provided in the issuing corporation's articles of incorporation or bylaws (under the NGCL in effect on the tenth day following acquisition of a controlling interest by an acquiring person, and under the IBCL in effect prior to such acquisition), if the shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, any shareholder of the corporation who has not voted in favor of authorizing voting rights for the control shares is entitled to demand the corporation to purchase such shareholder's shares at fair value. Neither the Articles of Incorporation or By-Laws of any Corporate Target nor the Articles of Incorporation or By-Laws of Hillhaven presently contain any provision that would alter these statutory rights. SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS Under the IBCL, shareholders may take action without a meeting, without prior notice and without a vote if all of the shareholders entitled to vote on the action execute a written consent which is thereafter delivered to the corporation. Under the NGCL, unless otherwise provided in the articles of incorporation or the bylaws, shareholders may take action without a meeting, without prior notice and without a vote, upon the written consent of shareholders having not less than the minimum number of votes that would be necessary to authorize the proposed action at a meeting at which all shares entitled to vote were present and voted. The Hillhaven Articles provide that all action required or permitted to be taken by the shareholders must be taken at an annual or special meeting of the shareholders except actions taken by unanimous written consent. The NCI Articles provide that special meetings of the shareholders may be called only by the Chairman of the Board or by the Board pursuant to a resolution adopted by a majority of the total number of directors. The By-Laws of Meadowvale provide that special meetings of the shareholders may be called by the President or any Vice President, by the Board or by shareholders holding not less than one-fourth of the outstanding voting shares. The By-Laws of PEI provide that special meetings of the shareholders may be called by the President, by the Board or by shareholders holding not less than one-fourth of the outstanding voting shares. The Hillhaven By-Laws provide that special meetings of shareholders may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors. AMENDMENT OR REPEAL OF THE ARTICLES OF INCORPORATION AND BY-LAWS Under the IBCL and the NGCL, unless the articles of incorporation or bylaws otherwise provide, amendments to the articles of incorporation generally require the approval of the board or directors and approval of the holders of a majority of the outstanding stock entitled to vote thereon, and if such amendments would adversely affect the shares of such class or series, a majority of the outstanding stock of such class or series would have to approve the amendment. The NCI Articles further require the vote of a least 80% of the outstanding shares to amend certain provisions of the NCI Articles (i.e., provisions relating to number, classification and removal of directors; amendment of the NCI By-Laws; call of special shareholder meeting; criteria for evaluating certain offers; certain business combinations; and amendments to provisions relating to the foregoing). There are no similar provisions in the Articles of Incorporation of Meadowvale or PEI. The Hillhaven Articles provide that a vote of two-thirds of all of the outstanding shares voting together as a single class, regardless of limitations on voting power or whether such shares have voting power, are required to amend or repeal certain provisions of the Articles of Incorporation or the By-Laws (i.e., provisions relating to 55 62 number, classification and removal of directors; amendment of certain provisions of the By-Laws; call of special shareholder meeting; criteria for evaluating certain offers; certain business combinations; certain control share acquisitions and amendments to provisions relating to the foregoing). The Boards of Directors of NCI, Meadowvale and PEI have the exclusive power to adopt, amend or repeal bylaws by the affirmative vote of a majority of the directors, except that the shareholders of PEI may also adopt bylaws. Subject to the provisions of the Hillhaven Articles and subject to by-laws adopted by the shareholders, the Hillhaven Board has the power to adopt, amend or repeal by-laws. CUMULATIVE VOTING Under IBCL cumulative voting of stock applies only when so provided in the articles of incorporation or bylaws of a corporation. The Articles of Incorporation and By-Laws of NCI and PEI, respectively, do not provide for cumulative voting of stock. The Meadowvale By-Laws require the cumulative voting of stock. Under the NGCL, cumulative voting of stock applies only when so provided in the articles of incorporation of a corporation. The Hillhaven Articles specifically prohibit cumulative voting. SHAREHOLDER VOTE FOR MERGERS OR SHARE EXCHANGES Except with respect to certain mergers between parent and subsidiary corporations, both the IBCL and the NGCL generally require the affirmative vote of a majority of the outstanding shares of the target and surviving corporations in a merger and of outstanding shares of the corporation whose shares are being acquired in a share exchange. Neither the IBCL nor the NGCL requires a shareholder vote of the corporation acquiring the shares in a share exchange. APPRAISAL RIGHTS IN MERGERS OR SHARE EXCHANGES Both the IBCL and the NGCL provide that shareholders have the right, in some circumstances, to dissent from certain corporate reorganizations and to instead demand payment of the fair cash value of their shares. Unless a corporation's articles of incorporation provide otherwise, the NGCL does not provide for such rights of appraisal with respect to a merger or share exchange of a corporation, the shares of which are either listed on a national securities exchange or traded on NASDAQ or widely held (by more than 2,000 shareholders), if shareholders receive cash or shares of the surviving corporation or of such a listed, NASDAQ-traded or widely-held corporation. Like the IBCL, the NGCL does not provide appraisal rights to shareholders of the corporation acquiring the shares in a share exchange. DIVIDENDS Under the IBCL and the NGCL, corporations may pay dividends or make other distributions with respect to its stock unless, after giving effect to the dividend or other distribution, either the corporation would not be able to pay its debts as they become due in the usual course of business or (except as otherwise specifically allowed by its articles of incorporation under the NGCL) the corporation's total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise under the IBCL) the amount that would be needed, if the corporation were to be dissolved at the time of the dividend or other distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of the holders of shares receiving the dividend or other distribution. HILLHAVEN RIGHTS PLAN Hillhaven made a dividend distribution of one right (the "Rights") for each share of Hillhaven Common Stock outstanding on January 31, 1990 and authorized the issuance of additional Rights for Hillhaven Common Stock issued after that date. Hillhaven may redeem the Rights at $.01 per Right at any time until they become exercisable. With certain exceptions, the Rights become exercisable ten business days, which may be extended under certain conditions to twenty business days by the Hillhaven Board, after an investor (an "Acquiring Person") has (i) commenced a tender or exchange offer for 30% or more of the general voting power of Hillhaven stock or (ii) made or is the subject of a public announcement that the investor has 56 63 acquired 20% or more of the general voting power of Hillhaven stock. Upon the occurrence of such events, the Rights may be exchanged for one one hundredth of a share of Hillhaven's Series A Preferred Stock at an exercise price of $10.00 per share, subject to certain adjustments. The Right holder as such will have no rights as a shareholder of Hillhaven, including no right to vote or to receive dividends or distributions. The Series A Preferred Stock is non-redeemable and ranks junior in preference as to dividends and distributions of assets to all other classes or series of Preferred Stock, unless the terms thereof provided otherwise. Each share of Series A Preferred Stock will have a minimum preferential quarterly dividend rate of $5.00 per share but will be entitled to an aggregate of 100 times the cash and non-cash (payable in kind) dividends and distributions (other than dividends and distributions payable in Hillhaven Common Stock) declared on Hillhaven Common Stock. Each share of Series A Preferred Stock has a liquidation preference equal to the greater of $1,000 per share of 100 times the payment made per share on the Hillhaven Common Stock, plus the amount of accrued and unpaid dividends and distributions. Each share of Series A Preferred Stock will have 100 votes. In the event that, on or after the date the Rights become exercisable, Hillhaven is acquired or merged, or more than 50% of the assets or earning power of Hillhaven and its subsidiaries, taken as a whole, are sold, each Right holder, excluding those Rights owned by an Acquiring Person, will be entitled to purchase, for the then-current exercise price of each Right, common stock of the surviving company having a market value equal to two times the exercise price of each Right. In the event that, on or after the date the Rights become exercisable, Hillhaven is the survivor of a merger or other business combination, an Acquiring Person engages in certain self-dealing transactions, a person becomes the beneficial owner of 30% or more of the general voting power of Hillhaven stock, or certain events occur which cause an Acquiring Person's ownership interest being increased by more than 1%, then each Right holder, excluding Rights beneficially held by an Acquiring Person, will be entitled to purchase, for the then-current exercise price of each Right, that number of shares of Series A Preferred Stock having a market value equal to two times the exercise price of each Right. The Rights could have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of Hillhaven, even though such an attempt might be beneficial to Hillhaven and its shareholders. In addition, because the Rights may discourage accumulations of large blocks of Hillhaven Common Stock by purchasers whose objective is to take control of Hillhaven, the Rights could tend to reduce the likelihood of fluctuations in the market price of the Hillhaven Common Stock that might result from accumulations of large blocks of stock. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of Hillhaven Common Stock at a higher market price than otherwise might be the case. No Corporate Target has a shareholder rights plan. 57 64 RESALES OF HILLHAVEN COMMON SHARES The Hillhaven Common Shares to be issued as the Share Exchange Consideration pursuant to the Share Exchange Agreement to the Shareholders have been registered under the Securities Act pursuant to the Registration Statement. As a result, unless the Shareholder is considered an "affiliate" of one of the Corporate Targets within the meaning of Rule 144 under the Securities Act promulgated by the SEC (an "Affiliate"), such Hillhaven Common Shares are freely tradeable. Hillhaven Common Shares acquired by Affiliates may be resold by those Affiliates pursuant to the provisions of Rule 145(d) under the Securities Act promulgated by the SEC, pursuant to this Prospectus/Information Statement or pursuant to an exemption from registration under the Securities Act. Shares sold pursuant to this Prospectus/Information Statement may be sold in transactions involving a broker which is a member of the NYSE. Sales through such brokers may be made by any method of trading authorized by the NYSE or any other stock exchange on which such stock may be listed, including block trading in negotiated transactions. Without limiting the foregoing, such brokers may act as dealers by purchasing any or all of the shares covered by this Prospectus/Information Statement, either as agents for others or as principals for their own accounts and reselling such shares pursuant to this Prospectus/Information Statement. In reoffering or reselling the Hillhaven Common Shares covered by this Prospectus/Information Statement, any Affiliate and any brokers/dealers who execute sales for an Affiliate may be considered to be statutory "underwriters" with the meaning of the Securities Act. The engagement of a broker for the reoffering or resale of any of the Hillhaven Common Shares covered by this Prospectus/Information Statement may be terminated at any time by either the Shareholder or the broker. Each of the NCI Shareholders has represented to the Company that they will be acting independently in making decisions with respect to the timing, manner and size of reoffering or resale. To ensure compliance with the Securities Act, pursuant to the terms of an "Affiliate Letter" each Affiliate will agree to make any sales or distributions of Hillhaven Common Shares only (i) in conformity with the provisions of Rule 145(d) of the Securities Act, (ii) pursuant to an effective registration statement under the Securities Act or (iii) pursuant to an exemption from registration under the Securities Act. In general, Rule 145(d) restricts sales of Hillhaven Common Shares during the two-year period after the Effective Time of the Share Exchange, and permits sales, while Hillhaven is subject to the requirements to file, and is filing, periodic reports under Section 13 or 15(d) of the Exchange Act, only in brokers' transactions or transactions directly with a market maker where the aggregate number of shares sold at any time together with all sales of restricted Hillhaven securities sold from the account of the Affiliate during the preceding three-month period does not exceed the greater of (i) one percent of the outstanding Hillhaven Common Shares, or (ii) the average weekly trading volume of Hillhaven Common Stock on all national securities exchanges during any four-week period preceding any such sale. In addition, Hillhaven has agreed pursuant to the "Affiliate Letter" to have legends placed on the Hillhaven Common Shares issued as the Share Exchange Consideration to that effect and to use its best efforts to file, in a timely manner, all reports with the SEC necessary for the current public information requirement of Rule 144 under the Securities Act to be satisfied. In addition, pursuant to the terms of a "Pooling Letter," each of the Shareholders has agreed that in order for the Share Exchange to qualify for a pooling-of-interests accounting treatment under GAAP, the Shareholders may sell the Hillhaven Common Shares only in accordance with certain restrictions. These restrictions on the sale of Hillhaven Common Shares prohibit any sales by Shareholders that would cause the criteria for pooling-of-interest accounting treatment to be violated and include a period, beginning on the Effective Time of the Share Exchange and ending at such time as financial results covering at least 30 days of post-Share Exchange combined operations have been published, where no sales or other disposition of the Hillhaven Common Shares may be made. Pursuant to the terms of the Share Exchange Agreement, Hillhaven has agreed to publish the financial results of the combined operations of Hillhaven and the Nationwide Entities, covering at least 30 days of such combined operations, no later than the last to occur of (a) 60 days following the end of the month in which the Closing occurs or (b) 10 days following delivery of such financial information with respect to the operations previously owned by the Nationwide Entities as Hillhaven considers reasonably necessary to prepare such combined financial results. See "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Covenants." 58 65 Additionally, to preserve the proposed tax-free status of the Share Exchange and in order to ensure that the continuity of shareholder interest requirements related thereto, and set forth in Treasury Regulation sec. 1.368-1(b), will be satisfied with respect to the Share Exchange, each Shareholder will enter into a Shareholders' Agreement pursuant to which each Shareholder shall severally represent, warrant and covenant to the other Shareholders that he, she or it has no present plan, intention or arrangement to sell, exchange or otherwise dispose of a number of the Hillhaven Common Shares received as Share Exchange Consideration that would reduce such person's ownership of such Hillhaven Common Shares to a number having a value, determined at the Effective Time, of less than 50% of the value of Corporate Target stock held by such person immediately before the Share Exchange. Further, pursuant to the Shareholders' Agreement, a Shareholder may sell, exchange or otherwise dispose of any of the Hillhaven Common Shares received as Share Exchange Consideration provided such disposition would not reduce the fair market value of the Hillhaven Common Shares, determined as of the Effective Time, retained by such Shareholder to an amount less than 50% of the fair market value of the Corporate Target stock held by such Shareholder immediately before the Share Exchange. A Shareholder may not sell more than 50% of such Shareholder's Hillhaven Common Shares within the two-year period immediately following the Effective Time unless: (a) such Shareholder obtains and delivers to the Representative, an unqualified opinion of counsel (from counsel reasonably acceptable to the Representative, and in a form acceptable to the Representative) to the effect that such sale, exchange or disposition would not adversely affect the tax-free status of the Share Exchange; and (ii) the Representative and the Phillippes, jointly consent in writing to such sale, exchange or disposition. The Phillippes shall use reasonable efforts to reply to a request for a disposition of shares pursuant to clause (b) above within 30 days of receipt of a written notice of a Shareholder's request to sell shares pursuant to such clause. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Richard P. Adcock, Senior Vice President, Secretary and General Counsel of the Company. As to matters governed by the laws of the state of Nevada, the Company's General Counsel will rely on Woodburn and Wedge, Reno, Nevada. As of February 28, 1995, Mr. Adcock owned 35,789 shares of the Company's Common Stock. In addition, Mr. Adcock held options to purchase an additional 3,340 shares of the Company's Common Stock pursuant to the 1990 Stock Incentive Plan and options to purchase an aggregate of 184,590 shares of the Company's Common Stock pursuant to the Performance Investment Plan. Mr. Adcock also has an interest in 92,576 Performance Shares (reflects 100% of the target award) awarded under the 1990 Stock Incentive Plan, which he is eligible to receive as follows: (a) with respect to the three-year period ending March 31, 1995, 2,576 shares, and (b) with respect to each of the five fiscal years ending May 31, 1996 to 2000, 18,000 shares per year. EXPERTS The consolidated financial statements and schedules of The Hillhaven Corporation and its subsidiaries as of May 31, 1994 and 1993, and for each of the three years in the period ended May 31, 1994, in the Company's annual report on Form 10-K, have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the May 31, 1994, consolidated financial statements refers to a change in the method of providing income taxes by adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The discussions included under the heading "TERMS AND CONDITIONS OF THE SHARE EXCHANGE AGREEMENT -- Certain Federal Income Tax Consequences" were prepared for the Company by KPMG Peat Marwick LLP and have been included herein upon the authority of said firm as experts in tax accounting. 59 66 The financial statements of Nationwide Care, Inc. as of September 30, 1993 and 1994, and for each of the three years in the period ended September 30, 1994, appearing in this Prospectus/Information Statement and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 60 67 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Combined Financial Statements give effect to the business combination as if the Share Exchange had been consummated, with respect to the statements of operations, at the beginning of each of the periods presented, or, with respect to the balance sheet, as of February 28, 1995. The business combination will be accounted for as a pooling of interests. The Unaudited Pro Forma Condensed Combined Financial Statements do not purport to present the financial position or results of operations of the Company had the business combination taken place on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The information presented does not include certain cost savings that management believes may be realized following the Share Exchange, currently estimated to be approximately $4 million annually beginning in fiscal 1996 (before any severance or other costs of implementing efficiencies). These savings are expected to be realized primarily through the elimination of duplicative corporate overhead and reduced expense due to the incorporation of the Nationwide Entities into the Company's group purchasing and workers compensation programs. There can be no assurance as to the amount of cost savings, if any, that may be realized as a result of the transactions contemplated by the Share Exchange Agreement. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the separate historical financial statements and notes thereto appearing elsewhere in this Prospectus/Information Statement or incorporated in this Prospectus/Information Statement by reference. See "BACKGROUND OF AND REASONS FOR THE SHARE EXCHANGE," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "SELECTED FINANCIAL DATA" and "NATIONWIDE CARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company reports its financial information on the basis of a May 31 fiscal year. NCI and the other entities which comprise the Nationwide Entities report their financial information on the basis of a September 30 year-end. The Unaudited Pro Forma Condensed Combined Balance Sheet combines the Company's balance sheet with the Nationwide Entities' balance sheets as of February 28, 1995. The Unaudited Pro Forma Condensed Combined Statements of Operations combine the Company's Consolidated Statements of Operations for each of the fiscal years ended May 31, 1994, 1993 and 1992 with the Nationwide Entities' Consolidated Statements of Operations for each of the fiscal years ended September 30, 1994, 1993 and 1992. The Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended February 28, 1995 and 1994 combine the Consolidated Statements of Operations of the Company and the Nationwide Entities for these same nine-month periods. On October 31, 1994, the Company acquired CPS Pharmaceutical Services, Inc. (CPS) and Advanced Infusion Systems, Inc. (AIS) in a business combination accounted for as a pooling of interests and, accordingly, the Company's results of operations have been restated to include the operations of CPS and AIS for all periods presented. CPS and AIS, which provide diversified pharmaceutical and infusion services through locations in Northern California, became part of the Company's Medisave Pharmacies subsidiary through the exchange of 1,262,062 shares of the Company's common stock valued at approximately $29 million. 61 68 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
AS OF FEBRUARY 28, 1995 ---------------------------------------------------------------------------------------- PRO FORMA PRO FORMA HILLHAVEN NCI PEI MEADOWVALE SHANGRI-LA ADJUSTMENTS COMBINED ---------- ------- ---- ---------- ---------- ----------- ---------- ASSETS Current assets: Cash and cash equivalents....... $ 48,965 $ 8,088 $ 43 $ -- $ 11 $(3,000)(b) $ 54,107 Accounts and notes receivable, net........................... 164,713 11,956 -- -- -- (151)(a) 176,518 Other current assets.............. 51,012 1,774 5 151 -- -- 52,942 ---------- ------- ---- ------ ------ ------- ---------- Total current assets...... 264,690 21,818 48 151 11 (3,151) 283,567 Long-term notes receivable, net... 85,365 -- -- -- -- -- 85,365 Property and equipment, net....... 811,559 51,184 752 -- 1,328 -- 864,823 Intangible assets, net............ 29,096 6,863 13 -- 30 (449)(b) 35,553 Other non-current assets.......... 42,872 3,494 42 1,396 -- (1,361)(a) 46,443 ---------- ------- ---- ------ ------ ------- ---------- Total assets.............. $1,233,582 $83,359 $855 $1,547 $1,369 $(4,961) $1,315,751 ========== ======= ==== ====== ====== ======= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term.... $ 38,765 $ 3,755 $ 16 $ 457 $ 130 $ (150)(a) $ 42,973 Accounts payable................ 58,944 3,912 34 -- 35 -- 62,925 Other current liabilities......... 105,055 6,896 97 -- 313 (274)(a) 112,087 ---------- ------- ---- ------ ------ ------- ---------- Total current liabilities............. 202,764 14,563 147 457 478 (424) 217,985 Long-term debt.................... 589,619 48,163 487 -- 2,112 (1,088)(a) 3,679 (b) 4,500 (c) 647,472 Other long-term liabilities....... 36,511 4,904 -- -- 400 -- 41,815 Stock warrants.................... -- 5,918 -- -- -- (5,918)(b) -- Redeemable preferred stock........ -- 1,343 -- -- -- (1,343)(b) -- Shareholders' equity: Series C Preferred Stock........ 5 -- -- -- -- -- 5 Series D Preferred Stock........ 10 -- -- -- -- -- 10 Common Stock.................... 24,618 3,990 -- 200 -- 13,298 (b) (13,738)(c) 28,368 Additional paid-in capital...... 421,772 -- 210 -- -- 13,738 (c) 435,720 Retained earnings (deficit)..... 49,718 4,478 11 890 (1,621) (13,165)(b) (4,500)(c) 35,811 Unearned compensation........... (3,587) -- -- -- -- -- (3,587) Shares held in trust............ (87,848) -- -- -- -- -- (87,848) ---------- ------- ---- ------ ------- ------- ---------- Net shareholders' equity.................. 404,688 8,468 221 1,090 (1,621) (4,367) 408,479 ---------- ------- ---- ------ ------- ------- ---------- Total liabilities and shareholders' equity.... $1,233,582 $83,359 $855 $1,547 $ 1,369 $(4,961) $1,315,751 ========== ======= ==== ====== ======= ======= ========== Common shares outstanding, excluding 4,180 shares held in trust........................... 28,645 5,000 (c) 33,645 Book value per common share....... $ 14.13 $ 12.14
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 62 69 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1995 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HILLHAVEN NCI PEI MEADOWVALE SHANGRI-LA ADJUSTMENTS COMBINED ---------- ------- ---- ---------- ---------- ----------- ---------- Net revenues......................... $1,177,640 $94,179 $858 $108 $285 $(151)(a) $1,272,919 Expenses: Operating and administrative....... 999,460 77,236 685 1 -- (43)(a) 1,077,339 Interest........................... 36,664 3,768 36 34 159 (108)(a) 40,553 Depreciation and amortization...... 42,646 2,325 23 -- 109 -- 45,103 Rent............................... 40,648 5,409 -- 37 -- -- 46,094 ---------- ------- ---- ---- ---- ------ ---------- Total expenses.............. 1,119,418 88,738 744 72 268 (151) 1,209,089 ---------- ------- ---- ---- ---- ------ ---------- Income before income taxes and extraordinary charges.............. 58,222 5,441 114 36 17 -- 63,830 Income tax expense................... (19,248) (2,698) -- -- -- -- (21,946) ---------- ------- ---- ---- ---- ------ ---------- Income before extraordinary charges............................ $ 38,974 (d) $ 2,743 $114 $ 36 $ 17 $ -- $ 41,884 ========== ======= ==== ==== ==== ====== ========== Income before extraordinary charges per share.......................... $ 1.07 $ 1.01 Weighted average common shares and equivalents outstanding:........... 36,800 5,000 (c) 41,800
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 63 70 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1994 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HILLHAVEN NCI PEI MEADOWVALE SHANGRI-LA ADJUSTMENTS COMBINED ---------- ------- ----- ---------- ---------- ----------- ---------- Net revenues....................... $1,107,155 $79,415 $ 677 $119 $284 $(154)(a) $1,187,496 Expenses: Operating and administrative..... 938,732 61,694 751 1 1 (35)(a) 1,001,144 Interest......................... 41,677 3,332 35 34 168 (119)(a) 45,127 Depreciation and amortization.... 40,738 1,982 26 -- 110 -- 42,856 Rent............................. 41,829 4,738 -- 30 -- -- 46,597 Restructuring.................... (20,225) -- -- -- -- -- (20,225) ---------- ------- ----- ---- ---- ----- ---------- Net expenses....................... 1,042,751 71,746 812 65 279 (154) 1,115,499 ---------- ------- ----- ---- ---- ----- ---------- Income (loss) before income taxes and extraordinary charges........ 64,404 7,669 (135) 54 5 -- 71,997 Income tax expense................. (18,165) (3,759) -- -- -- -- (21,924) ---------- ------- ----- ---- ---- ----- ---------- Income (loss) before extraordinary charges.......................... $ 46,239 (d) $ 3,910 $(135) $ 54 $ 5 $ -- $ 50,073 ========== ======= ===== ==== ==== ===== ========== Income before extraordinary charges per share, fully-diluted......... $ 1.34 $ 1.26 Weighted average common shares and equivalents outstanding, fully-diluted.................... 33,831 5,000 (c) 38,831
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 64 71 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1994 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HILLHAVEN NCI PEI MEADOWVALE SHANGRI-LA YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA MAY 31, 1994 SEPT. 30, 1994 SEPT. 30, 1994 SEPT. 30, 1994 SEPT. 30, 1994 ADJUSTMENTS COMBINED ------------ -------------- -------------- -------------- -------------- ----------- ---------- Net revenues.... $1,484,825 $120,724 $1,073 $153 $385 $(207)(a) $1,606,953 Expenses: Operating and administrative 1,255,332 96,355 989 2 1 (54)(a) 1,352,625 Interest...... 56,178 4,778 41 46 216 (153)(a) 61,106 Depreciation and amortization... 54,395 2,947 42 -- 149 -- 57,533 Rent.......... 56,280 7,085 -- 46 -- -- 63,411 Restructuring... (20,225) -- -- -- -- -- (20,225) ---------- ------- ------ ---- ---- ------ ---------- Net expenses.... 1,401,960 111,165 1,072 94 366 (207) 1,514,450 ---------- ------- ------ ---- ---- ------ ---------- Income before income taxes and extraordinary charges....... 82,865 9,559 1 59 19 -- 92,503 Income tax expense....... (23,385) (4,600) -- -- -- -- (27,985) ---------- ------- ------ ---- ---- ------ ---------- Income before extraordinary charges....... $ 59,480 (d) $ 4,959 $ 1 $ 59 $ 19 $ -- $ 64,518 ========== ======== ====== ==== ==== ====== ========== Income before extraordinary charges per share, fully-diluted.. $ 1.71 $ 1.62 Weighted average common shares and equivalents outstanding, fully-diluted... 34,326 5,000 (c) 39,326 ========== ===== ==========
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 65 72 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1993 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PEI NCI 11 MONTHS MEADOWVALE SHANGRI-LA HILLHAVEN YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, PRO FORMA PRO FORMA MAY 31, 1993 1993 1993 1993 1993 ADJUSTMENTS COMBINED ------------ ---------- --------- ---------- ---------- ----------- ---------- Net revenues............ $1,394,472 $ 66,161 $ 658 $166 $372 $ (200)(a) $1,461,629 Expenses: Operating and administrative...... 1,180,974 50,214 654 2 2 (34)(a) 1,231,812 Interest.............. 63,600 3,669 35 46 228 (166)(a) 67,412 Depreciation and amortization........ 53,651 2,738 32 -- 149 -- 56,570 Rent.................. 56,687 2,671 -- 35 -- -- 59,393 Restructuring......... 5,769 -- -- -- -- -- 5,769 ------------ ---------- --------- ----- ----- ----------- ---------- Total expenses...... 1,360,681 59,292 721 83 379 (200) 1,420,956 ------------ ---------- --------- ----- ----- ----------- ---------- Income (loss) before income taxes and extraordinary charges............... 33,791 6,869 (63) 83 (7) -- 40,673 Income tax (expense) benefit............... 7,116 (1,744) -- -- -- -- 5,372 ------------ ---------- --------- ----- ----- ----------- ---------- Income (loss) before extraordinary charges and cumulative effect of accounting change................ $ 40,907(d)(f) $ 5,125(e) $ (63) $ 83 $ (7) $ -- $ 46,045 ============ ========== ========= =========== ========== =========== ========== Income before extraordinary charges and cumulative effect of accounting change per share, primary.... $ 1.58 $ 1.49 Weighted average common shares and equivalents outstanding, primary............... 24,394 $ 5,000(c) 29,394
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 66 73 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1992 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
HILLHAVEN NCI MEADOWVALE SHANGRI-LA YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MAY 31, SEPT. 30, SEPT. 30, SEPT. 30, PRO FORMA PRO FORMA 1992 1992 1992 1992 ADJUSTMENTS COMBINED ---------- ----------- ---------- ---------- ----------- ---------- Net revenues.............................. $1,330,007 $43,348 $179 $359 (179)(a) $1,373,714 Expenses: Operating and administrative............ 1,144,390 31,192 4 21 -- 1,175,607 Interest................................ 56,863 3,540 46 243 (179)(a) 60,513 Depreciation and amortization........... 46,698 2,308 -- 154 -- 49,160 Rent.................................... 71,665 1,353 26 -- -- 73,044 Restructuring........................... 92,529 -- -- -- -- 92,529 Adjustment to carrying value of properties previously reported as discontinued operations............... 20,736 -- -- -- -- 20,736 ---------- ----------- ----- ----- ----------- ---------- Total expenses................... 1,432,881 38,393 76 418 (179) 1,471,589 ---------- ----------- ----- ----- ----------- ---------- Income (loss) from operations............. (102,874) 4,955 103 (59) -- (97,875) Income tax expense........................ (543) (380) -- -- -- (923) ---------- ----------- ----- ----- ----------- ---------- Income (loss) before reinstatement of discontinued operations and extraordinary items..................... (103,417) 4,575 103 (59) -- (98,798) Reinstatement of discontinued operations.............................. 24,743 -- -- -- -- 24,743 ---------- ----------- ----- ----- ----------- ---------- Income (loss) before extraordinary items................................... $ (78,674) $ 4,575(g) $103 $(59) $ -- $ (74,055) ========== ========== =========== ========== =========== ========== Loss before extraordinary items per share, primary................................. $ (3.63) $ (2.79) Weighted average common shares and equivalents outstanding, primary........ 22,073 5,000(c) 27,073
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements. 67 74 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The pro forma results do not purport to present the financial position or results of operations of the Company had the business combination taken place on the dates specified, nor are they necessarily indicative of the financial position or the results of operations that may be achieved in the future. The Unaudited Pro Forma Condensed Combined Financial Statements have been prepared under the assumptions set forth in the following notes. The October 1994 acquisition of CPS and AIS was recorded as a pooling of interests and, accordingly, the Company's results of operations have been restated to include the operations of CPS and AIS for all periods presented. The weighted average number of shares outstanding has been restated for all periods presented to include the 1,262,062 shares issued in connection with the business combination. The Unaudited Pro Forma Condensed Combined Statements of Operations do not include nonrecurring merger expenses. It is anticipated that approximately $4.5 million will be expensed as incurred in connection with the Share Exchange. The Unaudited Pro Forma Condensed Combined Statements of Operations do not give effect to any cost savings which may be realized following the Share Exchange, estimated by the Company's management to be approximately $4 million annually beginning in fiscal 1996 (before any severance or other costs of implementing such efficiencies). The anticipated savings are based on estimates and assumptions made by the Company that are inherently uncertain, although considered reasonable by the Company, and are subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of management. There can be no assurance that such savings, if any, will be achieved. The following adjustments have been made to give pro forma effect to the Share Exchange: (a) To eliminate management fees and capital lease transactions between the Nationwide Entities. (b) To record (i) the redemption of redeemable preferred stock for $3.0 million cash, (ii) the redemption of the Senior Subordinated Notes for $12.0 million, including the write-off of $3.7 million of unamortized discount, financed by borrowings, (iii) the write-off of related deferred financing charges amounting to $449,000, (iv) the $7.4 million adjustment to the fair market value of the stock warrants based on the Share Exchange, and (v) the exercise of the stock warrants. (c) To record the business combination under pooling of interests accounting and reflect Hillhaven Common Shares to be issued in connection with the Share Exchange. (d) Does not reflect the extraordinary loss on early extinguishment of Hillhaven debt. (e) Does not reflect the extraordinary loss on early extinguishment of Nationwide debt. (f) Does not reflect the cumulative effect of Hillhaven's change in the method of accounting for income taxes. (g) Does not reflect Nationwide's extraordinary tax benefit from utilization of net operating loss carryforwards. 68 75 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NATIONWIDE CARE, INC. FINANCIAL STATEMENTS Report of Independent Auditors........................................................ F-2 Balance Sheets as of September 30, 1993 and 1994 and February 28, 1995 (unaudited).... F-3 Statements of Income for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995 (unaudited)............................ F-4 Statements of Other Shareholders' and Partners' Equity (deficit) for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1995 (unaudited)......................................................................... F-5 Statements of Cash Flows for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995 (unaudited)............................ F-6 Notes to Financial Statements......................................................... F-7 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) FINANCIAL STATEMENTS (unaudited) Balance Sheets as of September 30, 1993 and 1994 and February 28, 1995................ F-16 Statements of Operations and Retained Earnings (Deficit) for the eleven months ended September 30, 1993, the year ended September 30, 1994 and the five months ended February 28, 1994 and 1995.......................................................... F-17 Statements of Cash Flows for the eleven months ended September 30, 1993, the year ended September 30, 1994 and the five months ended February 28, 1994 and 1995....... F-18 Notes to Financial Statements......................................................... F-19 MEADOWVALE SKILLED CARE CENTER, INC. FINANCIAL STATEMENTS (unaudited) Balance Sheets as of September 30, 1993 and 1994 and February 28, 1995................ F-21 Statements of Income and Retained Earnings for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995.................. F-22 Statements of Cash Flows for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995........................................ F-23 Notes to Financial Statements......................................................... F-24 SHANGRI-LA GENERAL PARTNERSHIP FINANCIAL STATEMENTS (unaudited) Balance Sheets as of September 30, 1993 and 1994 and February 28, 1995................ F-26 Statements of Income (Loss) and Partners' Deficit for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995............ F-27 Statements of Cash Flows for the years ended September 30, 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995........................................ F-28 Notes to Financial Statements......................................................... F-29
F-1 76 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Nationwide Care, Inc. We have audited the accompanying balance sheets of Nationwide Care, Inc. as of September 30, 1993 and 1994 and the related statements of income, other shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Care, Inc. at September 30, 1993 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Indianapolis, Indiana November 10, 1994, except for Note 9 as to which the date is February 27, 1995 F-2 77 NATIONWIDE CARE, INC. BALANCE SHEETS
SEPTEMBER 30 --------------------------- FEBRUARY 28 1993 1994 1995 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................... $ 2,023,930 $ 2,596,829 $ 8,088,064 Accounts receivable (less allowances of $126,000, $365,000 and $442,000)......................... 9,116,021 9,442,263 10,479,081 Third-party settlements........................... 1,360,000 2,322,000 1,278,000 Management fees receivable........................ 246,285 218,058 198,629 Deferred income taxes............................. 1,052,000 700,000 700,000 Prepaid expenses.................................. 1,587,828 1,537,631 790,933 Other current assets.............................. 307,654 361,826 283,215 ----------- ----------- ----------- Total current assets...................... 15,693,718 17,178,607 21,817,922 Property and equipment, net......................... 43,352,052 49,023,211 51,184,123 Other assets: Intangible assets, net............................ 6,561,733 6,153,774 6,863,316 Purchase option deposits.......................... 350,000 350,000 350,000 Lease security deposit............................ 2,482,000 2,482,000 2,482,000 Other............................................. 692,041 751,242 661,796 ----------- ----------- ----------- Total other assets........................ 10,085,774 9,737,016 10,357,112 ----------- ----------- ----------- Total assets.............................. $69,131,544 $75,938,834 $83,359,157 =========== =========== =========== LIABILITIES AND OTHER SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 4,034,450 $ 4,264,670 $ 3,912,114 Accrued payroll and related taxes................. 3,505,580 4,205,826 3,946,175 Accrued other liabilities......................... 2,378,070 2,671,102 2,949,485 Current portion of long-term debt................. 3,494,374 3,207,507 3,754,769 ----------- ----------- ----------- Total current liabilities................. 13,412,474 14,349,105 14,562,543 Long-term liabilities: Long-term debt, less current portion Banks and other................................ 40,097,941 40,982,686 47,075,476 Related parties................................ 2,305,560 2,062,019 1,087,538 Deferred income taxes............................. 4,295,000 4,655,000 4,805,000 Other............................................. 100,000 100,000 100,000 ----------- ----------- ----------- 46,798,501 47,799,705 53,068,014 Stock warrants...................................... 6,180,511 5,918,072 5,918,072 Redeemable preferred stock.......................... 1,072,995 1,250,986 1,342,689 Other shareholders' equity: Common stock...................................... 3,634,886 3,989,886 3,989,886 Retained earnings (deficit)....................... (1,967,823) 2,631,080 4,477,953 ----------- ----------- ----------- Total other shareholders' equity.......... 1,667,063 6,620,966 8,467,839 ----------- ----------- ----------- Total liabilities and other shareholders' equity.................................. $69,131,544 $75,938,834 $83,359,157 =========== =========== ===========
See accompanying notes. F-3 78 NATIONWIDE CARE, INC. STATEMENTS OF INCOME
FIVE MONTHS ENDED YEAR ENDED SEPTEMBER 30 FEBRUARY 28 ----------------------------------------- -------------------------- 1992 1993 1994 1994 1995 ------------ ------------ ------------- ------------ ------------ (UNAUDITED) Revenue: Health care services, net.... $39,587,525 $63,268,409 $119,782,550 $48,539,317 $52,887,380 Management fees from related parties and other......... 2,420,359 1,725,265 635,652 261,842 180,636 Lease revenue................ 1,339,794 1,167,537 306,252 127,605 127,605 ----------- ----------- ------------ ----------- ----------- 43,347,678 66,161,211 120,724,454 48,928,764 53,195,621 Expenses: Health care services......... 28,416,362 45,906,771 90,384,315 36,700,130 40,341,374 Selling, general and administrative............ 2,775,318 4,307,384 5,133,621 2,127,119 2,886,824 Abandoned IPO costs.......... -- -- 837,000 -- -- Leases and rental............ 1,353,305 2,670,650 7,085,425 2,954,946 3,016,776 Depreciation and amortization.............. 2,308,182 2,738,422 2,947,041 1,071,228 1,179,058 ----------- ----------- ------------ ----------- ----------- 34,853,167 55,623,227 106,387,402 42,853,423 47,424,032 ----------- ----------- ------------ ----------- ----------- Income from operations......... 8,494,511 10,537,984 14,337,052 6,075,341 5,771,589 Interest expense, net.......... 3,539,945 3,668,621 4,777,597 1,852,855 2,083,013 ----------- ----------- ------------ ----------- ----------- Income before income taxes and extraordinary items.......... 4,954,556 6,869,363 9,559,455 4,222,486 3,688,576 Income taxes................... 380,000 1,744,000 4,600,000 2,015,000 1,750,000 ----------- ----------- ------------ ----------- ----------- Income before extraordinary item......................... 4,574,566 5,125,363 4,959,455 2,207,486 1,938,576 Extraordinary items: Tax benefit from utilization of net operating loss carryforwards............. 380,000 -- -- -- -- Loss on early extinguishment of debt (net of income tax benefit of $1,101,000).... -- 1,652,420 -- -- -- ----------- ----------- ------------ ----------- ----------- Net income..................... $ 4,954,566 $ 3,472,943 $ 4,959,455 $ 2,207,486 $ 1,938,576 =========== =========== ============ =========== =========== Pro forma information reflecting income taxes as if all combined entities were C-Corporations (unaudited): Income before income taxes and extraordinary items.......... $ 4,954,566 $ 6,869,363 $ 9,559,455 $ 4,222,486 $ 3,688,576 Income taxes................... 2,080,000 2,885,000 4,600,000 2,015,000 1,750,000 ----------- ----------- ------------ ----------- ----------- Income before extraordinary items........................ $ 2,874,566 $ 3,984,363 $ 4,959,455 $ 2,207,486 $ 1,938,576 =========== =========== ============ =========== =========== Pro forma income before extraordinary items per share........................ $ 0.45 $ 0.59 $ 0.58 $ 0.26 $ 0.23 =========== =========== ============ =========== =========== Pro forma weighted average shares used in computing income before extraordinary items per share.............. 6,352,100 6,711,790 8,507,740 8,510,240 8,495,240 =========== =========== ============ =========== ===========
See accompanying notes. F-4 79 NATIONWIDE CARE, INC. STATEMENTS OF OTHER SHAREHOLDERS' EQUITY
RETAINED COMMON EARNINGS PARTNERS' STOCK (DEFICIT) DEFICIT TOTAL ---------- ----------- ----------- ----------- Balance, September 30, 1991............ $ -- $(4,867,005) $(1,357,312) $(6,224,317) Net income........................... -- 4,376,992 577,574 4,954,566 Dividends and distribution........... -- (1,820,997) (322,995) (2,143,992) Exchange of ownership interest for debt.............................. -- (227,500) (75,833) (303,333) ---------- ----------- ----------- ----------- Balance, September 30, 1992............ -- (2,538,510) (1,178,566) (3,717,076) Net income........................... -- 2,745,538 727,405 3,472,943 Dividends and distributions.......... -- (3,036,722) (512,587) (3,549,309) Issuance and exchange of shares, net of $2,535,732 issuance costs...... 3,634,886 908,871 963,748 5,507,505 Accretion of discount on redeemable preferred stock................... -- (47,000) -- (47,000) ---------- ----------- ----------- ----------- Balance, September 30, 1993............ 3,634,886 (1,967,823) -- 1,667,063 Net income........................... -- 4,959,455 -- 4,959,455 Accretion of discount on redeemable preferred stock................... -- (177,991) -- (177,991) Issuance of 76,592 shares of nonvoting common stock for warrants exercised................ 445,000 -- -- 445,000 Increase in value of common stock warrants outstanding.............. -- (182,561) -- (182,561) Purchase of 15,000 shares of common stock............................. (90,000) -- -- (90,000) ---------- ----------- ----------- ----------- Balance, September 30, 1994............ 3,989,886 2,631,080 -- 6,620,966 Net income (unaudited)................. -- 1,938,576 -- 1,938,576 Accretion of discount on redeemable preferred stock (unaudited).......... -- (91,703) -- (91,703) ---------- ----------- ----------- ----------- Balance, February 28, 1995 (unaudited).......................... $3,989,886 $ 4,477,953 $ -- $ 8,467,839 ========= ========== ========== ==========
See accompanying notes. F-5 80 NATIONWIDE CARE, INC. STATEMENTS OF CASH FLOWS
FIVE MONTHS ENDED YEAR ENDED SEPTEMBER 30 FEBRUARY 28 ---------------------------------------- ------------------------- 1992 1993 1994 1994 1995 ----------- ------------ ----------- ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income........................................... $ 4,954,566 $ 3,472,943 $ 4,959,455 $ 2,207,486 $ 1,938,576 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt............................................. -- 2,753,420 -- -- -- Depreciation and amortization...................... 2,496,263 2,848,310 3,179,931 1,168,265 1,277,609 Deferred income taxes.............................. -- 66,842 712,000 782,000 150,000 Loss on disposal................................... -- 1,081 -- -- 82,471 Non-cash compensation expense from employee stock transaction...................................... -- 122,009 -- -- -- Accretion of discount on subordinated debt......... -- 34,500 335,683 86,250 157,445 Changes in operating assets and liabilities: Accounts receivable.............................. (418,128) (6,421,385) (326,242) (2,021,588) (1,036,818) Third-party settlements.......................... -- (1,360,000) (962,000) (503,300) 1,044,000 Management fees receivable....................... 20,802 332,114 28,227 31,227 19,429 Prepaid expenses................................. (79,435) (1,166,029) 50,197 801,757 746,698 Other current assets............................. (211,462) 45,004 (54,172) (186,355) 78,611 Accounts payable................................. 458,296 2,800,065 230,220 (1,152,924) (352,556) Payroll liabilities.............................. 85,850 1,255,285 700,246 404,831 (259,651) Accrued other liabilities........................ (10,261) 1,141,410 293,032 (27,322) 278,383 ----------- ------------ ----------- ----------- ----------- Net cash provided by operating activities............ 7,296,491 5,925,569 9,146,577 1,590,327 4,124,197 INVESTING ACTIVITIES Purchase of common stock............................. -- -- (90,000) -- -- Purchase acquisition, net of cash required........... -- (3,793,058) -- -- (848,800) Purchases of property and equipment.................. (1,981,240) (2,433,032) (8,331,318) (1,823,954) (4,276,355) Proceeds from disposal of equipment.................. -- 10,900 -- -- -- Net change in other assets........................... (475,402) 49,267 (59,201) 92,090 89,446 Lease security deposits.............................. -- (2,482,000) -- -- -- ----------- ------------ ----------- ----------- ----------- Net cash used in investing activities................ (2,456,642) (8,647,923) (8,480,519) (1,731,864) (5,035,709) FINANCING ACTIVITIES Proceeds from banks and other related parties long-term debt and notes payable................... 5,656,030 40,580,762 4,738,670 2,225,843 7,907,121 Payments on long-term debt and notes payable: Banks and other.................................... (6,007,761) (35,235,035) (4,499,686) (1,329,834) (1,330,973) Prepayment penalties............................... -- (2,117,152) -- -- -- Related parties.................................... (392,070) (1,287,247) (220,330) (81,697) (82,600) Purchase of interest rate cap........................ -- -- (111,813) (111,813) -- Proceeds from issuance of redeemable preferred stock and stock warrants................................. -- 7,206,506 -- -- -- Costs related to redeemable preferred stock and subordinated debt issuance......................... (197,125) (1,668,976) -- -- -- Issuance costs....................................... -- (2,535,732) -- -- (90,801) Dividends and distributions.......................... (2,391,370) (3,418,140) -- -- -- Net changes in other long-term liabilities........... (11,950) (527,454) -- -- -- Net changes in advances from related parties......... 23,739 (268,362) -- -- -- ----------- ------------ ----------- ----------- ----------- Net cash provided (used) by financing activities..... (3,320,507) 729,170 (93,159) 702,499 6,402,747 ----------- ------------ ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........................................ 1,519,342 (1,993,184) 572,899 560,962 5,491,235 Cash and cash equivalents at beginning of period..... 2,497,772 4,017,114 2,023,930 2,023,930 2,596,829 ----------- ------------ ----------- ----------- ----------- Cash and cash equivalents at end of period........... $ 4,017,114 $ 2,023,930 $ 2,596,829 $ 2,584,892 $ 8,088,064 ========== =========== ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest............................. $ 3,431,459 3,259,873 $ 4,169,993 $ 1,876,662 $ 2,093,451 ========== =========== ========== ========== ========== Cash paid for income taxes......................... $ -- $ 130,000 $ 3,925,000 $ 1,180,000 $ 1,500,000 ========== =========== ========== ========== ==========
See accompanying notes. F-6 81 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (UNAUDITED WITH RESPECT TO INFORMATION AS OF AND FOR THE FIVE MONTHS ENDED FEBRUARY 28, 1994 AND 1995) 1. BASIS OF PRESENTATION AND ACQUISITIONS On July 27, 1993, Nationwide Care, Inc. (the Company) acquired the ownership interests of a group of companies under common control (Nationwide Businesses) and a group of non-controlled entities through an exchange of stock for their ownership interests (the Reorganization). The Company was formed in September 1992 to effect the Reorganization. The financial statements as of and for the year ended September 30, 1992 reflect the combined financial position, results of operations and cash flows of only the Nationwide Businesses. The financial statements for the year ended September 30, 1993 reflect the combined results of operations and cash flows of the Nationwide Businesses from October 1, 1992 through July 27, 1993 and the results of operations and cash flows of the reorganized Company from July 28, 1993 through September 30, 1993. The Company acquired the Nationwide Businesses and the non-controlled entities through an exchange of 7,416,460 shares of the Company's common stock and approximately $4 million in cash. For financial statement purposes, the Reorganization was accounted for as a purchase acquisition. The majority owners' interests in the net assets of Nationwide Businesses have been recorded by the Company at the historical cost basis. The acquisition of the minority interests in the Nationwide Businesses and the non-controlled entities has resulted in a new basis of accounting reflecting estimated fair values of assets and liabilities at July 27, 1993. The purchase price of the minority interests of the historical assets and liabilities of the Nationwide Businesses and the non-controlled entities of approximately $20 million was allocated to the net assets acquired, including approximately $3.6 million to goodwill, based upon the fair market value at the date of acquisition. The non-controlled entities consisted of B&P Care Centers, Inc., Coshocton Health Care Center, Inc., Delta Care Centers, Inc. and Vita, Incorporated. Concurrent with the Reorganization, the Company refinanced approximately $34.5 million of debt through the issuance of floating rate option notes, subordinated debt, and preferred stock. This refinancing resulted in $2,117,152 of prepayment penalties and the write-off of $636,268 of unamortized issuance costs. These items have been accounted for as an extraordinary loss of $1,652,420 (net of income tax benefit of $1,101,000). On December 28, 1992, one of the entities included in the Nationwide Businesses purchased Royal Oaks Health Care and Rehabilitation Center for $1,700,000. The acquisition was recorded using the purchase method of accounting and the results of operations have been included in the combined financial statements since the date of acquisition. The purchase price was allocated to the net assets acquired, including $1,150,000 to goodwill, based on the fair market value at the date of acquisition. Effective July 1, 1993, the Company began operating seven long term care centers (the Regency Centers) comprising 1,241 long-term care beds pursuant to a long-term lease agreement. The equipment portion of the lease payments has been capitalized as a capital lease obligation with the remaining portion of the lease payments being accounted for as an operating lease. The following unaudited pro forma information presents the results of operations as though the acquisitions of the group of the non-controlled entities and Royal Oaks Health Care and Rehabilitation Center and the leasing of seven long term care centers pursuant to a long-term lease had occurred on October 1, 1991. Pro forma information does not purport to be indicative of the results that actually would have been achieved had the acquisition occurred at the beginning of those periods. F-7 82 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. BASIS OF PRESENTATION AND ACQUISITIONS -- (CONTINUED)
YEAR ENDED SEPTEMBER 30 ----------------------------- 1992 1993 ------------ ------------ Operating revenues...................................... $101,221,000 $110,947,000 =========== =========== Income before extraordinary items....................... $ 4,206,000 $ 7,025,000 =========== =========== Net income.............................................. $ 2,934,000 $ 5,373,000 =========== ===========
On January 1, 1995, the Company purchased Med One Home Health Care for $850,000. The acquisition was recorded using the purchase method of accounting and the results of operations have been included in the financial statements since the date of the acquisition. The purchase price was allocated to the net assets acquired, including $848,800 to goodwill, based on the fair market value at the date of the acquisition. The Company's current operations include 23 nursing centers with a total of 3,257 licensed beds, two retirement centers with a total of 240 units, two assisted living centers totaling 162 units and 40 additional assisted living units located in one of the retirement centers. Of the Company's 27 centers, 14 are owned, 11 are leased and two are managed for other parties. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the five months ended February 28, 1995 are not necessarily indicative of the results that may expected for the year ending September 30, 1995. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents Highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Health Care Services Revenue and Third-Party Settlements Health care services revenue is recognized when the related patient services are provided at established rates. Contractual allowances and the results of other arrangements for providing services at less than established rates are reported as deductions to arrive at net revenues. Contractual adjustments include differences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas or contracts in effect. The administrative procedures related to the Medicare cost reimbursement programs in effect generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled upon with the applicable administrative agencies. Provisions for estimated third-party settlements are provided in the period the related services are rendered. Differences between the amounts accrued and interim and final settlements are recorded in operations in the year of settlement. Medicare revenues represented 7%, 13%, 21%, 18% and 26% and Medicaid revenues (Indiana, Ohio, and Florida) represented 54%, 49%, 45%, 47% and 40% of total health care services revenue for 1992, 1993 and 1994 and the five months ended February 28, 1994 and 1995, respectively. F-8 83 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The State of Indiana in August 1994, began implementing certain regulatory changes in regulations that govern payments using the Medicaid prospective method of reimbursement for Medicaid covered patients in Indiana. For the year ended September 30, 1994 the Company received approximately 40% of its total health care services revenue from the Indiana funded Medicaid program for covered patients. The effect of these regulations are anticipated to reduce payments under the Medicaid program. Accounts Receivable Accounts receivable are stated net of accrued contractual allowances on patient service revenue not yet remitted by the patient or the third-party intermediary, or both, and the allowance for doubtful accounts. The Company's accounts receivable at September 30, 1994 consist of 24% Medicare, 51% Medicaid (Indiana, Ohio and Florida) programs and 25% private pay and commercial insurers. Property and Equipment Property and equipment are carried at cost and depreciation is computed by the straight-line method using the estimated useful lives of the assets, generally 5 to 10 years for equipment and furnishings and 15 to 40 years for buildings and improvements. The cost of assets acquired using capital lease arrangements is included in property and equipment, and the related amortization is included in depreciation expense. Intangible Assets Intangible assets consist of costs incurred in obtaining long-term financing ($1,871,589), lease acquisition costs ($266,737), and goodwill ($5,564,958) and are amortized using the straight-line method over periods of 5 to 25 years. Accumulated amortization on intangible assets was $90,138, $609,909 and $839,967 at September 30, 1993 and 1994, and February 28, 1995, respectively. Income Taxes Prior to the Reorganization on July 27, 1993, the shareholders of certain of the Nationwide Businesses had elected to use Subchapter S of the Internal Revenue Code to include the income of certain of the Nationwide Businesses in their own income for income tax purposes. Accordingly, certain corporations and all partnerships comprising the Nationwide Businesses were not subject to federal and state taxes. Effective October 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires recognition of deferred tax liabilities and assets for the expected future consequences of events that have been included in the financial statements or tax returns. Using this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying current tax laws. Through July 27, 1993 deferred taxes were provided by certain Nationwide Businesses which were subject to federal and state taxes on income for significant timing differences in the recognition of revenue and expense for tax and financial statement purposes. F-9 84 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
SEPTEMBER 30 ---------------------------- FEBRUARY 28 1993 1994 1995 ------------ ------------ ----------- Land and improvements....................... $ 2,706,785 $ 2,991,120 $ 3,064,167 Buildings and improvements.................. 33,339,853 34,614,138 37,693,728 Equipment and furnishings................... 7,251,057 9,233,664 8,765,722 Construction in progress.................... 504,158 5,285,874 5,622,230 ----------- ----------- ----------- 43,801,853 52,124,796 55,145,847 Less accumulated depreciation............... 449,801 3,101,585 3,961,724 ----------- ----------- ----------- $43,352,052 $49,023,211 $51,184,123 =========== =========== ===========
4. LONG-TERM DEBT Long-term debt consisted of the following:
SEPTEMBER 30 ---------------------------- FEBRUARY 28 1993 1994 1995 ------------ ------------ ------------ Floating rate option notes.......................... $28,500,000 $26,600,000 $25,650,000 Bank line of credit................................. 3,274,240 6,247,809 -- Bank term loans with interest at 10%................ -- -- 13,705,023 Non-interest bearing county government note payable........................................... 624,962 125,013 -- Installment notes with monthly interest and principal payments maturing 1994 to 1998, collateralized by equipment and furnishings....... 314,240 178,633 464,903 Capital lease obligations, imputed interest from 8% to 11.5%.................................. 2,830,549 2,631,520 2,539,197 Capital lease obligations, related parties, imputed interest from 10% to 11.2%........................ 2,525,890 2,305,560 1,237,538 Senior Subordinated Notes (less unamortized discount)......................................... 7,827,994 8,163,677 8,321,122 ----------- ----------- ----------- 45,897,875 46,252,212 51,917,783 Less amounts due within one year.................... 3,494,374 3,207,507 3,754,769 ----------- ----------- ----------- $42,403,501 $43,044,705 $48,163,014 =========== =========== ===========
The Company issued $28.5 million of floating rate option notes on July 27, 1993, which are collateralized by an irrevocable direct pay letter of credit (Letter of Credit). The proceeds were used to retire various debt facilities. The floating rate option notes amortize over a fifteen year period, with a final maturity in August 2008 and the interest rate resets every seven days. The effective interest rate on the floating rate option notes at September 30, 1994 was approximately 7%. The notes are payable in $950,000 semi-annual payments. The Letter of Credit and a $9.5 million revolving line of credit (Line of Credit) were issued pursuant to a credit agreement with a commercial bank. The Line of Credit bears interest at prime plus .75% or the Company has the option of selecting a one, two or three month LIBOR rate. The Line of Credit matured during January 1995 and the outstanding balance was converted to a term loan, payable in equal principal installments with a balloon payment at maturity in January 2000 and bearing interest consistent with that of the Line of Credit. In January 1995, the Company also entered into a $4,330,000 term loan, which bears interest consistent with the $9.5 million term loan, payable in equal monthly installments with a balloon F-10 85 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT -- (CONTINUED) payment at maturity in January 2000. The Letter of Credit and the term loans are collateralized by substantially all of the Company's assets. Concurrent with the Reorganization in July 1993, the Company completed a private placement of $12 million of its Senior Subordinated Notes. The Senior Subordinated Notes are payable in quarterly principal installments of $1,500,000 beginning November 1998 with the final installment due in August 2000 and bear interest at an annual rate of 12.5%. Long-term debt maturities, excluding capital lease obligations, for the five years subsequent to September 30, 1994 are as follows:
YEAR ENDED SEPTEMBER 30: - ------------------------ 1995................................................................... $ 2,730,372 1996................................................................... 2,583,832 1997................................................................... 2,576,108 1998................................................................... 2,546,667 1999................................................................... 8,533,333 Thereafter............................................................. 22,344,820
The Company has agreed to certain restrictions which, among other things, require minimum levels of tangible net worth, total indebtedness to equity, and other financial ratios. The debt agreements also place restrictions on issuing new debt, mergers and acquisitions, sales of all or substantially all of the Company's assets, purchases or retirements of the Company's capital stock, payment of dividends and capital expenditures. 5. LEASES Effective July 1, 1993, the Company began operating seven long term care centers comprising 1,241 long term care beds pursuant to a 10 year lease agreement. The Company paid $2,482,000 to the lessor as a refundable security deposit, half of which is interest bearing. The monthly rent payments of $503,000 are subject to annual increases based on changes in the Consumer Price Index. The Company also has a right of first refusal, which expires six months prior to the expiration of the lease term, to purchase the long-term care centers or to renew the lease agreement at the expiration of the current agreement. The equipment portion of the lease payments was capitalized as a $2.6 million capital lease obligation with the remaining portion of the lease payments being accounted for as an operating lease. The Company has entered into several leases, as lessee, for the property and equipment of four additional long-term care centers. The Company has also entered into various separate leases for equipment in connection with the operation of certain owned and leased facilities. The leases are for terms ranging from ten to fifteen years and, with one exception, have been classified as operating leases. The equipment leases and one facility lease have been classified as capital leases and are for terms of five to fifteen years. At the inception of the facility leases, the Company made initial payments to the lessors and assumed certain net liabilities aggregating $881,802 of which $350,000 has been recorded as deposits for options to purchase facilities. The balance was capitalized and amortized using the lives of the respective leases. F-11 86 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. LEASES -- (CONTINUED) Capital lease assets included in property and equipment are as follows:
SEPTEMBER 30 -------------------------- FEBRUARY 28 1993 1994 1995 ----------- ----------- ----------- Buildings...................................... $ 773,343 $ 773,343 $ 773,343 Equipment and furnishings...................... 4,084,293 4,084,293 3,014,293 ----------- ----------- ----------- 4,857,636 4,857,636 3,787,636 Less accumulated amortization.................. 113,219 663,784 683,186 ----------- ----------- ----------- Net capital lease assets....................... $ 4,744,417 $ 4,193,852 $ 3,104,450 ========= ========= =========
Included in depreciation and amortization expense is $217,452, $416,005 and $550,565 for 1992, 1993 and 1994, respectively, and $229,402 and $209,402 for the five months ended February 28, 1994 and 1995, respectively, relating to amortization of capital leases. Future minimum annual lease payments for capital leases and noncancelable operating leases (including related party leases), together with the present value of the future minimum lease payments at September 30, 1994 are as follows:
YEAR ENDED SEPTEMBER 30: CAPITAL LEASES OPERATING LEASES ------------------------ -------------- ---------------- 1995........................................... $ 911,392 $ 7,278,015 1996........................................... 938,035 7,452,822 1997........................................... 953,810 7,485,843 1998........................................... 935,801 7,104,445 1999........................................... 964,323 7,272,028 Thereafter..................................... 2,765,184 26,389,634 -------------- ---------------- Total future minimum lease payments..................... 7,468,545 $ 62,982,787 ============ Less amount representing interest....................... 2,531,465 -------------- Present value of future minimum lease payments.......... $4,937,080 ==========
Rental expense for all operating leases was $1,353,305, $2,670,650 and $7,085,425 for 1992, 1993 and 1994, respectively, and $2,954,946 and $3,016,776 for the five months ended February 28, 1994 and 1995, respectively. The Company is a lessor of property and equipment related to one facility using an operating lease expiring in 1998 and provides management services to the lessee. The lease includes a purchase option in which the lessee may purchase the property and equipment at the end of the lease term for either a certain agreed upon minimum price or the fair value of the assets. The property and equipment leased has a net book value of approximately $2.1 million at September 30, 1994. Future minimum annual rentals to be received on the non-cancelable lease is approximately $306,000 per year through 1998. As a part of the Reorganization, the Company acquired the operations of certain entities that had previously leased property and equipment from the Nationwide Businesses. 6. RELATED PARTY TRANSACTIONS The Company is affiliated with several entities as a result of common ownership and transactions with the affiliated entities are made in the normal course of business. F-12 87 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. RELATED PARTY TRANSACTIONS -- (CONTINUED) The Company made payments to Opal Care Centers, Inc. (related to the Company through common ownership) of $850,737, $769,117 and $4,828,314 in 1992, 1993 and 1994, respectively, and $895,649 and $3,885,943 for the five months ended February 28, 1994 and 1995, respectively, related to construction projects and has a net payable to Opal of $145,715 at September 30, 1994. The Company also has contracts with Opal Care Centers, Inc. at September 30, 1994 for construction projects which have approximately $3 million of aggregate costs to complete. The Company leases a facility from Meadowvale Skilled Care Center, Inc., of which an immediate family member of a significant shareholder of the Company owns 25.93%. Lease payments were $240,948 in 1992, 1993 and 1994 and $100,395 for the five months ended February 28, 1994 and 1995. The lease is classified as a capital lease. The Company had an operating lease of an airplane for a portion of 1992 with a partnership which is related to the Company through common ownership. Lease payments were $36,270 in 1992. The Company leased an airplane from a partnership that is related to the Company which was classified as a capital lease and lease payments were $176,688 in both 1993 and 1994 and $73,612 and $44,172 for the five months ended February 28, 1994 and 1995, respectively. The Company canceled the lease effective December 31, 1994. At February 28, 1995 the Company had an advance of $22,500 to the partnership. The Company managed two related party long-term care centers, one of which was sold on April 1, 1993 and the other transferred to another management company on July 1, 1994. In addition, the Company manages an assisted living center, which is owned by significant shareholders. Management fees earned from these facilities were $383,329, $233,847 and $346,089 in 1992, 1993 and 1994, respectively, and $119,080 and $24,052 for the five months ended February 28, 1994 and 1995, respectively. 7. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
SEPTEMBER 30 ------------------------- 1993 1994 ---------- ---------- Deferred tax liabilities: Tax over book depreciation................................ $4,295,000 $4,655,000 Deferred tax assets: Net operating loss carryforwards.......................... 782,000 -- Other..................................................... 270,000 700,000 ---------- ---------- Total deferred tax assets......................... 1,052,000 700,000 ---------- ---------- Net deferred tax liabilities...................... $3,243,000 $3,955,000 ========= =========
F-13 88 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) Significant components of the provision for income taxes are as follows:
YEAR ENDED SEPTEMBER 30 ------------------------------------------- 1992 1993 1994 --------------- ---------- ---------- DEFERRED METHOD LIABILITY METHOD --------------- ----------------------- Current: Federal..................................... $ 380,000 $1,122,000 $2,221,000 State....................................... -- 555,000 1,667,000 --------- ---------- ---------- Total current....................... 380,000 1,677,000 3,888,000 Deferred: Federal..................................... -- 53,000 570,000 State....................................... -- 14,000 142,000 --------- ---------- ---------- Total deferred...................... -- 67,000 712,000 --------- ---------- ---------- $ 380,000 $1,744,000 $4,600,000 ========= ========== ==========
The unaudited pro forma income tax provisions reflect income taxes as if all combined Nationwide Businesses were C-Corporations using an estimated effective income tax rate of 42%. The reconciliation of income tax attributable to continuing operations computed at the U.S. Federal statutory tax rate to income tax expense is:
1992 1993 1994 --------------------- -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ----------- ------- ---------- ------- ---------- ------- DEFERRED METHOD LIABILITY METHOD --------------------- --------------------------------------------- Statutory federal income tax.... $ 1,685,000 34% $2,336,000 34% $3,250,000 34% Non-taxable income.............. (1,305,000) (26) (948,000) (14) -- State income taxes, net of federal tax benefit........... -- -- 375,000 5 1,194,000 12 Net operating loss carryforward utilized...................... -- -- (265,000) (4) -- -- Change from non-taxable to taxable status................ -- -- 289,000 4 -- -- Other -- net.................... -- -- (43,000) -- 156,000 2 ----------- ----- ---------- ----- ---------- ----- $ 380,000 8% $1,744,000 25% $4,600,000 48% =========== ===== ========== ===== ========== =====
8. STOCK WARRANTS, REDEEMABLE PREFERRED STOCK AND OTHER SHAREHOLDERS' EQUITY The Company has authorized 48,000,000 shares of common stock and 2,000,000 shares of nonvoting common stock, without par value. The nonvoting common stock is convertible into common stock on a share-for-share basis. At September 30, 1994, there were 7,431,460 shares of common stock and 76,592 shares of nonvoting common stock outstanding. Pursuant to a board of directors meeting on March 18, 1994 the Company declared a 2 for 1 split of its voting and nonvoting common stock. The Company also has authorized 2,000,000 shares of no par value preferred stock of which 300,000 shares were designated as Redeemable Preferred Stock and issued on July 27, 1993. The Redeemable Preferred Stock has no coupon rate and is redeemable for $3,000,000 in eight equal quarterly installments of $375,000 commencing November 1998 and is mandatorily redeemable in the event of an initial public F-14 89 NATIONWIDE CARE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. STOCK WARRANTS, REDEEMABLE PREFERRED STOCK AND OTHER SHAREHOLDERS' EQUITY -- (CONTINUED) offering, a change in control, an optional redemption of the Senior Subordinated Notes, or a call of the warrants. In conjunction with the Company's issuance of the Senior Subordinated Notes and the Redeemable Preferred Stock, detachable stock warrants were issued. The warrants are exercisable at any time prior to expiration, which occurs on the later of (i) July 27, 2000, (ii) the day upon which the Senior Subordinated Notes are paid in full and (iii) the day upon which the Redeemable Preferred Stock is fully redeemed. Certain warrants were exercised in October 1993 in exchange for 76,592 shares of nonvoting common stock. Warrants to receive 987,188 shares remain outstanding at September 30, 1994. The warrants include put and call options allowing the holders the right to require the Company to repurchase the warrants, and allowing the Company the right to repurchase the warrants, respectively. The put and call exercise prices are based upon the value of the warrants as determined by formulas defined in the agreement or an independent appraisal, whichever is greater. At the date of issuance, $4,206,506 and $1,974,005 of the proceeds from the Senior Subordinated Notes and the Redeemable Preferred Stock, respectively, were allocated to the value of the warrants which, in recognition of the put option, were classified as temporary capital in the accompanying balance sheets. The value of the warrants, as estimated using the put price formula, will be increased or decreased each year, based on the estimated value of the warrants, and the resulting charge will be recorded directly to retained earnings. The resulting discounts on the Senior Subordinated Notes and the Redeemable Preferred Stock are being amortized to interest and retained earnings, respectively, using the effective interest method over the life of the Senior Subordinated Notes and the Redeemable Preferred Stock. 9. SUBSEQUENT EVENT As of February 27, 1995, the Company entered into an agreement with The Hillhaven Corporation pursuant to which the shareholders of the Company will exchange their shares for approximately 4.8 million common shares at The Hillhaven Corporation. Immediately prior to this transaction, the outstanding warrants of the Company will be exercised. This share exchange is expected to be consummated in June 1995. F-15 90 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30 --------------------- FEBRUARY 28 1993 1994 1995 -------- -------- ----------- ASSETS Current assets: Cash.................................................... $ 24,939 $ 25,516 $ 42,941 Prepaid expenses........................................ 3,222 21,455 5,057 -------- -------- ----------- Total current assets............................ 28,161 46,971 47,998 Property and equipment (Notes 2 and 3).................... 707,283 747,628 752,451 Other assets: Deferred loan costs (less accumulated amortization of $4,401, $9,201 and $11,201).......................... 19,602 14,802 12,802 Other (Note 4).......................................... 41,627 41,627 41,627 -------- -------- ----------- 61,229 56,429 54,429 -------- -------- ----------- Total assets.................................... $796,673 $851,028 $ 854,878 ======== ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 31,227 $ 51,804 $ 34,185 Accrued liabilities..................................... 55,576 75,942 34,654 Security deposits....................................... 38,361 66,060 62,815 Current portion of long-term debt (Note 2).............. 15,600 15,600 15,600 -------- -------- ----------- Total current liabilities....................... 140,764 209,406 147,254 Long-term debt (Note 2)................................... 509,000 493,400 486,900 Shareholders' equity: Common stock, no par value: Authorized shares -- 10,000; issued and outstanding shares -- 2,000...................................... -- -- -- Additional paid-in capital.............................. 210,000 210,000 210,000 Retained earnings (deficit)............................. (63,091) (61,778) 10,724 -------- -------- ----------- Total shareholders' equity...................... 146,909 148,222 220,724 -------- -------- ----------- Total liabilities and shareholders' equity...... $796,673 $851,028 $ 854,878 ======== ======== =========
See accompanying notes. F-16 91 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) (UNAUDITED)
ELEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED FEBRUARY 28 SEPTEMBER 30 SEPTEMBER 30 ----------------------- 1993 1994 1994 1995 ------------- ------------ --------- --------- Health care services..................... $ 658,022 $1,073,198 $ 392,664 $ 471,554 Costs and expenses: Health care services................... 620,638 934,390 441,738 343,949 Management services.................... 33,656 54,301 20,152 24,052 Depreciation and amortization.......... 31,831 41,826 17,701 12,990 Interest............................... 34,988 41,368 16,218 18,061 ------------- ------------ --------- --------- Total costs and expenses....... 721,113 1,071,885 495,809 399,052 Net income (loss)........................ (63,091) 1,313 (103,145) 72,502 Retained deficit at beginning of period................................. -- (63,091) (63,091) (61,778) ------------- ------------ --------- --------- Retained earnings (deficit) at end of period................................. $ (63,091) $ (61,778) $(166,236) $ 10,724 ========== ========== ========= =========
See accompanying notes. F-17 92 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) STATEMENTS OF CASH FLOWS (UNAUDITED)
ELEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED FEBRUARY 28 SEPTEMBER 30 SEPTEMBER 30 -------------------- 1993 1994 1994 1995 ------------- ------------ --------- -------- OPERATING ACTIVITIES Net income (loss)............................... $ (63,091) $ 1,313 $(103,145) $ 72,502 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization................. 31,831 41,826 17,701 12,990 Changes in operating assets and liabilities: Prepaid expenses........................... (3,222) (18,233) (2,606) 16,398 Accounts payable........................... 31,227 20,577 22,043 (17,619) Accrued liabilities........................ 55,576 20,366 (10,614) (41,288) Security deposits.......................... 38,361 27,699 11,505 (3,245) ------------- ------------ --------- -------- Net cash provided (used) by operating activities.................................... 90,682 93,548 (65,116) 39,738 INVESTING ACTIVITIES Purchase acquisition............................ (734,713) -- -- -- Purchase of property and equipment.............. -- (77,371) (67,701) (15,813) FINANCING ACTIVITIES Proceeds from long-term debt.................... 535,000 -- -- -- Payments on long-term debt...................... (10,400) (15,600) (6,500) (6,500) Capital contribution............................ 210,000 -- -- -- Loan costs...................................... (24,003) -- -- -- Advance to related party........................ (41,627) -- -- -- ------------- ------------ --------- -------- Net cash provided (used) by financing activities.................................... 668,970 (15,600) (6,500) (6,500) ------------- ------------ --------- -------- Net increase (decrease) in cash................. 24,939 577 (139,317) 17,425 Cash at beginning of period..................... -- 24,939 24,939 25,516 ------------- ------------ --------- -------- Cash at end of period........................... $ 24,939 $ 25,516 $(114,378) $ 42,941 ========== ========== ========= ======== Supplemental cash flow information: Cash paid for interest.......................... $ 34,988 $ 41,368 $ 16,218 $ 18,061 ========== ========== ========= ========
See accompanying notes. F-18 93 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Phillippe Enterprises, Inc. (the Company) is the owner and operator of a 90 unit assisted living center in Brooksville, Florida. The Company began operations in November 1992. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed by the straight-line method using the following expected useful lives of the respective assets:
RANGE ----- Buildings.................................................................... 10-25 Land improvements............................................................ 10-15 Furniture and fixtures....................................................... 5-10
Deferred Loan Costs Loan costs are deferred and amortized over the 5 year term of the loan. 2. LONG-TERM DEBT Long-term debt consisted of the following:
SEPTEMBER 30 -------------------- FEBRUARY 28 1993 1994 1995 --------- --------- ----------- Mortgage note payable to a bank with monthly principal installments of $1,300. Interest (9% at September 30, 1994) is payable monthly and is adjusted at 1% over the banks rate. Collateralized by a mortgage on the real estate and the personal guarantee of shareholder. Final maturity in 1998................. $524,600 $509,000 $502,500 Less current portion.................................. 15,600 15,600 15,600 -------- -------- -------- $509,000 $493,400 $486,900 ======== ======== ========
Maturities of long-term debt for years ending September 30: 1995...................................................................... $ 15,600 1996...................................................................... 15,600 1997...................................................................... 15,600 1998...................................................................... 462,200
F-19 94 PHILLIPPE ENTERPRISES, INC. (D/B/A HERITAGE AT HERNANDO) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
SEPTEMBER 30 --------------------- FEBRUARY 28 1993 1994 1995 -------- -------- ----------- Buildings......................................... $583,202 $624,268 $ 624,944 Equipment......................................... 100,000 136,305 151,442 Land and improvements............................. 51,511 51,511 51,511 -------- -------- ----------- 734,713 812,084 827,897 Less accumulated depreciation..................... 27,430 64,456 75,446 -------- -------- ----------- $707,283 $747,628 $ 752,451 ======== ======== =========
4. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes," as of November 1, 1992. Federal income tax expense for the years ended September 30, 1994 and 1993 differs from the amount computed by applying the "expected" U.S. corporate income tax rate of 35% in 1994 and 34% in 1993 to net income (loss) primarily due to benefits from net operating losses not being available. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at September 30 are presented below:
1994 1993 -------- -------- Accrued expenses............................................... $ 21,766 $ 28,108 Net operating loss carryforwards............................... 2,781 2,608 -------- -------- Total gross deferred tax assets...................... 24,547 30,716 Less valuation allowance....................................... (20,335) (19,808) -------- -------- 4,212 10,908 -------- -------- Depreciation................................................... (4,037) (8,914) Other.......................................................... (175) (1,994) -------- -------- Total deferred tax liabilities....................... (4,212) (10,908) -------- -------- Net deferred tax assets.............................. $ -- $ -- ======== ========
5. RELATED PARTIES The Company contracts with Nationwide Care, Inc. for certain accounting, reporting and management services. The Company's shareholders are significant shareholders in Nationwide Care, Inc. The management fees incurred were $33,656 and $54,301 in 1993 and 1994, respectively, and $20,152 and $24,052 for the five months ended February 28, 1994 and 1995, respectively. The Company has advanced to an affiliated company $41,627. The advance is non-interest bearing and is due upon demand. The shareholders of the Company are also shareholders in the affiliated company. 6. PLANNED TRANSACTIONS As of February 27, 1995, the Company entered into an agreement with The Hillhaven Corporation pursuant to which the shareholders of the Company will exchange their shares for 83,333 common shares of The Hillhaven Corporation. It is anticipated that this share exchange will be consummated in June 1995. F-20 95 MEADOWVALE SKILLED CARE CENTER, INC. BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30 ------------------------- FEBRUARY 28 1993 1994 1995 ---------- ---------- ------------ ASSETS Current assets: Cash................................................. $ 4,720 $ 1,499 $ 303 Net Investment in sales-type lease -- current portion (Note 3).......................................... 131,176 146,573 151,000 ---------- ---------- ------------ Total current assets......................... 135,896 148,072 151,303 ---------- ---------- ------------ Other assets: Net Investment in sales-type lease, less current portion (Note 3).................................. 1,296,640 1,150,067 1,086,538 Lease obligation receivable (Note 3)................. 279,692 277,086 274,248 Deposits............................................. 19,475 30,069 34,547 ---------- ---------- ------------ 1,595,807 1,457,222 1,395,333 ---------- ---------- ------------ Total assets................................. $1,731,703 $1,605,294 $ 1,546,636 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable (Note 2)................................ $ 456,721 $ 456,721 $ 456,721 Shareholders' equity: Common stock, no par value: Authorized, issued and outstanding shares -- 3,000................................. 200,000 200,000 200,000 Retained earnings.................................... 1,074,982 948,573 889,915 ---------- ---------- ------------ Total shareholders' equity............................. 1,274,982 1,148,573 1,089,915 ---------- ---------- ------------ Total liabilities and shareholders' equity............. $1,731,703 $1,605,294 $ 1,546,636 ========= ========= =========
See accompanying notes. F-21 96 MEADOWVALE SKILLED CARE CENTER, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
YEAR ENDED FIVE MONTHS ENDED SEPTEMBER 30 FEBRUARY 28 ---------------------------------------- ----------------------- 1992 1993 1994 1994 1995 ---------- ---------- ---------- ---------- -------- Lease interest income(Note 3).......................... $ 178,741 $ 166,409 $ 152,629 $ 65,359 $ 59,150 Costs and expenses: Interest.................... 45,672 45,672 45,672 19,030 19,030 Loss on lease............... 25,903 35,510 45,462 16,488 20,696 General and administrative........... 1,958 1,965 2,018 796 838 ---------- ---------- ---------- ---------- -------- Total costs and expenses...... 73,533 83,147 93,152 36,314 40,564 Other expense................. 2,004 57 86 52 44 ---------- ---------- ---------- ---------- -------- Net income.................... 103,204 83,205 59,391 28,993 18,542 Dividends..................... (189,244) (195,600) (185,800) (82,000) (77,200) Retained earnings at beginning of period................... 1,273,417 1,187,377 1,074,982 1,074,982 948,573 ---------- ---------- ---------- ---------- -------- Retained earnings at end of period...................... $1,187,377 $1,074,982 $ 948,573 $1,021,975 $889,915 ========= ========= ========= ========= ========
See accompanying notes. F-22 97 MEADOWVALE SKILLED CARE CENTER, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
YEAR ENDED FIVE MONTHS ENDED SEPTEMBER 30 FEBRUARY 28 ------------------------------------- --------------------- 1992 1993 1994 1994 1995 --------- --------- --------- -------- -------- OPERATING ACTIVITIES Net income....................... $ 103,204 $ 83,205 $ 59,391 $ 28,993 $ 18,542 Adjustments to reconcile net income to net cash provided by operating activities: Changes in other assets........ Deposits.................... -- -- (10,594) -- (4,478) --------- --------- --------- -------- -------- Net cash provided by operating activities..................... 103,204 83,205 48,797 28,993 14,064 FINANCING ACTIVITIES Payments received under sales-type lease............... 88,110 110,048 133,782 51,524 61,940 Dividends........................ (189,244) (195,600) (185,800) (82,000) (77,200) --------- --------- --------- -------- -------- Net cash used in financing activities..................... (101,134) (85,552) (52,018) (30,476) (15,260) --------- --------- --------- -------- -------- Net increase (decrease) in cash........................... 2,070 (2,347) (3,221) (1,483) (1,196) Cash at beginning of period...... 4,997 7,067 4,720 4,720 1,499 --------- --------- --------- -------- -------- Cash at end of period............ $ 7,067 $ 4,720 $ 1,499 $ 3,237 $ 303 ========= ========= ========= ======== ======== Supplemental cash flow information: Cash paid for interest........... $ 45,672 $ 45,672 $ 45,672 $ 19,030 $ 19,030 ========= ========= ========= ======== ========
See accompanying notes. F-23 98 MEADOWVALE SKILLED CARE CENTER, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Meadowvale Skilled Care Center, Inc. (the Company) is the lessor of a nursing home consisting of 120 intermediate care beds in Bluffton, Indiana under a capital lease with Nationwide Care, Inc. as discussed in Note 3. The Company began operations in July 1969. Income Taxes The shareholders of the Company have elected to be taxed as defined by the S Corporation provisions of the Internal Revenue Code. Income and losses are allocated to the shareholders; therefore, no provision is made by the Company for state or federal taxes on income. 2. NOTE PAYABLE
SEPTEMBER 30 --------------------- FEBRUARY 28 1993 1994 1995 -------- -------- ----------- Note payable to a 22% owner of the Company, interest rate of 10%, payable on demand......... $456,721 $456,721 $456,721 ======== ======== ========
3. LEASES The Company entered into a lease on February 28, 1986 with Nationwide Care, Inc. (a related party -- see Note 4) to lease all property and equipment. The term of the lease is for three five year periods and commenced on February 28, 1986 and the lease payment is adjusted annually by the gross national product implicit price deflator twelve month moving average. The lease is classified as a sales-type capital lease and is componentized as follows at September 30, 1994: Total estimated minimum lease payments to be received.................... $2,098,172 Less unearned income..................................................... 801,532 ---------- Net investment in sales-type lease....................................... 1,296,640 Less current portion..................................................... 146,573 ---------- $1,150,067 ==========
Because of the changing annual lease payments, as noted above, an estimated average monthly payment of the lease was used to amortize the lease principal at the initial commencement of the lease. Therefore, the excess of average payments assumed over the actual payments received is classified as interest receivable and will be reduced as actual payments received are in excess of average payments assumed. Future estimated minimum lease payments to be received as of September 30, 1994 are as follows: 1995............................................................. $ 296,721 1996............................................................. 307,403 1997............................................................. 318,469 1998............................................................. 329,934 1999............................................................. 341,812 Thereafter....................................................... 503,833 ---------- $2,098,172 ==========
F-24 99 MEADOWVALE SKILLED CARE CENTER, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. RELATED PARTIES The Company leases the facility to Nationwide Care, Inc., of which an immediate family member of a 25.93% shareholder of the Company owns 51%. Lease payments received were $240,948 in 1992, 1993 and 1994 and $100,395 for the five months ended February 28, 1994 and 1995. 5. PLANNED TRANSACTIONS As of February 27, 1995, the Company entered into an agreement with The Hillhaven Corporation pursuant to which the shareholders of the Company will exchange their shares for 125,000 common shares of The Hillhaven Corporation. It is anticipated that this share exchange will be consummated in June 1995. F-25 100 SHANGRI-LA GENERAL PARTNERSHIP BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30 --------------------------- FEBRUARY 28 1993 1994 1995 ----------- ----------- ----------- ASSETS Current assets: Cash.............................................. $ 7,702 $ 412 $ 11,061 Property and equipment (Notes 2 and 3).............. 1,534,438 1,388,090 1,327,336 Other assets: Deferred loan costs (less accumulated amortization of $13,664, $16,108 and $17,127)............... 33,675 31,231 30,212 ----------- ----------- ----------- Total assets.............................. $ 1,575,815 $ 1,419,733 $ 1,368,609 ========== ========== ========== LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Accounts payable.................................. $ 77,000 $ 35,000 $ 35,000 Advance from partner (Note 4)..................... 313,408 313,408 313,408 Current portion of long-term debt (Note 2)........ 133,561 142,910 129,604 ----------- ----------- ----------- Total current liabilities................. 523,969 491,318 478,012 Lease deposit (Note 3).............................. 400,000 400,000 400,000 Long-term debt, less current portion (Note 2)....... 2,300,378 2,157,468 2,111,411 ----------- ----------- ----------- 2,700,378 2,557,468 2,511,411 Partners' deficit................................... (1,648,532) (1,629,053) (1,620,814) ----------- ----------- ----------- Total liabilities and partners' deficit... $ 1,575,815 $ 1,419,733 $ 1,368,609 ========== ========== ==========
See accompanying notes. F-26 101 SHANGRI-LA GENERAL PARTNERSHIP STATEMENTS OF INCOME (LOSS) AND PARTNERS' DEFICIT (UNAUDITED)
YEAR ENDED FIVE MONTHS ENDED SEPTEMBER 30 FEBRUARY 28 ------------------------------------------- --------------------------- 1992 1993 1994 1994 1995 ----------- ----------- ----------- ----------- ----------- Lease revenue (Note 3).................... $ 359,160 $ 372,084 $ 384,732 $ 160,305 $ 157,075 Costs and expenses: Interest.............. 242,800 227,716 $ 215,448 91,280 86,613 Depreciation and amortization....... 154,027 149,157 148,792 63,017 61,773 General and administrative..... 21,379 1,835 1,013 1,012 450 ----------- ----------- ----------- ----------- ----------- Total costs and expenses.............. 418,206 378,708 365,253 155,309 148,836 Net income (loss)....... (59,046) (6,624) 19,479 4,996 8,239 Partners' deficit at beginning of period... (1,582,862) (1,641,908) (1,648,532) (1,648,532) (1,629,053) ----------- ----------- ----------- ----------- ----------- Partners' deficit at end of period............. $(1,641,908) $(1,648,532) $(1,629,053) $(1,643,536) $(1,620,814) ========== ========== ========== ========== ==========
See accompanying notes. F-27 102 SHANGRI-LA GENERAL PARTNERSHIP STATEMENTS OF CASH FLOWS (UNAUDITED)
YEAR ENDED FIVE MONTHS ENDED SEPTEMBER 30 FEBRUARY 28 ------------------------------------- --------------------- 1992 1993 1994 1994 1995 --------- --------- --------- -------- -------- OPERATING ACTIVITIES Net income (loss)................ $ (59,046) $ (6,624) $ 19,479 $ 4,996 $ 8,239 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 154,027 149,157 148,792 63,017 61,773 Changes in operating assets and liabilities: Accounts receivable......... 116,152 -- -- -- -- Accounts payable............ (102,947) (15,561) (42,000) (10,000) -- --------- --------- --------- -------- -------- Net cash provided by operating activities..................... 108,186 126,972 126,271 58,013 70,012 FINANCING ACTIVITIES Payments on long-term debt....... (183,028) (121,172) (133,561) (54,090) (59,363) --------- --------- --------- -------- -------- Net increase (decrease) in cash........................... (74,842) 5,800 (7,290) 3,923 10,649 Cash at beginning of period...... 76,744 1,902 7,702 7,702 412 --------- --------- --------- -------- -------- Cash at end of period............ $ 1,902 $ 7,702 $ 412 $ 11,625 $ 11,061 ========= ========= ========= ======== ======== Supplemental cash flow information: Cash paid for interest........... $ 242,800 $ 227,716 $ 215,448 $ 91,280 $ 86,613 ========= ========= ========= ======== ========
See accompanying notes. F-28 103 SHANGRI-LA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Shangri-La General Partnership (the Partnership) is a general partnership and is the lessor of a nursing home consisting of 90 intermediate care beds in LaFountaine, Indiana. The Partnership was organized and began operations in August 1986. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed by the straight-line method using the following expected useful lives of the respective assets.
RANGE ----- Buildings.................................................................... 10-25 Land improvements............................................................ 10-15 Furniture and fixtures....................................................... 5-10
Loan Costs Loan costs are amortized over the terms of the mortgage notes. Income Taxes Income and losses of the Partnership are allocated to and reportable by the partners; therefore, no provision is made by the Partnership for state or federal income taxes. 2. LONG-TERM DEBT Long-term debt consisted of the following:
SEPTEMBER 30 ------------------------- FEBRUARY 28 1993 1994 1995 ---------- ---------- ----------- 10% mortgage note payable in monthly installments of $13,413 including interest, collateralized by real estate and personal property, final maturity in 2006................................................. $1,168,522 $1,122,341 $1,101,700 Mortgage note payable in variable monthly installments ($7,145 including 7.19% interest at September 30, 1994) adjusted every six months at 3% over the Treasury Auction Average, collateralized by real estate and personal guarantees of all partners, final maturity in 2007..................................... 711,114 682,121 669,502 Mortgage note payable in variable monthly installments ($4,856 including 7.19% interest at September 30, 1994) adjusted every six months at 3% over the Treasury Auction Average, collateralized by real estate and personal guarantees of all partners, final maturity in 2007..................................... 476,948 456,710 447,898 Other.................................................. 77,355 39,206 21,915 ---------- ---------- ----------- 2,433,939 2,300,378 2,241,015 Less current portion................................... 133,561 142,910 129,604 ---------- ---------- ----------- $2,300,378 $2,157,468 $2,111,411 ========== ========== ==========
F-29 104 SHANGRI-LA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. LONG-TERM DEBT -- (CONTINUED) Maturities of long-term debt for years ending September 30: 1995............................................................. $ 142,910 1996............................................................. 113,527 1997............................................................. 124,291 1998............................................................. 136,086 1999............................................................. 149,012 Thereafter....................................................... 1,634,552
3. LEASES The Company is the lessor of land, building and equipment using an operating lease with the Lessee. The lease covering the land, building and equipment is for 5 years and commenced on October 1, 1991. The lease payments are adjusted annually by the gross national product implicit price deflator twelve month moving average. As provided in the lease agreement, the Company received $400,000 from the Lessee for an option to purchase the facility at the end of the original lease term at a predetermined price. If the Lessee purchases the facility, the deposit will be applied against the purchase price. The option payment is a nonrefundable deposit and will be retained by the Company if the Lessee does not purchase the facility. Property and equipment using the operating lease consists of the following:
SEPTEMBER 30 -------------------------- FEBRUARY 28 1993 1994 1995 ----------- ----------- ----------- Buildings...................................... $ 1,751,573 $ 1,751,573 $ 1,751,573 Equipment...................................... 742,289 742,289 742,289 Land and improvements.......................... 51,405 51,405 51,405 ----------- ----------- ----------- 2,545,267 2,545,267 2,545,267 Less accumulated depreciation.................. 1,010,829 1,157,177 1,217,931 ----------- ----------- ----------- $ 1,534,438 $ 1,388,090 $ 1,327,336 =========== =========== ===========
Future minimum annual rentals to be received on noncancelable leases for years ended September 30 are as follows: 1995.............................................................. $ 394,740 1996.............................................................. 394,740 --------- $ 789,480 =========
4. RELATED PARTY The Partnership has a $313,408 advance from a 30% partner in the Partnership. The advance is non-interest bearing and is payable upon demand. 5. SUBSEQUENT EVENT In March 1995, the lessee informed the Partnership that they intend to exercise their purchase option if they are able to obtain financing for the purchase. In accordance with the lease agreement, the lessee has ninety days to exercise the purchase option after notice to the lessor. F-30 105 SHANGRI-LA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. PLANNED TRANSACTIONS As of February 27, 1995, the partners of the Partnership entered into an agreement with The Hillhaven Corporation pursuant to which the partners will assign their partnership interest to The Hillhaven Corporation in consideration for the assumption of the Partnership's outstanding debt. It is anticipated that this assignment will be consummated in June 1995. F-31 106 ANNEX A Investment Banking Group World Financial Center North Tower New York, New York 10281-1330 Merrill Lynch February 27, 1995 Board of Directors The Hillhaven Corporation 1148 Broadway Plaza, 4th Floor Tacoma, WA 98401-2264 Attention: Bruce L. Busby Chairman of the Board Gentlemen: The Hillhaven Corporation (the "Company"), Acquisition Corp., a wholly owned subsidiary of the Company (the "Purchaser"), and Nationwide Care, Inc., Philippe Enterprises, Inc. and Meadowvale Skilled Care Center, Inc. (collectively, the "Subject Companies") and specified partners of Camelot Care Centers, Shangri-La Partnership and Evergreen Woods, Ltd. (collectively, the "Subject Partnerships" and, together with the Subject Companies, the "Subject Entities") propose to enter into an agreement (the "Agreement") pursuant to which the Subject Companies will be merged with and into the Purchaser and the partners of the Subject Partnerships will assign to the Purchaser such partners' interests in the Subject Partnerships (the "Merger"). Pursuant to the Agreement, the holders of the common stock of the Subject Companies and the partners of the Subject Partnerships, as the case may be, will have the right to receive, in the aggregate, 5,000,000 shares of common stock of the Company (the "Company Shares"), subject to adjustment if the average closing price per Company Share as reported on the New York Stock Exchange for ten days immediately preceding the consummation of the Merger is less than $24, but in no event greater than 5,500,000 Company Shares. You have asked us whether, in our opinion, the proposed consideration to be paid by the Company pursuant to the Merger is fair to the Company from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed the Subject Entities' unaudited financial information for the three fiscal years ended September 30, 1994 and for the quarterly period ending December 31, 1994; (2) Reviewed the Company's Annual Reports, Forms 10-K and related financial information for the three fiscal years ended May 31, 1994 and the Company's Form 10-Q and the related unaudited financial information for the quarterly periods ending August 31, 1994 and November 30, 1994 and certain other filings with the Securities and Exchange Commission made by the Company, including proxy statements and registration statements during the last three years; (3) Reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Subject Entities and the Company, furnished to us by the Subject Entities and the Company; (4) Conducted discussions with members of senior management of the Subject Entities and the Company concerning their respective businesses and prospects and potential synergies which might be realized following the Merger; A-1 107 (5) Compared the results of the operations of the Subject Entities with those of certain companies which we deemed to be reasonably similar to the Subject Entities; (6) Compared the proposed financial terms of the transactions contemplated by the Agreement with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; (7) Considered the pro forma effect of the Merger on the combined company's capitalization ratios and earnings per share; (8) Reviewed a draft of the Agreement dated February 25, 1995; and (9) Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Subject Entities and the Company, and we have not independently verified such information or undertaken an independent appraisal of the assets or liabilities of the Subject Entities or the Company or conducted a physical inspection of the Subject Entities' or the Company's properties or facilities. With respect to the financial forecasts and estimates of potential synergies furnished to us by the Subject Entities and the Company, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Subject Entities or the Company's management as to the expected future financial performance of the Subject Entities or the Company, as the case may be. We have, in the past, provided financial advisory and financing services to the Company. In the ordinary course of our business, we actively trade in the securities of the Company for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. On the basis of, and subject to the foregoing, we are of the opinion that the proposed consideration to be paid by the Company pursuant to the Merger is fair to the Company from a financial point of view. This opinion is solely for the use and benefit of the Company and shall not be disclosed publicly or made available to, or relied upon by, any third party without out prior written approval. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/ James F. Flaherty III ------------------------------------ Managing Director Investment Banking Group A-2 108 ANNEX B INDIANA BUSINESS CORPORATION LAW CHAPTER 44. DISSENTERS' RIGHTS 23-1-44-1. "CORPORATION" DEFINED As used in this chapter, "corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer. 23-1-44-2. "DISSENTER" DEFINED As used in this chapter, "dissenter" means a shareholder who is entitled to dissent from corporate action under section 8 [IC 23-1-44-8] of this chapter and who exercises that right when and in the manner required by sections 10 through 18 [IC 23-1-44-10 -- 23-1-44-18] of this chapter. 23-1-44-3. "FAIR VALUE" DEFINED As used in this chapter, "fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. 23-1-44-4. "INTEREST" DEFINED As used in this chapter, "interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. 23-1-44-5. "RECORD SHAREHOLDER" DEFINED As used in this chapter, "record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent that treatment as a record shareholder is provided under a recognition procedure or a disclosure procedure established under IC 23-1-30-4. 23-1-44-6. "BENEFICIAL SHAREHOLDER" DEFINED As used in this chapter, "beneficial shareholder" means the person who is a beneficial owner of shares held by a nominee as the record shareholder. 23-1-44-7. "SHAREHOLDER" DEFINED As used in this chapter, "shareholder" means the record shareholder or the beneficial shareholder. 23-1-44-8. SHAREHOLDER DISSENT (a) A shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate actions: (1) Consummation of a plan of merger to which the corporation is a party if: (A) Shareholder approval is required for the merger by IC 23-1-40-3 or the articles of incorporation; and (B) The shareholder is entitled to vote on the merger. (2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan. B-1 109 (3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one (1) year after the date of sale. (4) The approval of a control share acquisition under IC 23-1-42. (5) Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. (b) This section does not apply to the holders of shares of any class or series if, on the date fixed to determine the shareholders entitled to receive notice of and vote at the meeting of shareholders at which the merger, plan of share exchange, or sale or exchange of property is to be acted on, the shares of that class or series were: (1) Registered on a United States securities exchange registered under the Exchange Act (as defined in IC 23-1-43-9); or (2) Traded on the National Association of Securities Dealers, Inc. Automated Quotations System Over-the-Counter Markets -- National Market Issues or a similar market. (c) A shareholder: (1) Who is entitled to dissent and obtain payment for the shareholder's shares under this chapter; or (2) Who would be so entitled to dissent and obtain payment but for the provisions of subsection (b); may not challenge the corporate action creating (or that, but for the provisions of subsection (b), would have created) the shareholder's entitlement. 23-1-44-9. BENEFICIAL SHAREHOLDER DISSENT (a) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in the shareholder's name only if the shareholder dissents with respect to all shares beneficially owned by any one (1) person and notifies the corporation in writing of the name and address of each person on whose behalf the shareholder asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which the shareholder dissents and the shareholder's other shares were registered in the names of different shareholders. (b) A beneficial shareholder may assert dissenters' rights as to shares held on the shareholder's behalf only if: (1) The beneficial shareholder submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and (2) The beneficial shareholder does so with respect to all the beneficial shareholder's shares or those shares over which the beneficial shareholder has power to direct the vote. 23-1-44-10. NOTICE OF DISSENTERS' RIGHTS PRECEDING SHAREHOLDER VOTE (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this chapter. (b) If corporate action creating dissenters' rights under section 8 of this chapter is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in section 12 [IC 23-1-44-12] of this chapter. B-2 110 23-1-44-11. NOTICE OF INTENT TO DISSENT (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights: (1) Must deliver to the corporation before the vote is taken written notice of the shareholder's intent to demand payment for the shareholder's shares if the proposed action is effectuated; and (2) Must not vote the shareholder's shares in favor of the proposed action. (b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment for the shareholder's shares under this chapter. 23-1-44-12. NOTICE OF DISSENTERS' RIGHTS FOLLOWING ACTION CREATING RIGHTS (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter. (b) The dissenters' notice must be sent no later than ten (10) days after approval by the shareholders, or if corporate action is taken without approval by the shareholders, then ten (10) days after the corporate action was taken. The dissenters' notice must: (1) State where the payment demand must be sent and where and when certificates for certificated shares must be deposited; (2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (3) Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not the person acquired beneficial ownership of the shares before that date; (4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty (30) nor more than sixty (60) days after the date the subsection (a) notice is delivered; and (5) Be accompanied by a copy of this chapter. 23-1-44-13. DEMAND FOR PAYMENT BY DISSENTER (a) A shareholder sent a dissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12] of this chapter must demand payment, certify whether the shareholder acquired beneficial ownership of the shares before the date required to be set forth in the dissenter's notice under section 12(b)(3) [IC 23-1-44-12(b)(3)] of this chapter, and deposit the shareholder's certificates in accordance with the terms of the notice. (b) The shareholder who demands payment and deposits the shareholder's shares under subsection (a) retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. (c) A shareholder who does not demand payment or deposit the shareholder's share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for the shareholder's shares under this chapter and is considered, for purposes of this article, to have voted the shareholder's shares in favor of the proposed corporate action. B-3 111 23-1-44-14. TRANSFER OF SHARES RESTRICTED AFTER DEMAND FOR PAYMENT (a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under section 16 [IC 23-1-44-16] of this chapter. (b) The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. 23-1-44-15. PAYMENT TO DISSENTER (a) Except as provided in section 17 [IC 23-1-44-17] of this chapter, as soon as the proposed corporate action is taken, or, if the transaction did not need shareholder approval and has been completed, upon receipt of a payment demand, the corporation shall pay each dissenter who complied with section 13 [IC 23-1-44-13] of this chapter the amount the corporation estimates to be the fair value of the dissenter's shares. (b) The payment must be accompanied by: (1) The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen (16) months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; (2) A statement of the corporation's estimate of the fair value of the shares; and (3) A statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. 23-1-44-16. RETURN OF SHARES AND RELEASE OF RESTRICTIONS (a) If the corporation does not take the proposed action within sixty (60) days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. (b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters' notice under section 12 [IC 23-1-44-12] of this chapter and repeat the payment demand procedure. 23-1-44-17. OFFER OF FAIR VALUE FOR SHARES OBTAINED AFTER FIRST ANNOUNCEMENT (a) A corporation may elect to withhold payment required by section 15 [IC 23-1-44-15] of this chapter from a dissenter unless the dissenter was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. (b) To the extent the corporation elects to withhold payment under subsection (a), after taking the proposed corporate action, it shall estimate the fair value of the shares and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of the dissenter's demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares and a statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. 23-1-44-18. DISSENTER DEMAND FOR FAIR VALUE UNDER CERTAIN CONDITIONS (a) A dissenter may notify the corporation in writing of the dissenter's own estimate of the fair value of the dissenter's shares and demand payment of the dissenter's estimate (less any payment under section 15 [IC 23-1-44-15] of this chapter), or reject the corporation's offer under section 17 [IC 23-1-44-17] of this chapter and demand payment of the fair value of the dissenter's shares, if: (1) The dissenter believes that the amount paid under section 15 of this chapter or offered under section 17 of this chapter is less than the fair value of the dissenter's shares; B-4 112 (2) The corporation fails to make payment under section 15 of this chapter within sixty (60) days after the date set for demanding payment; or (3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty (60) days after the date set for demanding payment. (b) A dissenter waives the right to demand payment under this section unless the dissenter notifies the corporation of the dissenter's demand in writing under subsection (a) within thirty (30) days after the corporation made or offered payment for the dissenter's shares. 23-1-44-19. EFFECT OF FAILURE TO PAY DEMAND -- COMMENCEMENT OF JUDICIAL APPRAISAL PROCEEDING (a) If a demand for payment under IC 23-1-42-11 or under section 18 [IC 23-1-44-18] of this chapter remains unsettled, the corporation shall commence a proceeding within sixty (60) days after receiving the payment demand and petition the court to determine the fair value of the shares. If the corporation does not commence the proceeding within the sixty (60) day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. (b) The corporation shall commence the proceeding in the circuit or superior court of the county where a corporation's principal office (or, if none in Indiana, its registered office) is located. If the corporation is a foreign corporation without a registered office in Indiana, it shall commence the proceeding in the county in Indiana where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. (c) The corporation shall make all dissenters (whether or not residents of this state) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. (e) Each dissenter made a party to the proceeding is entitled to judgment. (1) For the amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation; or (2) For the fair value, plus accrued interest, of the dissenter's after-acquired shares for which the corporation elected to withhold payment under section 17 [IC 23-1-44-17] of this chapter. 23-1-44-19. EFFECT OF FAILURE TO PAY DEMAND -- COMMENCEMENT OF JUDICIAL APPRAISAL PROCEEDING (a) If a demand for payment under IC 23-1-42-11 or under section 18 [IC 23-1-44-18] of this chapter remains unsettled, the corporation shall commence a proceeding within sixty (60) days after receiving the payment demand and petition the court to determine the fair value of the shares. If the corporation does not commence the proceeding within the sixty (60) day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. (b) The corporation shall commence the proceeding in the circuit or superior court of the county where a corporation's principal office (or, if none in Indiana, its registered office) is located. If the corporation is a foreign corporation without a registered office in Indiana, it shall commence the proceeding in the county in Indiana where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. B-5 113 (c) The corporation shall make all dissenters (whether or not residents of this state) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. (e) Each dissenter made a party to the proceeding is entitled to judgment. (1) For the amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation; or (2) For the fair value, plus accrued interest, of the dissenter's after-acquired shares for which the corporation elected to withhold payment under section 17 [IC 23-1-44-17] of this chapter. 23-1-44-20. JUDICIAL DETERMINATION AND ASSESSMENT OF COSTS (a) The court in an appraisal proceeding commenced under section 19 [IC 23-1-44-19] of this chapter shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against such parties and in such amounts as the court finds equitable. (b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: (1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of sections 10 through 18 [IC 23-1-44-10 -- 23-1-44-18] of this chapter; or (2) Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. (c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. B-6 114 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Nevada General Corporation Law and the Company's Amended and Restated Articles of Incorporation and Amended and Restated By-Laws permit indemnification of directors and officers in terms sufficiently broad to indemnify officers and directors under certain circumstances for liabilities (including expense reimbursement) arising under the Securities Act of 1933, as amended (the "Securities Act"). The Company also maintains an indemnification agreement with each of its directors and any officer designated by the Company's Board of Directors insuring them against certain liabilities incurred by them in the performance of their duties, including liabilities under the Securities Act. In addition, the Company has directors and officers liability insurance policies. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following Exhibits are filed or incorporated by reference in this Registration Statement: 2.01 Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests by and among The Hillhaven Corporation, Nationwide Care, Inc., Phillippe Enterprises, Inc., Meadowvale Skilled Care Center, Inc. and Specified Partners of Camelot Care Centers, Evergreen Woods, Ltd., and Shangri-La Partnership, dated as of February 27, 1995. 3.01 Amended and Restated Articles of Incorporation of Registrant (Incorporated by reference to Exhibit J to Exhibit 2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1989, as amended) 3.02 Amended and Restated By-Laws of Registrant (Incorporated by reference to Exhibit 3.02 to Registrant's Annual Report on Form 10-K for the year ended May 31, 1994) 5.01 Opinion of Richard P. Adcock* 5.02 Opinion of Woodburn and Wedge* 8.01 Opinion of KPMG Peat Marwick LLP regarding tax matters* 8.02 Opinion of Ice Miller Donadio & Ryan regarding tax matters* 23.01 Consent of KPMG Peat Marwick LLP 23.02 Consent of Ernst & Young LLP 23.03 Consent of Richard P. Adcock (Included in Exhibit 5.01)* 23.04 Consent of Woodburn and Wedge (Included in Exhibit 5.02)* 23.05 Consent of Ice Miller Donadio & Ryan (Included in Exhibit 8.02)* 23.06 Consent of Merrill Lynch, Pierce, Fenner & Smith, Inc.* 24.01 Power of Attorney (included in signature page to this Registration Statement)
- --------------- * To be filed by amendment to this Registration Statement. ITEM 22. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or most recent post-effective amendment thereof) which, individually or in II-1 115 the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8, or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus/Information Statement pursuant to Items 4, 19(b), 11 or 13 of Form S-4 within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. (d) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-2 116 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tacoma, State of Washington, on April 12, 1995. THE HILLHAVEN CORPORATION By: /s/ RICHARD P. ADCOCK ------------------------------------ Richard P. Adcock Senior Vice President and Secretary POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears in this Registration Statement in any capacity hereby constitutes and appoints Bruce L. Busby, Chris Marker, Robert F. Pacquer and Richard P. Adcock, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that the attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------------------ ---------------------------------- --------------- /s/ BRUCE L. BUSBY Chief Executive Officer, Chairman April 12, 1995 - ------------------------------------------ of the Board and Director Bruce L. Busby /s/ CHRIS MARKER President and Director April 12, 1995 - ------------------------------------------ Chris Marker /s/ MARIS ANDERSONS Director April 12, 1995 - ------------------------------------------ Maris Andersons /s/ WALTER F. BERAN Director April 12, 1995 - ------------------------------------------ Walter F. Beran /s/ PETER DE WETTER Director April 12, 1995 - ------------------------------------------ Peter de Wetter /s/ DINAH JACOBS Director April 12, 1995 - ------------------------------------------ Dinah Jacobs
II-3 117
SIGNATURES TITLE DATE - ------------------------------------------ ---------------------------------- --------------- /s/ ROBERT F. PACQUER Senior Vice President and Chief April 12, 1995 - ------------------------------------------ Financial Officer Robert F. Pacquer /s/ JACK O. VANCE Director April 12, 1995 - ------------------------------------------ Jack O. Vance /s/ MICHAEL B. WEITZ Vice President and Principal April 12, 1995 - ------------------------------------------ Accounting Officer Michael B. Weitz /s/ DONALD S. BURNS Director April 12, 1995 - ------------------------------------------ Donald S. Burns
II-4 118 EXHIBIT LIST
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ --------------------------------------------------------------------- ------------- 2.01 Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests by and among The Hillhaven Corporation, Nationwide Care, Inc., Phillippe Enterprises, Inc., Meadowvale Skilled Care Center, Inc. and Specified Partners of Camelot Care Centers, Evergreen Woods, Ltd., and Shangri-La Partnership, dated as of February 27, 1995.......... 3.01 Amended and Restated Articles of Incorporation of Registrant (Incorporated by reference to Exhibit J to Exhibit 2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1989, as amended)..................................... 3.02 Amended and Restated By-Laws of Registrant (Incorporated by reference to Exhibit 3.02 to Registrant's Annual Report on Form 10-K for the year ended May 31, 1994)........................................... 5.01 Opinion of Richard P. Adcock*........................................ 5.02 Opinion of Woodburn and Wedge*....................................... 8.01 Opinion of KPMG Peat Marwick LLP regarding tax matters*.............. 8.02 Opinion of Ice Miller Donadio & Ryan regarding tax matters*.......... 23.01 Consent of KPMG Peat Marwick LLP..................................... 23.02 Consent of Ernst & Young LLP......................................... 23.03 Consent of Richard P. Adcock (Included in Exhibit 5.01)*............. 23.04 Consent of Woodburn and Wedge (Included in Exhibit 5.02)*............ 23.05 Consent of Ice Miller Donadio & Ryan (Included in Exhibit 8.02)*..... 23.06 Consent of Merrill Lunch, Pierce, Fenner & Smith, Inc.*.............. 24.01 Power of Attorney (included in signature page to this Registration Statement).........................................................
- --------------- * To be filed by amendment to this Registration Statement. EX-2.01 2 EXHIBIT 2.01 1 ============================================================================== AMENDED AND RESTATED AGREEMENT AND PLAN OF SHARE EXCHANGE AND AGREEMENTS TO ASSIGN PARTNERSHIP INTERESTS BY AND AMONG THE HILLHAVEN CORPORATION NATIONWIDE CARE, INC. PHILLIPPE ENTERPRISES, INC. MEADOWVALE SKILLED CARE CENTER, INC. AND SPECIFIED PARTNERS OF CAMELOT CARE CENTERS EVERGREEN WOODS, LTD. AND SHANGRI-LA PARTNERSHIP DATED AS OF FEBRUARY 27, 1995 ============================================================================== 2 TABLE OF CONTENTS
PAGE ---- Preliminary Statement................................................................... 1 Terms and Conditions.................................................................... 2 ARTICLE I The Share Exchanges................................................... 2 SECTION 1.1. Share Exchanges....................................................... 2 SECTION 1.2. Effective Time of Share Exchanges..................................... 2 SECTION 1.3. Other Actions......................................................... 2 ARTICLE II Corporate Governance.................................................. 3 SECTION 2.1. [Intentionally Omitted]............................................... 3 SECTION 2.2. Directors and Officers................................................ 3 ARTICLE III Exchange of Shares; Assignment of Partnership Interests; Prepayment of Subordinated Notes and Redemption of Preferred Stock......................................... 3 SECTION 3.1. Effect of Share Exchanges............................................. 3 SECTION 3.2. Consideration for Share Exchanges..................................... 3 SECTION 3.3. Escrow................................................................ 3 SECTION 3.4. Surrender and Payment for the Target Common Shares.................... 4 SECTION 3.5. Redemption of Nationwide Subordinated Notes and Nationwide Preferred Stock................................................................. 5 ARTICLE IV Representations and Warranties of Corporate Targets and Partners...... 5 SECTION 4.1. Organization; Power................................................... 5 SECTION 4.2. Capital Stock......................................................... 5 SECTION 4.3. Authority; No Violation............................................... 6 SECTION 4.4. Consents and Approvals................................................ 6 SECTION 4.5. Transactions with Certain Persons..................................... 6 SECTION 4.6. Books and Records..................................................... 7 SECTION 4.7. Financial Statements.................................................. 7 SECTION 4.8. Absence of Undisclosed Liabilities.................................... 7 SECTION 4.9. Actions Pending....................................................... 7 SECTION 4.10. Outstanding Debt and Related Matters.................................. 7 SECTION 4.11. Tax Matters........................................................... 7 SECTION 4.12. Absence of Changes or Events.......................................... 8 SECTION 4.13. Compliance with Laws; No Default...................................... 9 SECTION 4.14. Property.............................................................. 9 SECTION 4.15. Contracts............................................................. 10 SECTION 4.16. Licenses and Permits.................................................. 11 SECTION 4.17. Proprietary Information............................................... 11 SECTION 4.18. Title to Assets and Related Matters................................... 11 SECTION 4.19. Environmental Matters................................................. 11 SECTION 4.20. Labor Relations; Employees............................................ 12 SECTION 4.21. Employee Benefit Plans................................................ 13 SECTION 4.22. Insurance............................................................. 13 SECTION 4.23. Life Care Contracts................................................... 13 SECTION 4.24. Survey Reports........................................................ 13
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PAGE ---- SECTION 4.25. Payment Programs...................................................... 13 SECTION 4.26. Gratuitous Payments................................................... 14 SECTION 4.27. Brokers' or Finders' Fees............................................. 14 SECTION 4.28. Disclosure............................................................ 14 SECTION 4.29. Tax Representations................................................... 15 SECTION 4.30. Representations and Warranties as of Date Hereof; No Other Representations and Warranties............................... 15 ARTICLE V Representations and Warranties of Acquiror............................ 15 SECTION 5.1. Organization; Power................................................... 15 SECTION 5.2. Capital Stock......................................................... 15 SECTION 5.3. Authority; No Violation; Etc.......................................... 15 SECTION 5.4. Consents and Approvals................................................ 16 SECTION 5.5. Reports............................................................... 16 SECTION 5.6. Due Authorization of Shares........................................... 16 SECTION 5.7. Compliance with Laws; No Default or Litigation........................ 16 SECTION 5.8. Tax Representations................................................... 17 SECTION 5.9. Brokers' or Finders' Fees............................................. 17 SECTION 5.10. Representations and Warranties as of Date Hereof...................... 17 ARTICLE VI Certain Pre-Closing Covenants of the Targets.......................... 17 SECTION 6.1. Maintenance of Corporate Status....................................... 17 SECTION 6.2. No Change in Capitalization........................................... 17 SECTION 6.3. Shareholders Meetings................................................. 17 SECTION 6.4. Operation of the Business............................................. 18 SECTION 6.5. Other Offers.......................................................... 18 SECTION 6.6. Compliance with the Securities Act; Affiliates........................ 18 SECTION 6.7. Taxes................................................................. 19 SECTION 6.8. Access; Review........................................................ 19 SECTION 6.9. Insurance............................................................. 19 SECTION 6.10. Monthly Financial Statements.......................................... 19 SECTION 6.11. Approvals, Notices and Consents....................................... 19 SECTION 6.12. The Targets' Actions; Supplements to Representations and Warranties... 19 SECTION 6.13. Notice of Material Adverse Change..................................... 20 SECTION 6.14. Pooling............................................................... 20 SECTION 6.15. Tax Statements........................................................ 20 SECTION 6.16. Cooperation........................................................... 20 SECTION 6.17. Nationwide to Use Its Best Efforts to Terminate Option................ 20 ARTICLE VII Certain Pre-Closing Covenants of Acquiror............................. 20 SECTION 7.1. Required Consents and Approvals....................................... 20 SECTION 7.2. Pre-transaction Notification.......................................... 20 SECTION 7.3. Registration Statement; NYSE Listing.................................. 20 SECTION 7.4. Notice of Material Adverse Change..................................... 20 SECTION 7.5. Pooling Actions....................................................... 20 SECTION 7.6. Pooling Letter........................................................ 21
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PAGE ---- SECTION 7.7. Tax Statements........................................................ 21 SECTION 7.8. Environmental Surveys................................................. 21 SECTION 7.9. Cooperation........................................................... 21 ARTICLE VIII Conditions Precedent to the Performance of Acquiror................... 21 SECTION 8.1. Accuracy of Representations and Warranties of the Targets............. 21 SECTION 8.2. Compliance............................................................ 21 SECTION 8.3. Approval.............................................................. 21 SECTION 8.4. HSR Act Approval...................................................... 21 SECTION 8.5. Authorizations........................................................ 21 SECTION 8.6. Litigation............................................................ 22 SECTION 8.7. No Material Adverse Change............................................ 22 SECTION 8.8. Closing Deliveries.................................................... 22 SECTION 8.9. Dissenters' Rights.................................................... 22 SECTION 8.10. Pooling Letter........................................................ 22 SECTION 8.11. Exercise of Warrants.................................................. 22 SECTION 8.12. Tax Opinions.......................................................... 22 SECTION 8.13. Lease Extensions...................................................... 22 SECTION 8.14. Option Termination.................................................... 24 ARTICLE IX Conditions Precedent to Performance of the Corporate Targets and Partners.............................................................. 22 SECTION 9.1. Accuracy of Representations and Warranties of Acquiror................ 22 SECTION 9.2. Compliance............................................................ 22 SECTION 9.3. Corporate Approval.................................................... 22 SECTION 9.4. Authorizations........................................................ 22 SECTION 9.5. Registration Statement................................................ 23 SECTION 9.6. Litigation............................................................ 23 SECTION 9.7. No Material Adverse Change............................................ 23 SECTION 9.8. HSR Act Waiting Periods............................................... 23 SECTION 9.9. Closing Deliveries.................................................... 23 SECTION 9.10. Tax Opinions.......................................................... 23 SECTION 9.11. Release of Guarantees................................................. 23 ARTICLE X Termination........................................................... 23 SECTION 10.1. Termination by Mutual Agreement....................................... 23 SECTION 10.2. Termination by Acquiror............................................... 23 SECTION 10.3. Termination by the Corporate Targets and Partners..................... 24 ARTICLE XI Additional Agreements................................................. 24 SECTION 11.1. Confidentiality....................................................... 24 SECTION 11.2. Employee Benefit Matters.............................................. 24 SECTION 11.3. Agreements Respecting Meadowvale...................................... 24 SECTION 11.4. Preservation of Tax-Free Reorganization Treatment..................... 24 SECTION 11.5. Publication of Financial Results...................................... 25 SECTION 11.6. The Shangri-La Partners............................................... 25
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PAGE ---- ARTICLE XII The Closing........................................................... 25 SECTION 12.1. Time and Place........................................................ 25 SECTION 12.2. Deliveries to Acquiror at the Closing................................. 25 SECTION 12.3. Deliveries to the Targets at the Closing.............................. 26 ARTICLE XIII Indemnification....................................................... 26 SECTION 13.1. Indemnification of Acquiror........................................... 26 SECTION 13.2. Threshold and Maximum Amounts......................................... 26 SECTION 13.3. Survival of Indemnification Obligations............................... 27 ARTICLE XIV Supplemental Indemnification.......................................... 27 SECTION 14.1. Supplemental Indemnification of Acquiror.............................. 27 SECTION 14.2. Maximum Amounts....................................................... 27 SECTION 14.3. Survival of Indemnification Obligations............................... 28 ARTICLE XV Miscellaneous Provisions.............................................. 28 SECTION 15.1. Survival of Representations and Warranties............................ 28 SECTION 15.2. Definition of Knowledge............................................... 28 SECTION 15.3. Counterparts.......................................................... 28 SECTION 15.4. Entire Agreement...................................................... 28 SECTION 15.5. Exhibits and Schedules................................................ 28 SECTION 15.6. Parties in Interest................................................... 28 SECTION 15.7. Expenses.............................................................. 29 SECTION 15.8. Gender................................................................ 29 SECTION 15.9. Governing Law......................................................... 29 SECTION 15.10. Headings.............................................................. 29 SECTION 15.11. Modification and Waiver............................................... 29 SECTION 15.12. Notices............................................................... 29 SECTION 15.13. Press Releases........................................................ 30 SECTION 15.14. Rights of Parties..................................................... 30 SECTION 15.15. Successors............................................................ 30 SECTION 15.16. Intent; Construction.................................................. 30 SECTION 15.17. Release............................................................... 30
-iv- 6 AMENDED AND RESTATED AGREEMENT AND PLAN OF SHARE EXCHANGE AND AGREEMENTS TO ASSIGN PARTNERSHIP INTERESTS This Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests (the "Agreement") dated as of the 27th day of February, 1995, is by and among The Hillhaven Corporation, a Nevada Corporation ("Acquiror"), Nationwide Care, Inc., an Indiana corporation ("Nationwide"), Phillippe Enterprises, Inc., an Indiana corporation ("PEI"), Meadowvale Skilled Care Center, Inc., an Indiana corporation ("Meadowvale") (Nationwide, PEI and Meadowvale are collectively referred to herein as the "Corporate Targets"), the partners of Camelot Care Centers, an Indiana general partnership ("Camelot"), (subject to Section 11.6 hereof) the partners of Shangri-La Partnership, an Indiana general partnership ("Shangri-La") and the limited partners of Evergreen Woods, Ltd., a Florida limited partnership ("Evergreen") (Camelot, Shangri-La and Evergreen are collectively referred to herein as the "Partnership Targets"; the partners of Camelot and Shangri-La and the limited partners of Evergreen are collectively referred to herein as the "Partners"; the interests in the Partnerships held by the Partners are collectively referred to herein as the "Partnership Interests"). The Corporate Targets and the Partnership Targets are collectively referred to herein as the "Targets." PRELIMINARY STATEMENT Acquiror and its subsidiaries operate nursing centers, pharmacies and retirement housing communities. Nationwide and its subsidiaries operate long-term health care centers located in Indiana, Ohio and Florida. Dr. Thomas E. Phillippe, Sr. and Thomas E. Phillippe, Jr. (the "Phillippes") are the majority owners of Nationwide. Shangri-La, which is owned by the Phillippes and two other parties, owns an 81-bed long term care health care facility. PEI is wholly-owned by the Phillippes and owns a 90 bed assisted living center in Florida managed by Nationwide. Meadowvale is owned by certain relatives of the Phillippes. Meadowvale owns a 120 bed long-term care center in Indiana leased by Nationwide. Each of Camelot and Evergreen operates long term care facilities. Nationwide owns in excess of 95% of the Partnership Interests of Camelot and Evergreen. The capital structure of Acquiror consists of 60 million authorized shares of Common Stock, par value $0.75 per share, of which approximately 32,824,863 are outstanding (the "Acquiror Common Shares"); 25 million authorized shares of preferred stock, par value $0.15 per share, of which the following series have been designated: 3 million authorized shares of Series A Preferred Stock, of which no shares are outstanding; 950 authorized shares of Series B Convertible Preferred Stock, of which 618 shares have been designated as Subseries 1, of which no shares are outstanding; 35,000 authorized shares of Series C Preferred Stock, all of which are outstanding; and 300,000 authorized shares of Series D Preferred Stock, of which approximately 63,403 shares are outstanding. The capital structure of Nationwide consists of 48,000,000 authorized shares of Common Stock, without par value, of which 7,431,458 shares are issued and outstanding (the "Nationwide Voting Common"); 2,000,000 authorized shares of Nonvoting Common Stock, without par value, of which 76,592 shares are issued and outstanding (the "Nationwide Nonvoting Common")(the Nationwide Voting Common and the Nationwide Nonvoting Common are collectively referred to herein as the "Nationwide Common Shares"); and 2,000,000 authorized shares of Preferred Stock, without par value, of which 300,000 shares of Redeemable Preferred Stock are issued and outstanding (the "Nationwide Preferred Stock"). Nationwide also has outstanding warrants to purchase 987,188 shares of Nationwide Nonvoting Common (the "Nationwide Warrants"), which will be exercised prior to the Closing (as defined in Section 12.1). The capital structure of PEI consists of 10,000 authorized shares of Common Stock, without par value, of which 2,000 are issued and outstanding (the "PEI Common Shares"). The capital structure of Meadowvale consists of 3,000 authorized shares of Common Stock, without par value, of which 3,000 are issued and outstanding (the "Meadowvale Common Shares"). The Nationwide Common Shares, PEI Common Shares and Meadowvale Common Shares are collectively referred to herein as the "Target Common Shares." Nationwide owns substantially all of each of the Partnerships, except that Shangri-La is controlled by the Phillippes. The ownership of the Partnerships is as set forth in Section 1 of the statement of disclosure delivered by the 7 Corporate Targets and the Partners to Acquiror in connection with the execution of this Agreement (the "Disclosure Statement"). The parties to this Agreement previously had executed an Agreement and Plan of Merger and Agreements to Assign Partnership Interests, dated as of February 27, 1995 (the "Original Agreement"). Subsequent to execution of the Original Agreement, the parties determined to restructure the acquisitions of the Corporate Targets in the form of statutory share exchanges, whereby all of the outstanding common stock of each of the Corporate Targets would be exchanged for Acquiror Common Shares (the "Share Exchanges"), so that the transactions contemplated thereby would be treated as a "reorganization" within the meaning of Sections 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). The parties to the Original Agreement have therefore executed this Agreement to amend and restate the Original Agreement. The Board of Directors of Acquiror deems the Share Exchanges pursuant to the terms of this Agreement desirable and in the best interests of Acquiror. The Board of Directors of each of the Corporate Targets deems each respective Share Exchange desirable and in the best interests of the respective Corporate Target. The Board of Directors of Acquiror has, by resolutions duly adopted, approved this Agreement. The Board of Directors of each of the Corporate Targets has, by resolutions duly adopted, approved this Agreement. The question of approval of each of the Share Exchanges will be submitted to the shareholders of each of the respective Corporate Targets. In connection with this Agreement, the Phillippes have agreed to approve the Share Exchanges. Each of the Partners deems the assignment of his, her or its Partnership Interests to be desirable and in his, her or its best interest and, where appropriate, has approved such assignment. It is intended that the Share Exchanges shall qualify for treatment as "poolings of interests" transactions. TERMS AND CONDITIONS In consideration of the mutual covenants, agreements, representations and warranties contained in this Agreement, and intending to be legally bound thereby, the parties agree to amend and restate the Original Agreement in its entirety as follows. ARTICLE I THE SHARE EXCHANGES SECTION 1.1. Share Exchanges. Upon the terms and subject to the satisfaction of the conditions precedent contained in this Agreement, each of the shareholders of the Corporate Targets shall exchange their respective Target Common Shares for Acquiror Common Shares. The Share Exchanges shall be effected pursuant to the provisions of and with the effect provided in the Indiana Business Corporation Law (the "BCL") and the Nevada General Corporation Law (the "NCL"). SECTION 1.2. Effective Time of Share Exchanges. If (a) all of the conditions precedent to the Share Exchanges as set forth in Article VIII and Article IX of this Agreement are satisfied or waived, and (b) this Agreement is not terminated prior to the Closing (as permitted by the provisions of this Agreement, then as soon as reasonably practicable following the Closing, Acquiror and the Corporate Targets shall cause Articles of Share Exchange conforming to the requirements of the BCL and the NCL (the "Articles of Share Exchange") to be filed with the Secretary of State of the State of Indiana (the "Indiana Secretary of State") and the Secretary of State of the State of Nevada (the "Nevada Secretary of State") with respect to each of the Share Exchanges, in the manner provided under the BCL and the NCL. The Share Exchanges shall become effective as of 12:01 a.m., Eastern Standard Time, on the date following the date of such filing of the Articles of Share Exchange (the "Effective Time"). SECTION 1.3. Other Actions. If after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the officers and directors of Acquiror shall have the authority to take that action. -2- 8 ARTICLE II CORPORATE GOVERNANCE SECTION 2.1. [Intentionally Omitted]. SECTION 2.2. Directors and Officers. The persons set forth in Schedule 2.2 shall become the directors and officers, respectively, of each of the Corporate Targets at the Effective Time, to serve until their successors shall have been elected or appointed and qualified in the manner provided in their respective Articles of Incorporation and Bylaws, or as otherwise provided by law. ARTICLE III EXCHANGE OF SHARES; ASSIGNMENT OF PARTNERSHIP INTERESTS; PREPAYMENT OF SUBORDINATED NOTES AND REDEMPTION OF PREFERRED STOCK SECTION 3.1. Effect of Share Exchanges. At the Effective Time, each of the Target Common Shares will be exchanged for Acquiror Common Shares as provided in this Agreement, and the former holders of Target Common Shares will be entitled only to the exchange rights provided in this Agreement. SECTION 3.2. Consideration for Share Exchanges. (a) As of the Effective Time, the Target Common Shares issued and outstanding immediately prior to the Effective Time shall be exchanged for the number of Acquiror Common Shares as set forth in Schedule 3.2 (subject to adjustment as described in Section 3.2(c), below) to this Agreement. At the Closing, the Partners of the Partnerships (except Nationwide) shall assign to Nationwide, free and clear of all liens, security interests and encumbrances, their Partnership Interests and shall receive in exchange the number of Acquiror Common Shares as is set forth in Schedule 3.2 (subject to adjustment as described in Section 3.2(c), below). The total consideration to be received by holders of the Target Common Shares and by the Partners of the Partnerships in connection with the transactions contemplated herein is referred to herein as the "Exchange Consideration." (b) The Exchange Consideration shall consist of five million (5,000,000) Acquiror Common Shares, provided that the average closing price of one Acquiror Common Share as reported on the New York Stock Exchange ("NYSE") for the ten (10) trading days immediately preceding the Closing Date (the "Trading Price") is greater than or equal to Twenty-Four Dollars ($24.00). If the Trading Price is less than Twenty-Four Dollars ($24.00), the Exchange Consideration shall consist of the number (the "Consideration Number") of Acquiror Common Shares equal to the quotient of (i) One Hundred Twenty Million Dollars ($120,000,000), divided by the Trading Price; provided, however, that the Consideration Number shall not be greater than five and one-half million (5,500,000) Acquiror Common Shares. (c) The allocation of Acquiror Common Shares among the Corporate Targets and the Partners set forth in Schedule 3.2 shall be determined assuming that the Exchange Consideration consists of five million (5,000,000) Acquiror Common Shares. In the event of an adjustment in the Exchange Consideration as provided in Section 3.2(b), above, the number of Acquiror Common Shares to be received in exchange for each Target Common Share and each Partnership Interest, respectively, shall be multiplied by a fraction, the numerator of which is the number of Acquiror Common Shares which comprise the Exchange Consideration as adjusted pursuant to Section 3.2(b), above, and the denominator of which is five million (5,000,000). SECTION 3.3. Escrow. As security for, and as the sole source for satisfaction of, the indemnification obligations provided for in Article XIII (except as provided in the proviso to Section 13.2(b) hereof), ten percent (10%) of the number of Acquiror Common Shares received by the shareholders of the Corporate Targets and the Partners that comprise the Exchange Consideration shall be transferred by the shareholders of the Corporate Targets and the Partners to and held by Bank One, Indianapolis, N.A., as escrow agent, in escrow for the period and in accordance with the other terms, conditions and procedures set forth in the Escrow Agreement attached hereto as Exhibit 3.3(a) (the "Escrow"). In addition, as security for the indemnification obligations provided for in Article XIV, five percent (5%) of the number of Acquiror Common -3- 9 Shares received by the shareholders of the Corporate Targets and the Partners that comprise the Exchange Consideration shall be transferred by the shareholders of Nationwide to and held by Bank One, Indianapolis, N.A., as escrow agent, in escrow for the period and in accordance with the other terms, conditions and procedures set forth in the Supplemental Escrow Agreement attached hereto as Exhibit 3.3(b) (the "Supplemental Escrow"); provided that the Acquiror Common Shares to be delivered to the Supplemental Escrow shall be deducted pro rata solely from the Acquiror Common Shares to be delivered to the shareholders of Nationwide. SECTION 3.4. Surrender and Payment for the Target Common Shares. (a) At the Closing, each holder of Target Common Shares shall deliver to Acquiror each certificate (a "Certificate") for such shares held of record by such holder. Risk of loss and title to the Certificates shall pass upon delivery of the certificates to Acquiror. At the Closing, each Partner shall deliver to Acquiror such documents and instruments agreed to by Acquiror and the Partners. Promptly following the Effective Time, Acquiror shall deliver to (i) each holder so delivering his, her or its Certificate(s) or assigning his, her or its Partnership Interest in exchange therefor the Acquiror Common Shares such holder would be entitled to receive under Section 3.2, less such Acquiror Common Shares to be escrowed pursuant to Section 3.3 and (ii) the Escrow and the Supplemental Escrow, the balance of the Acquiror Common Shares otherwise deliverable pursuant to Sections 3.2 and 3.3. (b) No certificates or scrip representing fractional Acquiror Common Shares shall be issued in the Share Exchanges or in connection with the assignment of the Partnership Interests and no holder of any such fractional share interest shall be entitled to vote, to receive any dividends or other distributions paid or declared on Acquiror Common Shares, or to exercise any other rights as a shareholder of Acquiror with respect to such fractional share interest. (c) Each holder of Target Common Shares as of the Effective Time shall be entitled to receive the applicable Exchange Consideration upon surrender to the Acquiror of the Certificates representing the Target Common Shares owned by the shareholder. Each Partner shall be entitled to receive the consideration specified in Section 3.2 upon execution and delivery of such documents and instruments to be agreed to by Acquiror and the Partners. (d) In the event that any Certificate representing Target Common Shares is lost, stolen or destroyed, Acquiror may require as a condition to the payment of the Exchange Consideration with respect to such Target Common Shares pursuant to this Agreement that the holder of such Target Common Shares execute such affidavits and indemnities as Acquiror shall reasonably require. (e) In the event a dividend or other distribution is declared by Acquiror on the Acquiror Common Shares the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all Acquiror Common Shares issuable pursuant to this Agreement; provided that no dividend or other distribution declared or made on the Acquiror Common Shares shall be paid to the holder of any unsurrendered Certificate with respect to the Acquiror Common Shares (including those Acquiror Common Shares deliverable into the Escrow or the Supplemental Escrow) represented thereby until the holder of such Certificate shall duly surrender such Certificate in accordance with this Section 3.4; and provided further that no holder of any unsurrendered Certificate shall have any rights (including voting rights, if applicable) with respect to Acquiror Common Shares (including those Acquiror Common Shares deliverable into the Escrow or the Supplemental Escrow) represented thereby until the holder of such Certificate shall duly surrender such Certificate in accordance with this Section 3.4. (f) If, after the Effective Time, Certificates are presented to Acquiror, they shall be exchanged for the Exchange Consideration deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this Section 3.4. (g) Following the Effective Time, if Certificates previously representing Target Common Shares are not delivered to Acquiror or the payment of Exchange Consideration therefor is not claimed prior to the date on which such payments would otherwise escheat or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and any other applicable law, become -4- 10 the property of Acquiror (and to the extent not in its possession shall be paid over to it), free and clear of all claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, neither Acquiror nor any other person shall be liable to any former holder of Target Common Shares for any amount delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. SECTION 3.5. Redemption of Nationwide Subordinated Notes and Nationwide Preferred Stock. At the Closing, the Subordinated Notes of Nationwide, as set forth on Schedule 3.5 (the "Nationwide Subordinated Notes") shall be prepaid by Acquiror, in accordance with the terms thereof; provided, however, that no "Additional Premium" (as that term is defined in that certain Subordinated Note Purchase Agreement dated as of July 27, 1993 between Nationwide and Continental Bank, N.A.) shall be incurred in connection with the prepayment of the Nationwide Subordinated Notes. At the Closing, the Nationwide Preferred Stock shall be redeemed by Nationwide, in accordance with the terms thereof. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CORPORATE TARGETS AND PARTNERS For purposes of this Article IV, each of the representations and warranties of the Corporate Targets shall be deemed to have been made with respect to the Corporate Targets and their respective subsidiaries. As a material inducement to Acquiror to enter into this Agreement and to consummate the transactions contemplated hereby, the Corporate Targets and the Partners jointly and severally represent and warrant to Acquiror that: SECTION 4.1. Organization; Power. Each of the Corporate Targets is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of the Corporate Targets is qualified as a foreign corporation to transact business and is in good standing in each jurisdiction, if any, in which the conduct of its business or the ownership or leasing of its properties requires it to be so qualified. Each business entity in which any of the Targets owns an equity interest, together with such entity's jurisdiction of organization and such Target's percentage ownership interest therein and the states in which the Targets and each such entity are qualified as a foreign corporation or otherwise are listed in Section 4.1 of the Disclosure Statement. Each of the Corporate Targets has all requisite corporate power and authority to own, lease and operate its business as it is now being conducted, and to enter into, execute and deliver this Agreement, to consummate the transactions contemplated hereby, and to comply with and fulfill the terms and conditions hereof. Each of the Corporate Targets has delivered to Acquiror (a) true and complete copies of its Articles of Incorporation, as may be amended or restated, certified by the Indiana Secretary of State, (b) Certificates of Existence issued by the Indiana Secretary of State and by any other state in which it is qualified to do business and (c) a copy of its Bylaws, as currently in effect, certified as true and complete by the respective Corporate Target's Secretary. Each of the Partnerships has been duly formed under the laws of its jurisdiction of formation. Each of the Partnerships is duly qualified to do business in each jurisdiction in which the conduct of its business or the ownership or leasing of its properties requires it to be so qualified. Each of the Partners has all requisite power and authority to enter into, execute and deliver this Agreement, to consummate the transactions contemplated hereby, and to comply with and fulfill the terms and conditions hereof. The Partners have delivered to Acquiror true and complete copies of the partnership agreements of each of the Partnerships. SECTION 4.2. Capital Stock. The authorized capital stock of each of the Corporate Targets is as set forth in the Preliminary Statement of this Agreement. All issued and outstanding Common Shares of each Corporate Target are validly issued and outstanding, fully paid and nonassessable. Except as set forth in Section 4.2 of the Disclosure Statement, there are no outstanding warrants, options, agreements, convertible securities or other commitments pursuant to which any of the Corporate Targets are or may become obligated to issue any Target Common Shares or other securities of any of the Corporate Targets. Except as set forth in Section 4.2 of the Disclosure Statement, there are not outstanding any agreements or commitments pursuant to which any of the Corporate Targets are or may become obligated to purchase or redeem any of the Target Common Shares or other securities. The ownership of the Partnerships is as set forth in Section 1 of the Disclosure Statement. -5- 11 SECTION 4.3. Authority; No Violation. (a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of each of the Corporate Targets and the Partners. This Agreement is a valid and binding obligation of each of the Corporate Targets and the Partners, enforceable against each of them in accordance with its terms and conditions, except as the enforcement hereof may be limited by bankruptcy, insolvency, moratorium or other laws relating to or limiting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. (b) Except as set forth in Section 4.3 of the Disclosure Statement, neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by each of the Corporate Targets and the Partners with any of the provisions hereof, will: (i) conflict with, violate, result in a breach of, constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under, or give rise to any right of termination, cancellation or acceleration under any provision of the Articles of Incorporation, Bylaws or partnership agreements of any of the Targets, or any of the terms, conditions or provisions of any note, lien, bond, mortgage, indenture, license, lease, contract, commitment, agreement, understanding, arrangement, restriction or other instrument or obligation to which any of the Corporate Targets or Partners is a party or by which any of the Corporate Targets or Partners may be bound; (ii) violate any law, rule or regulation of any government or governmental agency or body, or any judgment, order, writ, injunction or decree of any court, administrative agency or governmental agency or body applicable to any of the Targets; or (iii) constitute an event that, with or without notice, lapse of time or action by a third party, could result in the creation of any lien, charge or encumbrance upon any of the assets of any of the Targets or cause the maturity of any liability, obligation or debt of any of the Targets to be accelerated or increased. SECTION 4.4. Consents and Approvals. Except in connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), the Securities Act of 1933, as amended ("Securities Act"), the Securities Exchange Act of 1934, as amended ("Exchange Act"), the approval of the shareholders of each of the Corporate Targets under the BCL and as set forth in Section 4.4 of the Disclosure Statement, the execution, delivery and performance of this Agreement by each of the Corporate Targets and the Partners, and the consummation of the transactions contemplated hereby, will not require any notice to, action of, filing with, or consent, authorization, order or approval from any court, administrative agency or other governmental authority or agency, or any individual, corporation, partnership, joint venture, association, firm, organization, group or any other entity or enterprise. Any and all notices, actions, filings, consents, authorizations, orders and approvals necessary to consummate the transactions contemplated by this Agreement shall have been made and obtained on or prior to and shall be in effect as of the Effective Time. SECTION 4.5. Transactions with Certain Persons. Except as set forth in Section 4.5 of the Disclosure Statement, during the past two years no Target has, directly or indirectly, in the ordinary course of business or otherwise, purchased, leased or otherwise acquired any property or obtained any services from, or sold, leased or otherwise disposed of any property or furnished any services (except with respect to remuneration for services rendered as a director, officer or employee of any of the Targets in the ordinary course of business) to, any current or former director, officer, employee or consultant of any of the Targets, any person who is the beneficial owner (within the meaning of Rule 13d-3 of the SEC under the Exchange Act) of 5% or more of the outstanding Target Common Shares or any "affiliate" of any of the Targets as defined in Rule 12b-2 under the Exchange Act (individually an "Affiliate"). None of the Targets owes any amount to, or has any contract with or commitment to, any Affiliate (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business), and no such Affiliate owes any amount to any of the Targets. No properties or assets owned by any Affiliate or by any subsidiary or affiliate of any Affiliate is used by any of the Targets in connection with their respective businesses. No Affiliate is or during the past three years has been the direct or indirect owner of any interest in any entity that is a -6- 12 competitor or supplier or a potential competitor or supplier of any of the Targets, nor does any Affiliate receive or has any Affiliate received income from any source other than the Targets that relates to the business of the Targets or should properly accrue to the Targets. SECTION 4.6. Books and Records. The minute books of each of the Corporate Targets as previously made available to Acquiror contain accurate records of all meetings of and corporate actions or written consents by the respective Board of Directors, any committee thereof, and the shareholders of each of the Corporate Targets. There have been no material transactions involving the business of any of the Corporate Targets that should have been set forth in the respective books of account, minute book, stock record book or stock transfer ledger, but which have not been accurately set forth therein. SECTION 4.7. Financial Statements. True and complete copies of the consolidated balance sheets of Nationwide as of September 30, 1994 and 1993, and the related statements of income, other shareholders' equity and cash flows for the years then ended, as audited by Ernst & Young LLP, Certified Public Accountants, (collectively, the "Audited Financial Statements") and the unaudited consolidated balance sheets of the Targets as of December 31, 1994 and 1993, and the related statements of income for the year and, in the case of Nationwide, the three months then ended (the "Unaudited Financial Statements"), are set forth in Section 4.7 of the Disclosure Statement. The Audited Financial Statements and the Unaudited Financial Statements (collectively the "Financial Statements") (including any related schedules and/or notes) present fairly in all material respects, the financial position of the Targets at the dates thereof and the results of their operations and their cash flows for the periods then ended, in conformity with generally accepted accounting principles. SECTION 4.8. Absence of Undisclosed Liabilities. Except as set forth or reserved against on the face of the balance sheets of any of the Targets included in the Financial Statements ("Target Balance Sheets") or in Section 4.8 of the Disclosure Statement, as of the date of the respective Target Balance Sheets, none of the Targets had any debts, liabilities or obligations of any nature whatsoever (known or unknown, matured or unmatured, absolute, accrued, fixed, contingent or otherwise, including, without limitation, any foreign or domestic tax liabilities or deferred tax liabilities incurred in respect of or measured by any Target's income, and products liability or any other liability attributable to defects in products, materials or workmanship not covered by insurance) that are required by generally accepted accounting principles to be so set forth or reserved against that are not set forth or reserved against on the Target Balance Sheets. SECTION 4.9. Actions Pending. Section 4.9 of the Disclosure Statement lists all actions, suits and proceedings pending, or to the knowledge of each of the Targets, threatened (whether or not purportedly brought on behalf of any of the Targets), and all investigations, to the knowledge of each of the Targets, pending or threatened, against each of the Targets, or any properties or rights of the Targets, by or before any court, arbitrator or administrative or governmental body. None of such actions, suits or proceedings, would reasonably be expected to have a material adverse effect on such Target's condition (financial or otherwise), properties, assets, liabilities, operations or prospects, or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated hereby. SECTION 4.10. Outstanding Debt and Related Matters. None of the Targets has outstanding any debt except as set forth in Section 4.10 of the Disclosure Statement ("Existing Debt"). Except as set forth in Section 4.10 of the Disclosure Statement, there exists no default under the provisions of any instrument evidencing such Existing Debt or of any agreement relating thereto. Section 4.10 of the Disclosure Statement lists all contracts or commitments of any of the Targets for the guaranty of any obligation of a third party (i.e., a party not a Target) in excess of $10,000. SECTION 4.11. Tax Matters. (a) Each of the Targets has timely filed with the Internal Revenue Service and other appropriate governmental authorities, or provided to its employees, shareholders, consultants and other persons, as the case may be, all tax returns, statements, forms or reports ("Returns") required to be filed or provided by it on or before the Closing Date. All federal, state, county, local, foreign and other taxes, including without limitation income (including gross, adjusted gross and supplemental net income taxes), receipts, sales, use, -7- 13 franchise, value added, excise, recording, filing, real and personal property, employees' income, unemployment, social security taxes (including withholding obligations for trust fund taxes), and all other taxes (together with all interest and penalties imposed thereon) ("Taxes"), due and payable by or on behalf of each of the Targets have been timely paid in full or timely and fully withheld and paid, as the case may be, except for Taxes being contested in good faith by appropriate proceedings as described in Section 4.11 of the Disclosure Statement. None of the Targets has been delinquent in the payment of any Tax assessment (whether proposed or final) or governmental charge or deposit of any kind or character. (b) All accrued but unpaid Taxes accrued for tax periods or portions thereof ending on or prior to December 31, 1994 are duly reflected as a liability or reserved against on the respective Target's Balance Sheet and each Target has established and maintained adequate reserves for Taxes for all prior tax periods. (c) None of the Targets (i) has any Tax deficiency or claim outstanding, proposed or assessed against it and there is no basis for any such deficiency or claim; (ii) has any audit, action, suit, proceeding or investigation for Taxes pending or threatened against it; and (iii) has received any notice that any deficiency, claim, audit, action, suit, proceeding or investigation may be made against or with respect to it. Except as described in Section 4.11 of the Disclosure Statement, during their existence none of the Targets has received any notice of any material deficiency which has not been satisfactorily resolved or other adjustment from the Internal Revenue Service or any other Taxing Authority, and, except as set forth in Section 4.11 of the Disclosure Statement, none of the Returns has been audited by the Internal Revenue Service. (d) Except as described in Section 4.11 of the Disclosure Statement, there is not now in force any extension of time with respect to the date on which any Return was or is due to be filed or provided by or on behalf of or with respect to any of the Targets or any waiver or agreement by any of the Targets for an extension of time for the assessment of any Tax. No election has been made to treat any of the Targets as a "collapsible corporation" under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). None of the Targets is subject to any penalty by reason of a violation of any order, rule or regulation of, or a default with respect to any Return required to be filed with any governmental authority. Except as described in Section 4.11 of the Disclosure Statement, none of the Targets has any pending requests with any governmental authority for rulings as to payment of any Tax. (e) All leases have been properly reported as either "capital" leases or "true" leases, as those terms are commonly used for federal income tax purposes. None of the property owned or used by any of the Targets is subject to a tax benefit transfer lease executed in accordance with Section 168(f)(8) of the Internal Revenue Code of 1954, as amended by the Economic Recovery Tax Act of 1981. (f) There are no liens for Taxes upon any of the Targets' assets, except liens for current Taxes not yet due. Except as described in Section 4.11 of the Disclosure Statement, none of the Targets is currently under any contractual obligation to indemnify any other person with respect to Taxes and none of the Targets is a party to any agreement providing for payments with respect to Taxes. None of the Targets will be required, as a result of a change in method of accounting, to include any adjustment under Section 481(c) of the Code in any period ending after the Closing Date. Except as set forth in Section 4.11 of the Disclosure Statement, no agreement exists that may cause any payment by any of the Targets to be nondeductible in full or in part under Section 280G of the Code. Since January 1, 1990, none of the Targets has been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code but Nationwide is a common parent of such an affiliated group. SECTION 4.12. Absence of Changes or Events. Except as set forth in Section 4.12 of the Disclosure Statement, since the most recent date of each Target Balance Sheet delivered to Acquiror (the "Bring-down Date") the business of each of the Targets has been conducted only in the ordinary course and consistent with historical practices and, since the Bring-down Date, none of the Targets has: (a) Declared, set aside or made any payment of dividends or other distributions to its shareholders upon or in respect of any the Target Common Shares or purchased, retired or redeemed any Target Common Shares or other securities issued by it; -8- 14 (b) Mortgaged, pledged or subjected to lien, mortgage, pledge, claim, security interest, charge, encumbrance or restriction any material portion of its tangible or intangible property, business or assets; (c) Sold, transferred, leased to others or otherwise disposed of any material portion of its tangible or intangible assets or properties, except for inventory sold in the ordinary course of business; (d) Encountered any actual or threatened labor union organizing activity or collective bargaining agreement negotiation, had any actual or threatened employee strikes, work stoppages, slow-downs or lock-outs, or had any material change in its relationship with its employees, agents, consultants, salespersons, distributors or independent contractors; (e) Transferred or granted any concessions, leases, licenses, agreements or other rights with respect to or under, or entered into any settlement regarding the breach or infringement of, any United States or foreign license, patent, copyright, trademark, service mark, trade name, invention or similar rights, or modified any existing rights with respect thereto; (f) Made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or paid or agreed to pay, conditionally or otherwise, any bonus, extra compensation, pension, severance or vacation pay, to any director, officer, employee, consultant, sales representative, distributor or independent contractor of such Targets other than normal annual increases consistent with past practice, entered into any employment contract with any officer or salaried employee, instituted any employee welfare, bonus, stock option, profit-sharing, retirement or similar plan or arrangement, or made any loan or advance to any third party except those made pursuant to normal trade terms extended to customers; (g) Issued or sold any shares of its capital stock, partnership interests, bonds, notes or other securities, or issued, granted or sold any options, rights or warrants with respect thereto, or acquired any capital stock or other securities of any corporation or any interest in any business enterprise, or otherwise made any loan or advance to or investment in any third party; (h) Changed its accounting methods or practices, including without limitation changes in depreciation or amortization policies or rates and in the method of accounting for inventory; (i) Suffered any change, event or condition that, in any case or in the aggregate, has had or may have a material adverse effect on the Target's condition (financial or otherwise), properties, assets, liabilities, operations or prospects; (j) Entered into any transaction, contract or commitment, other than in the ordinary course of business; or (k) Entered into any agreement or contract, made any commitment or otherwise obligated itself to take any of the types of action described in Subsections (a) through (j) of this Section 4.12. SECTION 4.13. Compliance with Laws; No Default. Except as set forth in Section 4.13 of the Disclosure Statement, none of the Targets is in default of or has violated (nor is there any event or condition which, with notice or lapse of time or both, would constitute a default or violation of) in any respect (i) any contract, agreement, lease, consent order or other written commitment or instrument to which it is a party or by which the assets or business of any of the Targets are bound, or (ii) any law, rule, regulation, ordinance, writ, injunction, development order, permit, resolution, approval, order, decree, policy or guideline of any court or any foreign, federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality (including without limitation applicable laws, rules and regulations relating to environmental protection, antitrust, civil rights, health and occupational health and safety). SECTION 4.14. Property. (a) Section 4.14 of the Disclosure Statement contains (i) the street address and legal description of each parcel of all real property owned or leased from third parties by any of the Targets, including all buildings, structures and improvements located thereon ("Real Property") and (ii) a brief description of the use to which each parcel of the Real Property is being employed and/or the use for which it is currently intended. -9- 15 (b) Each of the Targets owns or leases from third parties all tools, furniture, machinery, computer hardware and software, supplies, vehicles, equipment and other items of tangible personal property that are required to conduct its business ("Personal Property"). (c) Except as set forth in Section 4.14 of the Disclosure Certificate, the Real Property and each item of the Personal Property conforms in all material respects to applicable federal, state, local and foreign laws, regulations and ordinances, including without limitation, in the case of the Real Property, those related to zoning, use or construction, and the Real Property is zoned for the purposes for which it presently is used. The Real Property and each item of the Personal Property is in good operating condition and repair, subject to normal wear and tear, and is suitable for its intended use by the Target owning or leasing such Real Property and Personal Property. (d) With respect to each parcel of Real Property and each item of Personal Property that is leased from third parties ("Leased Property"), the respective Target is the owner and holder of the entire interest in the leasehold estates purported to be granted by the leases or agreements, each of which is in full force and effect and constitutes a legal, valid and binding obligation of the respective parties thereto, enforceable in accordance with its terms. No consent of any lessor of the Leased Property is required in connection with the transactions contemplated by this Agreement, except as set forth in Schedule 4.14 of the Disclosure Certificate. SECTION 4.15. Contracts. (a) Section 4.15(a) of the Disclosure Statement lists all contracts, leases, commitments, purchase orders, work orders, agreements, consent orders and other arrangements, including all amendments thereto, to which each of the Targets is a party or is subject or by which each of the Targets, its assets, or its business is bound, that fall into one or more of the following categories ("Contracts"): (i) All loans, lines of credit, security agreements, guaranties or other payment obligations; (ii) All employment agreements, contracts, policies and commitments with or between any Target and any of its employees, directors or officers, individually or as one or more groups, including without limitation those relating to severance; (iii) All agreements of guaranty or indemnification; (iv) All agreements, contracts and commitments containing any covenant limiting the right of any Target to engage in any line of business or compete with any person; (v) Each agreement, contract and commitment relating to capital expenditures in excess of One Hundred Thousand Dollars ($100,000.00), or Two Hundred and Fifty Thousand Dollars ($250,000.00) in the aggregate; (vi) All agreements, contracts and commitments entered into that individually involve the payment of One Hundred Thousand Dollars ($100,000) or more over their remaining terms (including any period of extension or renewal) and are not cancelable within sixty (60) days or less notice; (vii) All agreements, contracts and commitments relating to the grant or receipt of any license or royalty; (viii) All agreements, contracts and commitments that require consent by any other person in connection with the consummation of the transactions contemplated by this Agreement and the Mergers either to prevent a breach or to continue the effectiveness thereof; and (ix) All agreements with any Affiliate of any Target. (b) All of the Contracts are valid and binding obligations of the respective parties thereto, enforceable in accordance with their respective terms, are in full force and effect, and Acquiror will be entitled to the full benefits thereof. Within 30 days of the date of this Agreement, the Targets will deliver to Acquiror true and complete copies of all of the Contracts. With respect to those Contracts which are substantially the same from facility to facility of the Targets, the Targets have provided to Acquiror or its counsel an example of a form of such Contracts, and such forms are substantially the same from facility to facility. -10- 16 SECTION 4.16. Licenses and Permits. (a) Section 4.16 of the Disclosure Statement contains a true and complete list of certificates of need, franchises, licenses, permits, certificates, approvals, resolutions, development orders, consents and other authorizations necessary to own, lease or operate each of the Target's assets or to conduct its business in compliance with applicable law ("Permits") and, with respect to each Permit, the name of the licensor or grantor, a description of the subject matter, the termination date, and the terms of any renewal options. Each of the Targets has delivered to Acquiror true and complete copies of all of its Permits. (b) Each of the Targets lawfully obtained and currently possesses the respective Permits and has fulfilled and performed its obligations under each of the Permits. No event has occurred and no condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any of the Permits or would allow revocation or termination of any of the Permits, or which might adversely affect the rights of any Target under any of the Permits. No notice of cancellation, of default, or of any dispute concerning any of the Permits, or of any event, condition or state of facts described in the preceding sentence, has been received by, or is known to, any Target or their respective officers, directors or employees. Except as set forth in Section 4.16 of the Disclosure Statement, each of the Permits is valid, subsisting and in full force and effect, and will continue in full force and effect after the Merger, in each case without (i) the occurrence of any breach, default or forfeiture of rights thereunder, or (ii) the consent, approval or act of, or the making of any filing with, any governmental body, regulatory commission or other person. (c) The Permits include all applicable environmental, land use and growth management obligations required by any federal, state, local, foreign or other governmental department, commission, board, bureau, agency or instrumentality. SECTION 4.17. Proprietary Information. Section 4.17 of the Disclosure Statement contains a true and complete list and brief description of all Intellectual Property, directly or indirectly related to the products, services or operations of each of the Targets or necessary to use the assets or conduct the business of the Targets as presently used or conducted. Each of the Targets owns or possesses the licenses or other rights to use their respective names and all the Intellectual Property identified in Section 4.17 of the Disclosure Statement. Except as set forth in Section 4.17 of the Disclosure Statement, to its knowledge, no Target is infringing upon or otherwise acting adversely to any Intellectual Property, the rights to which are owned by any other person. There is no claim or action by any person pending or threatened, with respect thereto. For the purposes of this Agreement, "Intellectual Property" means the names "Nationwide Care" (and any and all variations thereof) and all the corporate names, trade names, trademarks, trademark applications, service marks, service mark applications, theme concepts, copyrights, copyright applications, patents, patent applications, inventions, trade secrets, shop rights, know-how, business plans and strategies, proprietary processes and formulae, data bases, telephone numbers and all other proprietary technical information, whether patentable or unpatentable, directly or indirectly related to the products, services or operations of the business or necessary to conduct the business as it is now being conducted. SECTION 4.18. Title to Assets and Related Matters. Each of the Targets has good, valid, marketable and insurable title to all of the assets owned by it free and clear of all mortgages, liens, pledges, charges, claims, security interests, encumbrances, easements, encroachments, limitations, restrictions, rights of third parties or other interests of any kind or character, except as set forth in Section 4.18 of the Disclosure Statement and except for liens for Taxes not yet due and payable. SECTION 4.19. Environmental Matters. (a) Except as set forth in Section 4.19 of the Disclosure Statement, all of the Real Property and all operations conducted thereon, including without limitation the respective Target's use of its assets and the Real Property, are currently in compliance with all applicable federal, state, local and foreign environmental, land use and growth management laws, regulations, rules, ordinances, permits, development orders, approvals, resolutions and orders, including all consent orders. -11- 17 (b) Except as set forth in Section 4.19 of the Disclosure Statement, with respect to the Real Property, there exists no state of affairs and to each Target's knowledge there has occurred no event that currently requires, or is currently expected to require in the future, reporting or disclosure by the Corporate Targets to any federal, state, local or foreign agency concerned with environmental protection and management or land use control or growth management. (c) There are no pending or threatened claims by any private parties or governmental agencies, and there are no pending or threatened judicial or administrative actions, alleging violations of any federal, state, local or foreign environmental, land use or growth management laws, regulations, rules, ordinances, permits, development orders, approvals, resolutions or orders on or connected with the Real Property, the assets or the operations conducted thereon or at any time prior to the Closing Date. (d) Section 4.19 of the Disclosure Statement contains a list and brief description of all written and oral communications between each of the Targets and any federal, state or local governmental authority with respect to any removal, remediation or clean-up required to be undertaken, the results of any inspection or compliance review, potential liability arising under or potential violations of the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act and equivalent state and local laws, regulations, rules, ordinances and all court and administrative orders issued pursuant thereto, since January 1, 1991. SECTION 4.20. Labor Relations; Employees. (a) The Targets collectively employ approximately 4,500 employees. No Target is a party to any collective bargaining agreement with respect to its work force or any portion thereof. Except as set forth in Section 4.20 of the Disclosure Statement: (i) each Target has paid in full to all its employees all due and owing wages, salaries, commissions, bonuses, fringe benefit payments and all other direct and indirect compensation of any kind for all services performed by them and each of them to the date hereof; (ii) each Target is in compliance with (1) all federal, state, local and foreign laws, regulations, rules, ordinances and court and administrative orders dealing with employment and employment practices of any kind, (2) all of the terms and conditions of employment of any kind with respect to its business, and (3) all wages and hours requirements and regulations; (iii) there is no unfair labor practice, safety, health, discrimination or wage claim, charge, complaint suit, arbitration or proceeding pending or to each Target's knowledge threatened against or involving such Target before the National Labor Relations Board, Occupational Safety and Health Administration, Equal Employment Opportunity Commission, Department of Labor or any other federal, state, local or foreign agency; (iv) there is no labor dispute, strike, work stoppage, interference with production or slowdown in progress or threatened against or involving such Target; (v) there is no question of representation under the National Labor Relations Act, as amended, or any similar state statute, pending with respect to the employees of any Target; (vi) there is no grievance pending or threatened which might have an adverse effect on any Target or on the conduct of its business; and (vii) there is no collective bargaining agreement currently being negotiated or subject to negotiation or renegotiation by any Target. SECTION 4.21. Employee Benefit Plans. (a) Except as set forth in Section 4.21 of the Disclosure Statement, no Target maintains any (i) employee welfare benefit plan (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or (ii) employee pension benefit plan (as defined in Section 3.(2) of -12- 18 ERISA), (a) which was maintained or administered by the Target immediately prior to Closing; (b) to which the Target contributed to, or was legally obligated to contribute to immediately prior to Closing, or (c) under which the Target had any liability immediately prior to Closing, with respect to its current or former employees or independent contractors. Except as set forth in Section 4.21 of the Disclosure Statement, none of the Targets or any ERISA Affiliate is now or has been in the past obligated to contribute to any multiemployer plan (as defined in ERISA Section 3(37) or to any plan subject to Title IV of ERISA. For purposes of this Agreement, "ERISA Affiliate" means any member (other than a Target) of a group of business entities including a Target, which are treated as a single employer under Section 414 of the Code. (b) The only plans or arrangements maintained by any of the Targets for the benefit of current or former employees (including, without limitation, the plans referred to in paragraph (a)), are set forth in Section 4.21 of the Disclosure Statement (collectively, the "Benefit Plans"). The Targets have delivered or prior to the Closing shall deliver to Acquiror true and correct copies of each of the Benefit Plans. Each of the Benefit Plans has been established and maintained in all material respects in accordance with its terms and compliance with all applicable laws, including, but not limited to, ERISA and the Code. As of the Closing, all contributions required under applicable law or the terms of any Benefit Plan or other agreement relating to a Benefit Plan to be paid by any Target have been completely and timely made to such Benefit Plan when due, and each Target has established adequate reserves on its books to meet liabilities for contributions accrued but that have not been made because they are not yet due and payable. SECTION 4.22. Insurance. (a) Each of the Targets is insured by financially sound and reputable insurers with respect to its properties and the conduct of its businesses. (b) Section 4.22 of the Disclosure Statement contains (i) a true and complete list of all policies of liability, theft, fidelity, life, fire, product liability, workers' compensation, health and other forms of insurance held by the Targets and specifies the insurer, amount of coverage, type of insurance and policy number; and (ii) for the past three (3) fiscal years, an accurate description of any prior claims, any cancellation or significant increase in premiums and any pending claims under those or predecessor policies. (c) The policies listed in Section 4.22 of the Disclosure Statement are outstanding, in full force and effect and all premiums billed with respect to those policies have been paid. The insurance coverage provided by the policies listed in Section 4.22 of the Disclosure Statement satisfies all contractual and statutory requirements applicable to each Target, its assets or its business and is in such amounts and insures against such liabilities and hazards as is consistent with past practice and as is customarily maintained by other companies operating in similar businesses. No Target has, during the past five fiscal years, been denied or had revoked or rescinded by a carrier any policy of insurance. SECTION 4.23. Life Care Contracts. No Target is a party to any contract pursuant to which such Target has agreed to care for any individual for such individual's life. SECTION 4.24. Survey Reports. A true and complete copy of the most recent survey reports and any waivers of deficiencies, plans of correction and other investigation reports issued with respect to any facility of any Target has been delivered to Acquiror. Each facility is in compliance with all conditions and standards of licensing and participation in the Medicare and Medicaid programs. SECTION 4.25. Payment Programs. Each Target is now, and on the Closing Date will be, certified for participation in, and party to valid provider agreements for payment by, the federal Medicare and Medicaid programs (the "Programs"); provided, however, that Nationwide's Markle Health Care facility is not certified for participation in the Medicare program. The Targets have filed all cost reports in connection with their businesses and operations that are required to be filed with any federal or state governmental or regulatory authority (including pursuant to Titles XVIII and XIX of the Social Security Act). A true and complete copy of all such cost reports has been provided to Acquiror. Except as set forth in Section 4.25 of the Disclosure Statement, the Targets have not received any notice of pending or threatened investigations by any Program which poses a risk to the Targets' participation in the Program or may result in any adjustments to reimbursements that have been paid, excluding survey report deficiencies that have been corrected. All billing -13- 19 practices by the Target to all third payors, including the federal Medicare program, state Medicaid programs and private insurance companies, have been true, fair and correct and in compliance with all applicable laws, regulations and policies of all such third payors, and the Targets have not billed for or received any payment or reimbursement in excess of amounts allowed by law, other than insignificant amounts subject to adjustment pursuant to periodic audits of cost reports submitted by the Target. Neither any Target, nor any Affiliate thereof, nor any director, officer or employee thereof, is a party to any contract, lease, agreement or arrangement, including any joint venture or consulting agreement with any physician, hospital, nursing facility, home health agency or other person who is in a position to make or influence referrals to or otherwise generate business for any Target to provide services, lease space, lease equipment or engage in any other venture or activity, to the extent prohibited by law or regulations. SECTION 4.26. Gratuitous Payments. Neither any Target, nor any director, officer or employee, nor any agent acting on behalf of or for the benefit of any thereof, has directly or indirectly (i) offered or paid any remuneration, in cash or in kind, to, or made any financial arrangements with, any past or present customers, past or present suppliers, contractors or third party payors of any Target in order to obtain business or payments from such persons, other than entertainment activities in the ordinary and lawful course of business; (ii) given or agreed to give, or has knowledge that there has been made or that there is any agreement to make, any gift or gratuitous payment of any kind, nature or description (whether in money, property or services) to any customer or potential customer, supplier or potential supplier, contractors, third party payor or any other person other than in connection with promotional or entertainment activities in the ordinary and lawful course of business; (iii) made or agreed to make, or is aware that there has been made or that there is any agreement to make, any contribution, payment or gift of funds or property to, or for the private use of, any governmental official, employee or agent if either the contribution, payment or gift or the purpose of such contribution, payment or gift is or was illegal under the laws of the United States or under the laws of any state thereof or any other jurisdiction (foreign or domestic) under which such payment, contribution or gift was made; (iv) established or maintained any unrecorded fund or asset for any purpose or made any false or artificial entries on any of its books or records for any reason; or (v) made, or agreed to make, or has knowledge that there has been made or that the intention or understanding that any part of such payment would be used for any purpose other than that described in the documents supporting such payment. SECTION 4.27. Brokers' or Finders' Fees. No agent, broker, investment banker or other person or firm acting on behalf of the Targets or Partners or any of their directors, executive officers, or partners or under the authority of any of them, is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, from any of the parties hereto in connection with any of the transactions contemplated hereby, except for those fees or commissions set forth and described in Section 4.27 of the Disclosure Statement which the Targets shall have paid in full prior to or at the Closing, and evidence of payment for which shall have been delivered to Acquiror at the Closing. SECTION 4.28. Disclosure. (a) No representation or warranty by any Corporate Target or Partner contained in this Agreement and no statement made by any Corporate Target or Partner contained in the Disclosure Statement or any certificate or other instrument delivered or to be delivered pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. All information in the Disclosure Statement or any Schedule, Exhibit or any contract delivered on behalf of the Corporate Targets and the Partners pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to have been relied upon by Acquiror and constitute representations and warranties by the Corporate Targets and the Partners herein. (b) None of the information supplied or to be supplied by the Targets for inclusion in the registration statement on Form S-4 or other appropriate registration form to be filed with the SEC by Acquiror in connection with the offer and issuance of the Acquiror Common Shares in or as a result of the Share Exchanges (the "Registration Statement"), will at the time the Registration Statement becomes effective under the Securities Act contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. -14- 20 SECTION 4.29. Tax Representations. The representations and warranties by the shareholders of the Corporate Targets required under Section 6.15 shall be true, correct and complete in all respects as of the Effective Time. SECTION 4.30. Representations and Warranties as of Date Hereof; No Other Representations and Warranties. The representations and warranties contained in the foregoing Sections 4.1 through 4.29 inclusive are made as of the date hereof, except as otherwise expressly indicated therein. None of the Corporate Targets or Partners makes, and no party shall be entitled to rely upon, any representation or warranty as to any fact or matter other than as expressly set forth herein. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIROR As a material inducement to the Corporate Targets and the Partners to enter into this Agreement and to consummate the transactions contemplated hereby, Acquiror represents and warrants to the Corporate Targets and the Partners that: SECTION 5.1. Organization; Power. Acquiror is a corporation duly organized and validly existing under the laws of the State of Nevada, for which all required annual reports have been filed with the Nevada Secretary of State and for which no Articles of Dissolution appear as having been filed with the Nevada Secretary of State. Acquiror has all the requisite corporate power and authority to own, lease and operate its business as it is now being conducted and to enter into this Agreement, to consummate the transactions contemplated hereby, and to comply with and fulfill the terms and conditions of this Agreement. SECTION 5.2. Capital Stock. The authorized shares of Acquiror are as set forth in the Preliminary Statement to this Agreement. All issued and outstanding Acquiror Common Shares are validly issued and outstanding, fully paid and nonassessable. SECTION 5.3. Authority; No Violation; Etc. (a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Acquiror. This Agreement is a valid and binding obligation of Acquiror, enforceable against Acquiror in accordance with its terms and conditions, except as the enforcement hereof and thereof may be affected by bankruptcy, insolvency, moratorium or other laws relating to or limiting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. (b) Except as set forth in Section 5.3 of the statement of disclosure delivered by the Acquiror to the Corporate Targets and the Partners in connection with the execution of this Agreement (the "Acquiror's Disclosure Statement"), neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby, nor compliance by Acquiror with any of the provisions hereof, will: (i) conflict with, violate, result in a breach of, constitute a default (or an event that, with notice or lapse of time, or both, would constitute a default) under, or give rise to any right of termination, cancellation or acceleration under any provision of the Articles of Incorporation or Bylaws of Acquiror, or any of the terms, conditions or provisions of any note, lien, bond, mortgage, indenture, license, lease, contract, commitment, agreement, understanding, arrangement, restriction or other instrument or obligation to which Acquiror is a party or by which Acquiror may be bound; (ii) violate any law, rule or regulation of any government or governmental agency or body, or any judgment, order, writ, injunction or decree of any court, administrative agency or governmental agency or body applicable to Acquiror; or (iii) constitute an event that, with or without notice, lapse of time or action by a third party, could result in the creation of any lien, charge or encumbrance upon any of the assets of Acquiror or cause the maturity of any liability, obligation or debt of Acquiror to be accelerated or increased. -15- 21 SECTION 5.4. Consents and Approvals. Except in connection with the HSR Act, the Securities Act and the Exchange Act, and as set forth in Section 5.4 of the Acquiror's Disclosure Statement, the execution, delivery and performance of this Agreement by Acquiror and the consummation of the transactions contemplated hereby will not require any notice to, action of, filing with or consent, authorization, order or approval from any court, administrative agency or other governmental authority or agency, or any individual, corporation, partnership, joint venture, association, firm, organization, group or any other entity or enterprise. SECTION 5.5. Reports. Acquiror has filed all required forms, reports and documents with the SEC required to be filed by it pursuant to the federal securities laws and the rules and regulations of the SEC thereunder (the "Acquiror SEC Reports"), each of which complied, at the time such form, report or document was filed, in all material respects with the then applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations thereunder. None of the Acquiror SEC Reports, including without limitation any financial statements or schedules included therein, at the time filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of Acquiror included in the Acquiror SEC Reports (the "Acquiror Financial Statements") were prepared from Acquiror's books and records in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of Acquiror and its consolidated subsidiaries as at the dates thereof and the results of their operations and their cash flows for the periods then ended, subject, in the case of the unaudited interim financial statements, to normal, recurring year-end adjustments and any other adjustments described therein. Since the date of the last audited balance sheet in the Acquiror Financial Statements (the "Acquiror Bring Down Date"), neither Acquiror nor any of its subsidiaries has incurred any liabilities or obligations, whether absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise and whether due or to become due, except (i) as and to the extent set forth on the audited balance sheet of the Acquiror and its subsidiaries as at the Acquiror Bring Down Date (including the notes thereto), (ii) as incurred in connection with the transactions contemplated, or as provided, by this Agreement, (iii) as incurred after the Acquiror Bring Down Date in the ordinary course of business and consistent with past practices, (iv) as described in the Acquiror SEC Reports or (v) as would not, individually or in the aggregate, have a material adverse effect upon the business, assets or condition, financial or otherwise, of Acquiror and its subsidiaries considered as a whole. Acquiror has delivered to Nationwide all Acquiror SEC Reports filed with the SEC since January 1, 1993. SECTION 5.6. Due Authorization of Shares. The Acquiror Common Shares to be issued at the Closing will, when issued, be duly authorized Common Shares of Acquiror and, when delivered, will be duly and validly issued, fully paid and nonassessable and qualified for trading on the NYSE subject to notice of issuance. SECTION 5.7. Compliance with Laws; No Default or Litigation. Except as set forth in Section 5.7 of the Acquiror's Disclosure Statement, neither Acquiror nor any of its subsidiaries is in default of or has violated (nor is there any event or condition which, with notice or lapse of time or both, would constitute a default or violation of) in any respect, (i) any contract, agreement, lease, consent, order or other written commitment or instrument to which it is a party or by which the assets or business of any of the Acquiror or its subsidiaries are bound, or (ii) any law, rule, regulation, ordinance, writ, injunction, development order, permit, resolution, approval, order, decree, policy or guideline of any court or any foreign, federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality (including without limitation applicable laws, rules and regulations relating to environmental protection, antitrust, civil rights, health and occupational health and safety) except where such default or violation would not, individually or in the aggregate with all other defaults and/or violations, have a material adverse effect on the business, assets or condition, financial or otherwise, of Acquiror and its subsidiaries considered as a whole. Except as disclosed in the Acquiror Financial Statements or as set forth in Section 5.7 of the Acquiror's Disclosure Statement: neither Acquiror nor any of its subsidiaries is presently engaged in or threatened with or aware of any situation that could subject Acquiror or any of its subsidiaries (together, the "Acquiring Companies") to any litigation (including appeals of lower court decisions), arbitration, claim or other legal proceedings or governmental or -16- 22 any other investigation relating to the affairs of any of the Acquiring Companies or any of their properties or assets that (a) questions the validity or enforceability of this Agreement or that could prevent, hinder or delay consummation of the transactions contemplated by this Agreement or (b) would reasonably be expected to have a material adverse effect on the business, assets or condition, financial or otherwise, of Acquiror and its subsidiaries considered as a whole. SECTION 5.8. Tax Representations. The representations and warranties by Acquiror required under Section 7.7 shall be true, correct and complete in all respects as of the Effective Time. SECTION 5.9. Brokers' or Finders' Fees. Except for certain fees and expense reimbursements to be paid by Acquiror to Merrill Lynch, Pierce, Fenner & Smith, Incorporated, no agent, broker, investment banker or other person or firm acting on behalf of Acquiror or any of its directors or executive officers, or under the authority of any of them is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, from Acquiror in connection with any of the transactions contemplated hereby. SECTION 5.10. Representations and Warranties as of Date Hereof. The representations and warranties contained in the foregoing Sections 5.1 through 5.9 inclusive are made as of the date hereof, except as otherwise expressly indicated therein. The Acquiror does not make, and no party shall be entitled to rely upon, any representation or warranty as to any fact or matter other than as expressly set forth herein. ARTICLE VI CERTAIN PRE-CLOSING COVENANTS OF THE TARGETS Each of the Corporate Targets and the Partners covenants and agrees that between the date hereof and the Closing: SECTION 6.1. Maintenance of Corporate Status. Each of the Corporate Targets shall be maintained at all times as a corporation validly existing and in good standing under the laws of the state of its incorporation and in good standing as a foreign corporation in all states in which it is currently qualified to do business. No amendment shall be made to the Articles of Incorporation or Bylaws of any of the Corporate Targets without the prior written consent of Acquiror. SECTION 6.2. No Change in Capitalization. No change will be made in the number of issued and outstanding Target Common Shares, other than as a result of the exercise of outstanding warrants or options to purchase Target Common Shares in accordance with the terms of such warrants or options. No option, warrant or any other right to purchase or to convert any obligation or security into Target Common Shares will be sold, issued or granted by the Targets. SECTION 6.3. Shareholders Meetings. Each of the Corporate Targets shall cause a meeting of its shareholders to be duly called and held as soon as practicable following the effectiveness of the Registration Statement (but not earlier than 20 business days after the date of such effectiveness) for the purpose of voting on the approval and adoption of this Agreement and the Share Exchanges. The Board of Directors of each of the Corporate Targets shall recommend approval and adoption of this Agreement and the Share Exchanges by the respective Corporate Target's shareholders. In connection with such meeting, each of the Targets: (a) will cooperate with Acquiror in the prompt preparation of the Registration Statement and use its best efforts to have the Registration Statement declared effective by the SEC, and will thereafter mail to its shareholders as promptly as practicable the Prospectus/Information Statement and all other solicitation materials for use in connection with the meeting of shareholders; (b) will use its best efforts to obtain the necessary approvals by its shareholders of this Agreement and the Share Exchanges; and (c) will otherwise comply with all legal requirements applicable to such meeting. SECTION 6.4. Operation of the Business. Each of the Targets shall operate its business diligently and only in the regular and ordinary course and manner as it has previously been operated. Without limiting the -17- 23 generality of the foregoing, each of the Targets shall use all reasonable efforts to (i) preserve its present business organization intact and conserve its goodwill; (ii) keep available and maintain the services of all officers, employees, agents and representatives on the same or substantially the same terms; (iii) continue and preserve good relationships with suppliers, customers, lenders and others having business dealings or relationships with the Targets; (iv) maintain in full force and effect all Permits required for the operation of the business as presently conducted; and (v) maintain and keep in good order, consistent with past practice, all of the Targets's tangible assets, ordinary wear and tear excepted. None of the Targets shall, without the prior written consent of Acquiror: (i) incur any indebtedness to any third party, except trade payables incurred in the ordinary course of business consistent with past practices; (ii) declare, set aside or pay any dividends or other distributions or payments on or in respect of its outstanding shares, or purchase, redeem or otherwise acquire, or agree to purchase, redeem or otherwise acquire any Target Common Shares; (iii) knowingly do any act or omit any act or permit any omission to act within its control, which will cause a breach or default in any of the Targets' contracts, commitments or obligations; (iv) except in the ordinary course of business consistent with past practices, change or increase the rate of compensation paid by any of the Targets to any of their directors, officers, employees or agents, including without limitation the payment of bonuses and arrangements for severance pay, or (v) enter into any agreement to do any of the foregoing. SECTION 6.5. Other Offers. From the date of this Agreement until it is terminated in accordance with Article X, the Targets shall not and shall cause its officers, directors, partners, employees and other agents not to, directly or indirectly, take any action to solicit, initiate or encourage the making of any Acquisition Proposal (as hereinafter defined). Until this Agreement shall be terminated in accordance with Article X, the Targets will not enter into any agreement to merge or consolidate with, issue Target Common Shares to, exchange the Target Common Shares with, or sell a substantial portion of the Targets' assets to, any person or entity. The Targets will promptly notify Acquiror after receipt of any Acquisition Proposal or any request for nonpublic information relating to the Targets in connection with an Acquisition Proposal or for access to the personnel, properties, books or records of any of the Targets by any person or entity that informs the Board of Directors or Partners of any of the Targets that it is considering making, or has made, an Acquisition Proposal. The term "Acquisition Proposal" as used herein means any offer or proposal for, or any indication of interest in, a merger or other business combination involving any of the Targets or the acquisition of a majority of the equity interest in, or a majority of the assets of, any of the Targets, other than the transactions contemplated by this Agreement. SECTION 6.6. Compliance with the Securities Act; Affiliates. Each of the Targets shall use its best efforts to cause each person who is an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act, of such Target to deliver to the Target at or prior to the Effective Time a written agreement to the effect that such person will not offer to sell, sell or otherwise dispose of any Acquiror Common Shares issued in the Share Exchanges, except, in each case, pursuant to an effective registration statement or in compliance with Rule 145, as amended from time to time, or in a transaction that, in the opinion of legal counsel satisfactory to Acquiror, is exempt from the registration requirements of the Securities Act, such agreement to be in substantially the form attached hereto as Exhibit 6.6(a). Each of the Targets shall use its best efforts to cause each such person not to take any action that would impair Acquiror's ability to account for the Share Exchanges as poolings of interests. Accordingly, each of the Targets shall use its best efforts to cause each such person to deliver prior to the Effective Time a written agreement in the form attached as Exhibit 6.6(b) to this Agreement, to the effect that such person shall not sell or otherwise reduce his or her risk relative to any Acquiror Common Shares received in connection with the Share Exchanges (within the meaning of the SEC's Codification of Financial Reporting Policies sec. 201.01) until Acquiror has published financial results (including combined sales and net income) covering at least thirty days of post-Share Exchange operations, except as permitted by Staff Accounting Bulletin No. 76 issued by the SEC. SECTION 6.7. Taxes. Each of the Targets shall timely file all Tax reports and Returns required to be filed with any governmental authority wherein the nature of its activities is such as to require the filing thereof, and shall promptly pay, when due, all federal, state, local and foreign taxes, assessments, governmental charges, fees, interest and penalties lawfully levied or assessed upon it or its properties. -18- 24 SECTION 6.8. Access; Review. Each of the Targets shall provide to Acquiror, its attorneys, accountants, appraisers and other authorized representatives or retained experts access upon reasonable notice to all the premises, books, records, personnel and income tax returns of or relating to such Target during normal business hours and shall furnish to such persons such financial and operating data and other information as Acquiror or such persons may from time to time reasonably request. In addition, each of the Targets shall authorize its independent certified public accountants to give Acquiror's independent certified public accountants access to books and records and work papers regarding the Target's financial statements. No investigation, test, examination or inquiry by Acquiror shall affect the representations and warranties contained in this Agreement. SECTION 6.9. Insurance. Each of the Targets shall maintain the types and levels of insurance currently in effect to insure its assets and its business against the risk of loss or damage attributable to casualty, storm, fire, theft, burglary or riot. SECTION 6.10. Monthly Financial Statements. On or prior to the thirtieth day of each calendar month, each of the Targets shall deliver to Acquiror copies (identified with a reference to this Section 6.10) of the unaudited monthly balance sheet and statement of income of such Target for the immediately preceding month (the "monthly statements"), prepared in a manner consistent with past practices used in preparation of such statements, all of which when delivered, shall be materially complete and correct, prepared from the books and records of such Target in accordance with generally accepted accounting principles (except for the omission of notes thereto) consistently applied and maintained throughout such months, and shall in all material respects fairly present the financial condition of such Target as at their respective dates and the results of the operations of its business for the months covered thereby. SECTION 6.11. Approvals, Notices and Consents. Promptly after the execution of this Agreement, each of the Targets shall file all forms, applications and reports, including without limitation all filings under the HSR Act, and take such other action which is required to be taken or filed with any governmental agency or authority in connection with the transactions contemplated by this Agreement. Each of the Targets shall cooperate with Acquiror in promptly producing such additional information as those authorities may require to allow early termination of the notice period provided by the HSR Act or as otherwise necessary to comply with statutory requirements and requests of the Federal Trade Commission or the Department of Justice. Each of the Targets shall give all additional notices to third parties and take such other action required to be given or taken by it under any authorization, lease, note, mortgage, indenture, agreement or other instrument or any law, rule, regulation, demand or court or administrative order in connection with the transactions contemplated by this Agreement, and shall use its best efforts to obtain all consents and approvals necessary to enable it to consummate the transactions contemplated by this Agreement. Each of the Targets shall use its reasonable efforts to obtain estoppel certificates from the lessors under the leases of Real Property. SECTION 6.12. The Targets' Actions; Supplements to Representations and Warranties. From the date of this Agreement through the Closing, (a) each of the Targets shall use its best efforts to cause the conditions to the obligations of the Corporate Targets and the Partners set forth in Article IX to be satisfied to the extent that the satisfaction of such conditions is within the control of such Target; provided, however, that the foregoing shall not constitute a limitation upon the covenants and obligations of the Corporate Targets and the Partners otherwise set forth in this Agreement; (b) none of the Targets shall take any action or omit to take any action within its control to the extent such action or omission might result in a breach of any term or condition of this Agreement or in any representation or warranty contained in this Agreement being inaccurate or incorrect on and as of the Closing Date; and (c) each of the Targets shall deliver to Acquiror, as soon as possible after discovery thereof, but not later than at the Closing, supplemental information updating the information set forth in the representations and warranties of the Targets set forth in this Agreement to reflect subsequent occurrences, if any, (along with a notice stating the representations and warranties, including the schedules referred to therein, to which such supplemental information relates) so that such representations and warranties as supplemented by such information will be true and correct as of the Closing as if then made. The foregoing provisions shall not be deemed to permit any transaction between the date hereof and the Closing not otherwise contemplated or permitted by this Agreement nor shall any action taken by any of the -19- 25 Targets pursuant to the foregoing provisions impair the exercise by Acquiror of its rights as set forth in Section 10.2. SECTION 6.13. Notice of Material Adverse Change. The Targets shall promptly advise Acquiror in writing of any material adverse change in the assets or financial condition, results of operations, businesses or properties of the Targets considered as a whole. SECTION 6.14. Pooling. None of the Targets shall take any action that would prevent the Share Exchanges from qualifying for pooling of interests accounting treatment. SECTION 6.15. Tax Statements. The Targets will make and will use their reasonable efforts to cause their respective shareholders to make the representations and warranties contained in Exhibit 6.15, and such other representations and warranties as considered reasonably necessary by the accountants or counsel for purposes of rendering the opinions referred to in Sections 8.12 and 9.10. SECTION 6.16. Cooperation. Each of the Targets shall generally cooperate with Acquiror and its officers, employees, attorneys, accountants and other agents and, generally, do such other acts and things in good faith as may be reasonable, necessary, or appropriate to timely effectuate the intents and purposes of this Agreement and the consummation of the transactions contemplated hereby. SECTION 6.17 Nationwide to Use Its Reasonable Best Efforts to Terminate Option. Nationwide shall use its reasonable best efforts to terminate that certain option to purchase the Marietta, Ohio facility pursuant to that certain Lease Agreement by and between Marietta Convalescent Center, Inc. (previously merged into Nationwide) and Jackson-Browne Enterprises, Inc., dated July 12, 1983. The terms of such termination shall be reasonably acceptable to Acquiror and Acquiror shall assist Nationwide with the negotiations to terminate such option to the extent Nationwide shall reasonably deem appropriate. ARTICLE VII CERTAIN PRE-CLOSING COVENANTS OF ACQUIROR Acquiror covenants and agrees that between the date hereof and the Closing: SECTION 7.1. Required Consents and Approvals. It shall use all reasonable efforts to obtain all consents and approvals necessary to enable it to consummate the transactions contemplated by this Agreement. Acquiror shall also use its best efforts to obtain by April 28, 1995 all necessary consents from its principal lenders, as set forth in Section 5.4 of Acquiror's Disclosure Statement. SECTION 7.2. Pre-transaction Notification. It shall file with the proper authorities all forms and other documents necessary to be filed pursuant to the HSR Act and regulations issued thereunder as promptly as possible and shall cooperate with the Targets in promptly producing such additional information as such authorities may require to allow early termination of the notice period provided by the HSR Act or as otherwise necessary to comply with statutory requirements and requests of the Federal Trade Commission or the Department of Justice. SECTION 7.3. Registration Statement; NYSE Listing. (a) Acquiror shall promptly prepare and file with the SEC under the Securities Act the Registration Statement and shall use all reasonable efforts to cause the Registration Statement to be declared effective as promptly as practicable. Acquiror shall take all reasonable action required to be taken under applicable state securities or Blue Sky laws in connection with the issuance of Acquiror Common Shares in the Share Exchanges. (b) Acquiror shall take all such action as is reasonably necessary to qualify the Acquiror Common Shares to be issued in the Share Exchanges for trading on the NYSE effective upon notice of issuance. SECTION 7.4. Notice of Material Adverse Change. Acquiror shall promptly advise the Targets in writing of any material adverse change in Acquiror, its assets or the financial condition, results of operations, businesses or properties of Acquiror and its subsidiaries considered as a whole. -20- 26 SECTION 7.5. Pooling Actions. Neither Acquiror nor any of its subsidiaries shall take any action that would prevent the Share Exchanges from qualifying for pooling of interests accounting treatment. SECTION 7.6. Pooling Letter. Prior to the date of Closing, Acquiror shall have caused KPMG Peat Marwick LLP to deliver to Acquiror a letter with respect to whether the Share Exchanges will qualify for pooling of interests accounting treatment. SECTION 7.7. Tax Statements. Acquiror will make the representations, warranties and covenants contained in Exhibit 7.7, and such other representations, warranties and covenants as considered reasonably necessary by the accountants or counsel for purposes of rendering the opinions referred to in Sections 8.12 and 9.10. SECTION 7.8. Environmental Surveys. Acquiror shall use its reasonable efforts to cause to have performed by April 28, 1995, at Acquiror's expense, Phase I environmental surveys of all long-term health care facilities currently operated but not owned by the Targets and to be operated by the Corporate Targets following the Closing. SECTION 7.9. Cooperation. Acquiror shall generally cooperate with each of the Targets and its officers, employees, attorneys, accountants and other agents, and, generally, do such other acts and things in good faith as may be reasonable, necessary or appropriate to timely effectuate the intents and purposes of this Agreement and the consummation of the transactions contemplated hereby, including assisting the Targets in obtaining agreements to release at the Closing the personal guarantees as described in Section 9.11. Prior to the Closing Date, Acquiror agrees to disclose to the Targets any fact or matter that comes to the attention of Acquiror that might indicate that any of the representations or warranties of any of the Targets may be untrue, incorrect, or misleading in any material respect. ARTICLE VIII CONDITIONS PRECEDENT TO THE PERFORMANCE OF ACQUIROR The obligations of Acquiror pursuant to the terms of this Agreement are subject to the satisfaction, at the Closing, of each of the following conditions: SECTION 8.1. Accuracy of Representations and Warranties of the Targets. Each of the representations and warranties of each of the Corporate Targets and the Partners contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date with the same force and effect as if made at and as of the Closing Date. For purposes of this Section 8.1, all references in such representations and warranties to "the date hereof," "the date of this Agreement" and like language shall mean the Closing Date. SECTION 8.2. Compliance. Each of the Targets and the Partners shall have performed, complied with and fulfilled in all material respects all the covenants, agreements, obligations and conditions required by this Agreement to be performed, complied with or fulfilled by it at or prior to the Closing. SECTION 8.3. Approval. The execution and delivery of this Agreement by each of the Corporate Targets and the Partners, and the performance of the Targets' and Partners' covenants and obligations hereunder, shall have been duly authorized by all necessary action on the part of such Target or Partner. SECTION 8.4. HSR Act Approval. Any applicable waiting period under the HSR Act relating to the Share Exchanges shall have expired or been terminated. SECTION 8.5. Authorizations. All material permits, authorizations, approvals and consents of and notices to any federal, state or local governmental body, agency or authority or any other third party, which may be required by law, regulation, rule, ordinance, order, decree, agreement, indenture, lease or other instrument or document to which any of the Targets or Acquiror is a party or by which such Target or Acquiror or its assets are bound or which Acquiror may otherwise reasonably require in connection with the execution of this Agreement or effectuation of the transactions contemplated by this Agreement shall have been obtained or made by the respective Target or Acquiror on terms and conditions reasonably satisfactory to -21- 27 Acquiror, other than licenses set forth in Section 4.16 of the Disclosure Statement which cannot be transferred, but which must be issued to Acquiror after the Closing. SECTION 8.6. Litigation. No order, decree, writ or ruling of any governmental authority or court shall have been entered that restrains, enjoins, or otherwise prohibits the consummation of the transactions contemplated hereby. SECTION 8.7. No Material Adverse Change. In the reasonable judgment of Acquiror, between the date hereof, and the Closing, there shall not have been any material adverse change or any event which is likely to result in any material adverse change in the assets, business, financial condition or results of operations of the Targets and their subsidiaries taken as a whole. SECTION 8.8. Closing Deliveries. Acquiror shall have received from the respective Target all of the instruments, documents and considerations described in Section 12.2, and the form and substance of all such deliveries shall be reasonably satisfactory in all material respects to Acquiror. SECTION 8.9. Dissenters' Rights. Holders in excess of 5% of the Target Common Shares shall not have exercised dissenters' rights under applicable law. SECTION 8.10. Pooling Letter. Acquiror shall have received a letter from KPMG Peat Marwick LLP, in form and substance reasonably satisfactory to Acquiror, stating that the Share Exchanges will qualify for poolings of interests accounting treatment. SECTION 8.11. Exercise of Warrants. All warrants issued by Nationwide shall have been exercised prior to the Closing. SECTION 8.12. Tax Opinions. Acquiror shall have received opinions of KPMG Peat Marwick LLP acceptable in form and content to Acquiror substantially to the effect that the exchange of Target Common Shares for Acquiror Common Shares as provided in this Agreement will, in each instance, constitute a reorganization within the meaning of Section 368(a)(1)(B) of the Code, and each Corporate Target and Acquiror will be a "party to reorganization" within the meaning of Section 368(b) of the Code. SECTION 8.13. Lease Extensions. The lease of Colonial Oaks Health Care Center shall have been renewed in accordance with such lease for an additional five year term, and the Targets shall have used their reasonable efforts to obtain modifications to the lease of Ossian Health Care to provide for a five year extension. SECTION 8.14. Option Termination. That certain Option to Purchase dated January 25, 1993 by and among Craig Moore, John Maxwell, the Anita Maxwell Trust (collectively, the "Optionees") and Nationwide, relating to the Cambridge and Parkwood facilities, shall have been terminated in exchange for the payment of not more than $300,000 to the Optionees, and Acquiror agrees that such termination and payment shall not constitute a breach of any representation, warranty or other provision of this Agreement. ARTICLE IX CONDITIONS PRECEDENT TO PERFORMANCE OF THE CORPORATE TARGETS AND PARTNERS The obligations of each of the Corporate Targets and Partners pursuant to the terms of this Agreement are subject to the satisfaction, at the Closing, of each of the following conditions: SECTION 9.1. Accuracy of Representations and Warranties of Acquiror. Each of the representations and warranties of Acquiror contained in this Agreement shall be true and correct in all material respects at the Closing with the same force and effect as if made at the Closing. For purposes of this Section 9.1, all references in such representations and warranties to "the date hereof," "the date of this Agreement" and like language shall mean the Closing Date. SECTION 9.2. Compliance. Acquiror shall have performed, complied with and fulfilled in all material respects all the covenants, agreements, obligations and conditions required by this Agreement to be performed, complied with or fulfilled by it at or prior to the Closing. -22- 28 SECTION 9.3. Corporate Approval. The execution and delivery of this Agreement by Acquiror and the performance by Acquiror of all of its covenants and obligations hereunder shall have been duly authorized by all necessary corporate action on the part of Acquiror. SECTION 9.4. Authorizations. All material permits, authorizations, approvals and consents of and notices to any federal, state or local governmental body, agency or authority or any other third party, which may be required by law, regulation, rule, ordinance, order, decree, agreement, indenture, lease or other instrument or document to which any of the Targets or Acquiror is a party or by which such Target or Acquiror or its assets are bound or which the Targets may otherwise reasonably require in connection with the execution of this Agreement or effectuation of the transactions contemplated by this Agreement shall have been obtained or made by the respective Target or Acquiror on terms and conditions reasonably satisfactory to the Targets. SECTION 9.5. Registration Statement. The Registration Statement shall have become effective under the Securities Act and the Acquiror Common Shares to be issued in the Share Exchanges shall have become qualified or registered (or shall be exempt from qualification or registration) under comparable state securities laws, and at or prior to the Effective Time no stop order suspending the effectiveness of the Registration Statement or the qualification or registration of the Acquiror Common Shares to be issued in the Share Exchanges under the Blue Sky laws of any jurisdiction shall have been issued and no proceeding for that purpose shall have been initiated or shall be threatened or contemplated by the SEC or the authorities of any such jurisdictions, and the Acquiror Common Shares shall be eligible for trading on the NYSE upon notice of issuance. SECTION 9.6. Litigation. No order, decree, writ or ruling of any governmental authority or court shall have been entered that restrains, enjoins or otherwise prohibits the consummation of the transactions contemplated by this Agreement. SECTION 9.7. No Material Adverse Change. In the reasonable judgment of the Targets, between the date of execution and the Closing, there shall not have been any material adverse change or any event which is likely to result in any material adverse change in the assets, business, financial condition or results of operations of Acquiror and its subsidiaries, taken as a whole. SECTION 9.8. HSR Act Waiting Periods. Acquiror and the Targets shall have filed all notifications required by the HSR Act with the Department of Justice and the Federal Trade Commission and the applicable waiting periods with respect thereto (including any extension thereof by reason of a request for additional information) shall have expired or been terminated. SECTION 9.9. Closing Deliveries. Each of the Targets shall have received from Acquiror all of the instruments, documents and considerations described in Section 12.3, and the form and substance of all such deliveries shall be reasonably satisfactory in all material respects to the Targets. SECTION 9.10. Tax Opinions. Nationwide shall have received opinions of Ice Miller Donadio & Ryan acceptable in form and content to Nationwide, substantially to the effect that the exchange of Target Common Shares for Acquiror Common Shares as provided in this Agreement will, in each instance, constitute a reorganization within the meaning of Section 368(a)(1)(B) of the Code, and each Corporate Target and Acquiror will be a "party to a reorganization" within the meaning of Section 368(b) of the Code. SECTION 9.11. Release of Guarantees. The beneficiaries with respect to the personal guarantees by the shareholders of the Corporate Targets and/or Partners in the Partnership Targets that are set forth in Section 9.11 of the Disclosure Statement shall have agreed to release such guarantees at the time of the Closing or Nationwide shall have agreed to indemnify such shareholders and/or Partners for any losses resulting from such guarantees. -23- 29 ARTICLE X TERMINATION SECTION 10.1. Termination by Mutual Agreement. This Agreement may be terminated by the mutual agreement in writing of the parties hereto at any time prior to the Closing. SECTION 10.2. Termination by Acquiror. This Agreement and any obligations of Acquiror hereunder (other than its obligations under the Confidentiality Agreement referred to in Section 11.1) may be terminated upon written notice to that effect by Acquiror at any time prior to or at the Closing, if in the judgment of Acquiror (a) any of the Targets or the Partners shall have breached or failed to perform in any material respect any of its covenants or obligations under this Agreement; (b) any representation or warranty of any of the Targets or the Partners contained in this Agreement is false or misleading in any material respect and cannot be cured prior to July 31, 1995; or (c) any other material condition precedent to Acquiror's performance of its obligations under this Agreement is not capable of being met. SECTION 10.3. Termination by the Corporate Targets and Partners. This Agreement and any obligations of any of the Corporate Targets and Partners hereunder (other than their obligations under the Confidentiality Agreement referred to in Section 11.1) may be terminated upon written notice to that effect by any of the Corporate Targets and the Partners at any time prior to or at the Closing if in the judgment of such Target or Partner (a) Acquiror shall have breached or failed to perform in any material respect any of its covenants or obligations under this Agreement; (b) any representation or warranty of Acquiror contained in this Agreement is false or misleading in any material respect and cannot be cured prior to July 31, 1995; (c) any other material condition precedent to such Target's or Partner's performance of its obligations under this Agreement is not capable of being met; (d) the average closing price of one Acquiror Common Share as reported by the NYSE for the ten (10) trading days immediately preceding the Closing Date is less than $21.82; or (e) the Share Exchanges have not been consummated by July 31, 1995. ARTICLE XI ADDITIONAL AGREEMENTS SECTION 11.1. Confidentiality. Acquiror and each of the Targets agree that the Confidentiality Agreement dated November 7, 1994 between Acquiror and Nationwide shall remain in full force and effect at all times prior to the Effective Time and after any termination of this Agreement, and each agrees to comply with the terms of that agreement. SECTION 11.2. Employee Benefit Matters. Acquiror agrees to continue in full force and effect the Benefit Plans of the Targets referred to in Section 4.21 of the Disclosure Statement and existing at the Effective Time until those employees of the Targets who continue as employees of the Targets or Acquiror after the Effective Time become eligible to participate in the employee benefit plans of Acquiror. Acquiror will recognize such transferred employees' service with any of the Targets for purposes of eligibility and vesting under such Acquiror plans. Nothing set forth in this Agreement shall be construed to impose any obligation on Acquiror to continue the employment of any person after the Effective Time or give any person any rights to such employment; provided, however, that Acquiror acknowledges that it will cause Nationwide to honor and perform after the Effective Time the obligations of Nationwide pursuant to those Employment Agreements set forth on Schedule 11.2(a). Acquiror also agrees that prior to the termination of any employee whose name is set forth on Schedule 11.2(b), Acquiror will cause the Corporate Targets to give such employee thirty days notice and will pay to such terminated employee as severance one week's salary for each year such employee has been employed by Nationwide or its affiliates, as set forth on Schedule 11.2(b), less applicable withholdings. SECTION 11.3. Agreements Respecting Meadowvale. Prior to the Effective Time, Meadowvale will transfer to Donald Cheesman ("Cheesman") real property including land and a home built thereon located at 1529 West Lancaster Street, Bluffton, Indiana and owned by Meadowvale (the "Residence"). In addition, Meadowvale will repay to Cheesman all amounts owing by Meadowvale to Cheesman pursuant to that certain -24- 30 Promissory Note dated February 1, 1986 executed by Meadowvale in favor of Cheesman. After the Effective Time, Acquiror shall, subject to Section 11.6 below, cause Nationwide to honor and pay out of its own funds the debt in the amount of $313,408 owed to Thomas E. Phillippe, Sr. by Shangri-La. The parties to this Agreement agree that the transactions contemplated by this Section 11.3 shall not affect the amount of Exchange Consideration due pursuant to this Agreement. SECTION 11.4. Preservation of Tax-Free Reorganization Treatment. Acquiror shall not take or cause to be taken any action, and shall not permit its affiliates to take or cause to be taken any action within Acquiror's control, whether before or after the Effective Time, which would disqualify any of the Share Exchanges as a "reorganization" within the meaning of Section 368(a)(1)(B) of the Code. Without limiting the foregoing, Acquiror may not participate in any tax-free reorganization or share exchange without first (i) obtaining an unqualified opinion, acceptable in form to the Representative (as defined in the Agreement among Shareholders attached hereto as Exhibit 12.2(i)), of KPMG Peat Marwick LLP that such reorganization or share exchange does not disqualify any of the Share Exchanges as a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Code; and (ii) providing such opinion to the Representative. SECTION 11.5. Publication of Financial Results. In accordance with the Codification of Financial Reporting Policies of the Securities and Exchange Commission, in order to permit the sale of Acquiror Common Shares following the Closing and also to preserve the treatment of the transactions described herein as a pooling of interests for accounting purposes, Acquiror agrees to publish the financial results of the combined operations of Acquiror and the Targets, covering at least 30 days of such combined operations, no later than the last to occur of (a) 60 days following the end of the month in which the Closing occurs and (b) 10 days following delivery of such financial information with respect to the operations previously owned by the Targets as Acquiror considers reasonably necessary to prepare the combined financial results described in this Section 11.5. SECTION 11.6. The Shangri-La Partners. Shangri-La owns an 81-bed long-term care center, known as Rolling Meadows Health Care Center (the "Rolling Meadows Facility"). Pursuant to a certain Lease Agreement (the "Shangri-La Lease") dated September 23, 1991 between Shangri-La and Rolling Meadows Health Care Center, Inc. (the "Lessee"), Shangri-La has leased the Rolling Meadows Facility to the Lessee. The Shangri-La Lease grants the Lessee the option to purchase the Rolling Meadows Facility from Shangri-La. On March 1, 1995, the Lessee notified Shangri-La of its intention to exercise this option. Notwithstanding any other provision of this Agreement, if the Lessee purchases the Rolling Meadows Facility prior to the Effective Time, (a) the partners of Shangri-La shall not be considered parties to the Original Agreement or this Agreement, and such partners shall be released and forever discharged from all obligations thereunder or hereunder, including without limitation, any obligation to assign their partnership interest to Nationwide and any representation or warranty pursuant to Article IV hereof; and (b) Acquiror and Nationwide shall be released and forever discharged from all obligations to the partners of Shangri-La pursuant to the Original Agreement and this Agreement, and the obligation to pay $313,408 to Thomas E. Phillippe, Sr. pursuant to Section 11.3 above. ARTICLE XII THE CLOSING SECTION 12.1. Time and Place. The closing of the transactions contemplated by this Agreement shall take place at the offices of Ice Miller Donadio & Ryan, One American Square, 34th Floor, Indianapolis, Indiana, at 10:00 a.m. Indianapolis time on June 30, 1995, or on such other date as the parties hereafter agree (the "Closing"). SECTION 12.2. Deliveries to Acquiror at the Closing. At the Closing, and simultaneously with the deliveries to the Targets specified in Section 12.3, the Corporate Targets and the Partners shall deliver or cause to be delivered to Acquiror the following: (a) Certificates of the President and Chief Financial Officer of each of the Corporate Targets and of each of the Partners as to the accuracy of its representations and warranties contained in this Agreement -25- 31 and as to its compliance with and fulfillment of all covenants, agreements, obligations and conditions required by this Agreement. (b) Copies of all resolutions adopted by the Board of Directors and the shareholders of each of the Corporate Targets authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, together with a certificate, duly executed by the Secretary of such Target, stating that such copies are true, complete and correct, and that the resolutions have been duly adopted by the Board of Directors and the shareholders, as the case may be, have not been amended since adoption, and remain in full force and effect. (c) Copies of all permits, authorizations, approvals and consents required to be obtained pursuant to Section 8.5. (d) An opinion of Ice Miller Donadio & Ryan, counsel to the Targets, dated the Closing Date, in such form as shall be agreed to by the parties hereto prior to the Closing, in their reasonable discretion. (e) If required by Section 6.6, the written agreements and letters described in Section 6.6. (f) The Certificates and such documents and instruments as agreed to by Acquiror and the Partners. (g) The lease amendment referred to in Section 8.13. (h) Noncompetition Agreements between Acquiror and each of the Phillippes, in the form of Exhibit 12.2(h). (i) Agreements among the shareholders of each of the Corporate Targets in substantially the form of Exhibit 12.2(i). (j) Resignations of each of the officers and directors of each of the Corporate Targets. (k) Evidence of redemption of the Nationwide Preferred Stock. SECTION 12.3. Deliveries to the Targets at the Closing. At the Closing, and simultaneously with the deliveries to Acquiror specified in Section 12.2, Acquiror shall deliver or cause to be delivered to the Targets and the Partners the following: (a) Certificates of the President and Chief Financial Officer of Acquiror as to the accuracy of its representations and warranties contained in this Agreement and as to its compliance with and fulfillment of all covenants, agreements, obligations and conditions required by this Agreement. (b) Copies of all permits, authorizations, approvals and consents required to be obtained pursuant to Section 9.4. (c) An opinion of Richard P. Adcock, General Counsel to Acquiror, dated the Closing Date, in such form as shall be agreed to by the parties hereto prior to the Closing, in their reasonable discretion. (d) The Exchange Consideration (less any amounts to be delivered to the Escrow and the Supplemental Escrow). (e) Evidence of prepayment of the Nationwide Subordinated Notes. ARTICLE XIII INDEMNIFICATION SECTION 13.1. Indemnification of Acquiror. Subject to Section 13.2, and except with respect to Supplemental Losses (as that term is defined in Section 14.1 hereof), Acquiror shall be indemnified and held harmless from and against any damages, loss, cost, liability, or expense (including, without limitation, costs and expenses of litigation, settlement and reasonable attorney's fees, but net of amounts received under applicable insurance carried by the Targets) ("Losses") that may be incurred by or suffered by or asserted -26- 32 against Acquiror or any of its subsidiaries (hereinafter, collectively, the "Indemnified Party"), but without duplication, arising out of or related to, directly or indirectly, the incorrectness of any of the representations or warranties contained in Article IV of this Agreement (or any section of the Disclosure Statement referred to in Article IV), or the breach prior to the Effective Time of any of the covenants or agreements of any Target or Partner contained in this Agreement or in any other instrument executed or delivered by the Targets or the Partners. SECTION 13.2. Threshold and Maximum Amounts. (a) The Indemnified Party shall be entitled to indemnification under this Article XIII only when the aggregate of all Losses suffered by the Indemnified Party, with respect to which the Indemnified Party would otherwise be entitled to indemnification hereunder exceeds Two Hundred and Fifty Thousand Dollars ($250,000.00) (the "Threshold Amount"), whereupon the Indemnified Party shall be entitled to indemnification for any and all such Losses in excess of the Threshold Amount; provided, however, that in the case of the incorrectness of any representation contained in Section 4.2 or fraud, the Threshold Amount shall not apply. (b) Subject to Section 13.2(c) below, the aggregate dollar amount of all Losses the Indemnified Party may be indemnified for under this Article XIII shall not exceed the fair market value, as of the Closing Date, of the Acquiror Common Shares delivered to the Escrow Agent for the Escrow pursuant to Section 3.3 (the "Escrow Value"); provided, however, that, in the case of the incorrectness of any representation contained in Section 4.2 or fraud, the Indemnified Party may be indemnified for an amount in excess of the Escrow Value. (c) Any and all Losses for which the Indemnified Party may be indemnified under this Article XIII shall be paid or satisfied only by distribution to Acquiror of the Acquiror Common Shares and cash, if any, held in the Escrow in accordance with Section 3.3 and the Escrow Agreement attached hereto as Exhibit 3.3(a). The Indemnified Party shall have no recourse against any of the former holders of the Target Common Shares, and such former holders shall have no personal liability to the Indemnified Party with respect to the indemnification provided for in Section 13.1, except to the extent such holders hold Acquiror Common Shares and cash, if any, in the Escrow or, with respect to the Targets and their respective officers, directors and employees only, as otherwise provided in Section 13.2(b). Except with respect to Supplemental Losses, indemnification pursuant to this Article XIII shall be the exclusive remedy of Acquiror for a breach of a representation or warranty made by any Target or Partner or a covenant of any Target or Partner set forth in this Agreement. SECTION 13.3. Survival of Indemnification Obligations. (a) The foregoing indemnification obligations shall survive, in the case of the incorrectness of any representation contained in Section 4.2 or fraud, indefinitely. (b) Except as provided in Section 13.3(a) and subject to Section 13.3(c), the foregoing indemnification obligations shall survive, in the case of the representations and warranties of the Targets and Partners contained in Article IV, until the date that Acquiror's independent accountants have completed the first audit following the Effective Time of Acquiror's and the Targets' combined operations, but not later than one year after the Closing Date. Acquiror Common Shares and cash, if any, held in the Escrow shall be distributed, if available, to the former holders of the Target Common Shares promptly following completion of such audit, but not later than one year after the Closing Date. (c) Notwithstanding the foregoing survival periods, if written notice of a claim or written notice describing with particularity facts and circumstances that exist and will be substantially likely, in the good faith judgment of Acquiror, to give rise to a claim of indemnification hereunder has been given by Acquiror to the Targets prior to the termination of any applicable representation and warranty of the Targets or the termination of the Escrow as specified in the Escrow Procedures, then the relevant representation and warranty, and the term of the Escrow shall survive, solely as to such claim as provided in the notice, until the claim has been finally resolved. -27- 33 ARTICLE XIV SUPPLEMENTAL INDEMNIFICATION SECTION 14.1. Supplemental Indemnification of Acquiror. Subject to Section 14.2, and in addition to the indemnification provided for in Article XIII hereof, an Indemnified Party shall be indemnified and held harmless from and against any Loss that may be incurred by or suffered by or asserted against such Indemnified Party, but without duplication, arising out of or related to, directly or indirectly, the litigation entitled Jerry K. Wright, Guardian of the Estate and Person of Oleta May Skelton, an Adult Incompetent v. Nationwide Care, Inc., Vigo Superior Court, State of Indiana, Cause No. 84D01-9409-CP-1618 (the "Pending Matter")(Losses with respect to the Pending Matter are referred to herein as "Supplemental Losses"). SECTION 14.2. Maximum Amounts. (a) Subject to Section 14.2(b) below, the aggregate dollar amount of all Supplemental Losses the Indemnified Party may be indemnified for under this Article XIV shall not exceed the fair market value, as of the Closing Date, of the Acquiror Common Shares delivered to the Escrow Agent for deposit in the Supplemental Escrow pursuant to Section 3.3 (the "Supplemental Escrow Value"). (b) Any and all Supplemental Losses for which the Indemnified Party may be indemnified under this Article XIV shall be paid or satisfied only by distribution to Acquiror of the Acquiror Common Shares and cash, if any, held in the Supplemental Escrow in accordance with Section 3.3 and the Supplemental Escrow Agreement attached hereto as Exhibit 3.3(b). The Indemnified Party shall have no recourse against any of the former holders of Nationwide, and such former holders shall have no personal liability to the Indemnified Party with respect to the indemnification provided for in Section 14.1, except to the extent such holders hold Acquiror Common Shares and cash, if any, in the Supplemental Escrow. Indemnification pursuant to this Article XIV shall be the exclusive remedy of the Indemnified Party for the incurrence of a Supplemental Loss. SECTION 14.3. Survival of Indemnification Obligations. Notwithstanding the provisions of Section 15.1, the indemnification obligations set forth in this Article XIV with respect to Supplemental Losses shall survive until such time as (a) the Pending Matter has been settled; (b) an order of a court of competent jurisdiction has been entered and either no appeal can be taken from such order or the time for such an appeal has run; or (c) a summary judgment or other order has been granted to the effect that punitive damages will not be awarded with respect to the Pending Matter. ARTICLE XV MISCELLANEOUS PROVISIONS SECTION 15.1. Survival of Representations and Warranties. Except as set forth in Sections 13.3 and 14.3, the representations and warranties contained in this Agreement shall survive until the date that Acquiror's independent accountants have completed the first audit following the Effective Time of Acquiror's and the Targets' combined operations, but not later than one year after the Closing Date. SECTION 15.2. Definition of Knowledge. For purposes of this Agreement, "to the knowledge of" or words of like import mean that the party to which the statement is attributed: (a) has made such investigations, and has made such inquiries of directors, officers, partners and responsible employees of such party and of legal counsel, independent auditors, actuaries and other persons who have performed services for such party as shall be reasonably necessary to determine the accuracy of such representation or warranty; and (b) nothing has come to the person's attention in the course of such investigation and review or otherwise, which would cause the person, in the exercise of reasonable care (in accordance with the standards of what a reasonable person in similar circumstances would have done to satisfy himself as to the accuracy of the representation and warranty), to believe that such representation and warranty is not true and correct in all respects. -28- 34 SECTION 15.3. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 15.4. Entire Agreement. This Agreement and the agreements to be delivered pursuant to this Agreement and the Confidentiality Agreement between the parties dated November 7, 1994 constitute the entire agreement among the parties pertaining to the subject matter contained herein and therein and supersede all other prior and contemporaneous agreements, representations and understandings of the parties. SECTION 15.5. Exhibits and Schedules. All exhibits and schedules attached to this Agreement are incorporated herein and made a part hereof in the same manner as if such exhibits and schedules were set forth at length herein. SECTION 15.6. Parties in Interest. This Agreement will be binding upon and inure solely to the benefit of each of the parties, and nothing in this Agreement, express or implied, is intended to or will confer upon any other person any right, benefit, or remedy; provided, however, each person receiving Acquiror Common Shares in connection with the Share Exchanges or the assignments of the Partnership Interests pursuant to this Agreement shall be a third-party beneficiary of this Agreement and shall be entitled, after the Effective Time, to enforce the Agreement against Acquiror for the benefit of such shareholders with respect to the covenants of Acquiror contained herein and shall be entitled to pursue all remedies available at law or in equity for, and Acquiror shall indemnify such shareholders from, any Losses that may be incurred by or suffered by or asserted against such shareholders (or any of them) arising out of or related to, directly or indirectly, the incorrectness of any representations and warranties of Acquiror in Article V of this Agreement or for any breach of any of the covenants or agreements of Acquiror contained herein. Except in the case of fraud, such indemnification obligations shall survive until the date that Acquiror's independent accountants have completed the first audit following the Effective Time of Acquiror's and the Targets' combined operations, but not later than one year after the Closing Date. SECTION 15.7. Expenses. Each of the parties shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement, except as otherwise expressly provided for herein. SECTION 15.8. Gender. Any reference to the masculine gender shall be deemed to include the feminine and neuter genders unless the context otherwise requires. SECTION 15.9. Governing Law. This Agreement and all transactions contemplated hereby shall be governed, construed and enforced in accordance with the laws of the State of Washington, notwithstanding any state's choice of law rules to the contrary. SECTION 15.10. Headings. The subject headings of the articles and sections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. SECTION 15.11. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties. The party for whose benefit a warranty, representation, covenant or condition is intended may in writing waive any inaccuracies in the warranties and representations contained in this Agreement or waive compliance with any of the covenants or conditions contained herein and so waive performance of any of the obligations of the other party hereto, and any defaults hereunder; provided, however, that such waiver shall not affect or impair the waiving party's rights with respect to any other warranty, representation or covenant or any default hereunder, nor shall any waiver constitute a continuing waiver. SECTION 15.12. Notices. All notices, requests, demands, waivers and other communications required to be given under this Agreement shall be in writing and shall be deemed to have been duly given on (a) the date of service if served personally on the party to whom notice is to be given, (b) the date sent if given by telegram, confirmed facsimile transmission or telex addressed to the party to whom notice is to be given or -29- 35 (c) the third day after mailing if mailed to the party to whom notice is to be given by certified mail, return receipt requested, and properly addressed as follows: If to Acquiror: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Attention: General Counsel Fax: (206) 756-4845 With a copy to: Edmund O. Belsheim, Jr. Bogle & Gates Two Union Square 601 Union Street Seattle, Washington 98101-2346 Fax: (206) 621-2660 If to any of the Targets: Dr. Thomas E. Phillippe, Sr. 9200 Keystone Crossing Suite 800 Indianapolis, Indiana 46240 Fax: (317) 848-3197 With a copy to: Marcus B. Chandler Ice Miller Donadio & Ryan One American Square, Suite 3400 Indianapolis, Indiana 20036 Fax: (317) 236-2219 Any party may change the address to which notice is to be sent or the telephone number for facsimile transmission pursuant to this Section 15.11 by giving written notice thereof in compliance with this section. SECTION 15.13. Press Releases. Acquiror and the Targets shall consult with each other with respect to the form and substance of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby. SECTION 15.14. Rights of Parties. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any person other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third person to any party to this Agreement, nor shall any provision give any third person any right of subrogation or action over or against any party to this Agreement. SECTION 15.15. Successors. This Agreement shall be binding on, and shall inure to the benefit of, the parties and their respective successors and assigns. SECTION 15.16. Intent; Construction. It is the intent of the parties that this Agreement and the transactions contemplated hereby will satisfy the requirements contained in Section 368(a)(1)(B) of the Code and the regulations promulgated thereunder, and that it will qualify as a corporate reorganization without recognition of gain by any of the holders of Target Common Shares other than to the extent any holder shall receive cash in lieu of fractional shares for all or part of his, hers or its Target Common Shares, and this Agreement shall be construed to effect the foregoing. Any transactions inconsistent with the foregoing shall be void and of no force or effect. -30- 36 SECTION 15.17. Release. NCI Acquisition Corp., a party to the Original Agreement, is hereby released of any obligation under the Original Agreement and shall have no obligation under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THE HILLHAVEN CORPORATION By: /s/ ROBERT F. PACQUER --------------------------------- Robert F. Pacquer Senior Vice President and Chief Financial Officer Attest: /s/ RICHARD P. ADCOCK ----------------------------- Richard P. Adcock Secretary NATIONWIDE CARE, INC. By: /s/ THOMAS E. PHILLIPPE, SR. --------------------------------- Dr. Thomas E. Phillippe, Sr. Chairman of the Board Attest: /s/ GREGORY O. MERVINE ----------------------------- Gregory O. Mervine Secretary PHILLIPPE ENTERPRISES, INC. By: /s/ THOMAS E. PHILLIPPE, SR. --------------------------------- Dr. Thomas E. Phillippe, Sr. President Attest: /s/ THOMAS E. PHILLIPPE, JR. ----------------------------- Thomas E. Phillippe, Jr. Secretary MEADOWVALE SKILLED CARE CENTER, INC. By: /s/ DONALD CHEESMAN --------------------------------- Donald Cheesman President Attest: /s/ JOAN M. PHILLIPPE ----------------------------- Joan M. Phillippe Secretary -31- 37 THE PARTNERS OF CAMELOT CARE CENTERS /s/ RODNEY BENSON ------------------------------------- Rodney Benson THE PARTNERS OF SHANGRI-LA PARTNERSHIP /s/ THOMAS E. PHILLIPPE, SR. ------------------------------------- Dr. Thomas E. Phillippe, Sr. /s/ THOMAS E. PHILLIPPE, JR. ------------------------------------- Thomas E. Phillippe, Jr. /s/ LUPE M. BROWNE ------------------------------------- Lupe M. Browne, as Executor of Estate of Jim Browne /s/ GREGORY O. MERVINE ------------------------------------- Gregory O. Mervine THE LIMITED PARTNERS OF EVERGREEN WOODS, LTD. /s/ THOMAS E. PHILLIPPE, SR. ------------------------------------- Dr. Thomas E. Phillippe, Sr. /s/ THOMAS E. PHILLIPPE, JR. ------------------------------------- Thomas E. Phillippe, Jr. /s/ LORENE BURNS ------------------------------------- Lorene Burns /s/ RODNEY BURNS ------------------------------------- Rodney Burns Each of the undersigned persons hereby agrees to vote all shares or ownership interests owned by such person in each of the Targets (as defined in this Agreement) in favor of approval of the transactions contemplated by this Agreement. /s/ THOMAS E. PHILLIPPE, SR. ------------------------------------- Dr. Thomas E. Phillippe, Sr. /s/ THOMAS E. PHILLIPPE, JR. ------------------------------------- Thomas E. Phillippe, Jr. -32- 38 EXHIBIT LISTING Exhibit 3.3(a). Escrow Agreement Exhibit 3.3(b). Supplemental Escrow Agreement Exhibit 6.6(a). Affiliate Letter Exhibit 6.6(b). Pooling Letter Exhibit 6.15. Tax Certificate of Targets Exhibit 7.7. Tax Certificate of Acquiror and AC Exhibit 12.2(h). Noncompetition Agreement Exhibit 12.2(i). Agreement among Shareholders
-33- 39 EXHIBIT 3.3 (A) ESCROW AGREEMENT This ESCROW AGREEMENT (this "Agreement") is made this day of , 1995, by and among The Hillhaven Corporation, a Nevada Corporation (such corporation and its subsidiaries being referred to herein collectively as "Acquiror"), the individuals listed on Exhibit A (collectively, the "Shareholders") and Bank One, Indianapolis, N.A. (the "Escrow Agent"). EXPLANATION STATEMENT A. Acquiror and the Targets are parties to that certain Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests (the "Share Exchange Agreement"), dated as of February 27, 1995. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned thereto in the Share Exchange Agreement. B. Prior to the Effective Time, the Shareholders owned all the capital stock of the Corporate Targets and all the partnership interests in the Partnership Targets. C. In order to induce Acquiror to enter into the Share Exchange Agreement and to consummate the transactions contemplated thereby, the Shareholders wish to execute and deliver this Agreement and to deposit or to cause to be deposited in escrow hereunder certificates representing ten percent (10%) of the Acquiror Common Shares that comprise the Exchange Consideration (such percentage of shares being referred to herein collectively as the "Escrow Shares") to secure the indemnification obligations under Article XIII of the Share Exchange Agreement, the terms of which Article are incorporated herein by this reference. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, and in consideration of the mutual covenants herein contained, agree as follows: 1. DEPOSIT OF ESCROW SHARES; ESCROW ACCOUNT; SHAREHOLDER AGENT. 1.1 Promptly following the Effective Time, Acquiror shall withhold from the Exchange Consideration and deposit with the Escrow Agent the Escrow Shares. The Escrow Agent shall establish an account (the "Escrow Account") for the Shareholders and place the Escrow Shares therein. The Escrow Agent agrees that the Escrow Shares shall be held in the Escrow Account and disbursed by the Escrow Agent in accordance with, and subject to the terms and conditions of, this Agreement. 1.2 Acquiror and the Shareholders acknowledge and agree that, to the extent and for so long as Escrow Shares are held by the Escrow Agent hereunder, Acquiror shall have, as of and from the date such Escrow Shares are received by the Escrow Agent, a perfected, first priority security interest in such Escrow Shares to secure the payment of amounts, if any, payable pursuant to Article XIII of the Share Exchange Agreement. In connection therewith, the Shareholders expressly agree (i) that the Escrow Agent is acting solely as Acquiror's agent to the extent necessary to perfect Acquiror's first-priority security interest in the Escrow Shares and (ii) to execute and deliver such instruments as Acquiror may from time to time reasonably request for the purpose of evidencing and perfecting such security interest. 1.3 All of the Shareholders hereby appoint Thomas E. Phillippe, Jr., an individual (the "Shareholder Agent"), as their attorney-in-fact to act as their agent in the performance of all of their obligations and exercise of all of their rights under this Agreement. 2. VOTING RIGHTS; DIVIDENDS ON ESCROW SHARES; SALE OF SHARES; INVESTMENT OF CASH. 2.1 All voting rights with respect to the Escrow Shares shall remain with the Shareholders. All cash dividends on Escrow Shares shall be distributed by Acquiror to the Escrow Agent. Within three (3) business days following receipt thereof by the Escrow Agent, the Escrow Agent shall distribute such dividends in respect of the Escrow Shares to the Shareholders, respectively. -34- 40 2.2 All non-cash dividends (including, without limitation, any stock split, share dividend, rights offering or recapitalization) on any Escrow Shares shall be added to the Escrow Account as additional Escrow Shares fully subject to the terms of this Agreement. 2.3 At any time while there are Escrow Shares in the Escrow Account, the Shareholder Agent may, by delivering written instructions to the Escrow Agent, direct the Escrow Agent to sell one or more of the Escrow Shares on the NYSE and deposit the sale proceeds into the Escrow Account, which proceeds shall be distributed, designated, withheld and otherwise subject to the terms of this Agreement in the same manner and to the same extent as the Escrow Shares, except that the Escrow Agent shall designate and withhold cash in the Escrow Account, to the extent thereof, to Pending Claim Notices and Escrow Disposition Notices (as defined in Section 4.2) prior to applying any remaining Escrow Shares to such claims. 2.4 Cash deposited into the Escrow Account pursuant to Section 2.3 shall be invested and reinvested by the Escrow Agent in (a) bonds, treasury notes or other evidences of indebtedness of, and those unconditionally guaranteed as to the payment of principal and interest by, the United States, (b) certificates of deposit of banks or trust companies (including the Escrow Agent) organized under the laws of the United States, or any state thereof, each of which has a combined capital, surplus and retained earnings of at least $50,000,000 and (c) money market funds, including short term investment funds of the Escrow Agent. In investing and reinvesting any such monies, the Escrow Agent shall seek to obtain the best yields consistent with safety of principal and ready marketability. The Escrow Agent shall have no duty or right to invest cash on deposit in the Escrow Account other than as provided in the foregoing sentence. Earnings on cash so invested shall be paid to the Shareholders. 3. ACCOUNTING. The Escrow Agent shall mail to Acquiror and the Shareholder Agent a written accounting of all transactions relating to the Escrow Account not less frequently than quarterly. 4. DISPOSITION OF ESCROW SHARES. 4.1 Prior to the Distribution Date (as defined in Section 4.3), Acquiror will issue, or cause to be issued, from time to time to the Escrow Agent and the Shareholder Agent one or more Pending Claim Notices in the form of Exhibit B (each a "Pending Claim Notice") describing with particularity existing facts and circumstances, if any, that are substantially likely, in the good faith judgment of Acquiror, to give rise to a claim of indemnification under Article XIII of the Share Exchange Agreement and designating the number of Escrow Shares necessary to satisfy in whole or, if there are not sufficient Escrow Shares in the Escrow Account, in part such claim. The Escrow Agent shall withhold and distribute such designated number of Escrow Shares as required by Sections 4.2 and 4.3. For all designations, withholdings and distributions of Escrow Shares pursuant to a Pending Claim Notice or Escrow Disposition Notice, the number of Escrow Shares to be designated, withheld and/or distributed shall be (i) determined using the average closing price of one Acquiror Common Share as reported on the NYSE for the ten (10) trading days immediately preceding the date of such notice and (ii) rounded to the nearest whole share. To the extent Acquiror and the Shareholder Agent are not in dispute as to the distribution or retention of Escrow Shares withheld pursuant to a Pending Claim Notice, Acquiror and the Shareholder Agent shall promptly prepare an Escrow Disposition Notice (as defined in Section 4.2) directing the Escrow Agent to so distribute or retain such Escrow Shares. 4.2 The Escrow Agent shall distribute the Escrow Shares only in accordance with (i) written instructions contained in one or more notices in the form of Exhibit C (each an "Escrow Disposition Notice") delivered to the Escrow Agent and executed by Acquiror and the Shareholder Agent, (ii) a final arbitration award secured under the provisions of Section 4.4 hereof, (iii) an order of a court of competent jurisdiction pursuant to Section 9 hereof or (iv) the procedures set forth in Section 4.3, as applicable. The Escrow Agent shall promptly comply with such instructions, award, order or procedures, as applicable, to the extent that there are sufficient Escrow Shares in the Escrow Account to so comply. 4.3 Promptly following the date that Acquiror's independent accountants have completed the first audit following the Effective Time of Acquiror's and the Targets' combined operations, but not later than one year after the Closing Date (such audit completion date being referred to herein as the "Distribution Date"), the -35- 41 Escrow Agent shall distribute to each Shareholder from the Escrow Account his or her percentage interest, as listed on Exhibit A, of the Escrow Shares remaining in the Escrow Account less the number of Escrow Shares specified in any unresolved Pending Claim Notice(s) received by the Escrow Agent prior to the Distribution Date, which specified Escrow Shares the Escrow Agent shall withhold from such distribution and not distribute except as provided in clause (i), (ii) or (iii) of Section 4.2, as applicable. If the first audit of Acquiror's and the Targets' combined operations is completed on or before the date that is one year after the Closing Date, then Acquiror shall notify the Escrow Agent and the Shareholder Agent in writing of such completion within five (5) days following such completion. 4.4 Acquiror and the Shareholder Agent agree to use their respective best efforts to resolve any dispute that may arise with respect to this Agreement, including without limitation any dispute regarding the validity of or the amount of Escrow Shares designated in any Pending Claim Notice, amicably and without resort to any third party dispute resolution forum. At any time Acquiror on the one hand or the Shareholder Agent on the other believes that a dispute exists among the parties with respect to this Agreement, it or he shall give prompt written notice thereof to the other party(s). Any dispute which has not been settled or resolved within thirty (30) days of receipt by Acquiror or the Shareholder Agent of the notice thereof shall be submitted for binding arbitration in Marion County, Indiana in an arbitration proceeding that, except as may otherwise be provided herein, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator chosen in accordance with such rules. All evidentiary and discovery matters shall be conducted in accordance with and governed by the applicable Federal Rules of Civil Procedure. No later than 10 calendar days after the arbitrator is appointed, the arbitrator shall schedule the arbitration for a hearing to commence on a mutually convenient date. All discovery shall be completed no later than the commencement of the arbitration hearing or 90 calendar days after the date that a proper demand for arbitration is served, whichever occurs first, unless, upon a showing of good cause, the arbitrator extends such period. The hearing shall commence no later than 90 calendar days after the arbitrator is appointed and shall continue until completed. The arbitrator shall issue his or her award in writing no later than 20 calendar days after the conclusion of the hearing. The parties to this Agreement agree that, in rendering an award, the arbitrator shall have no jurisdiction to consider evidence with respect to or render any award of judgment for punitive damages or any other amount awarded for purposes of imposing a penalty. The arbitrator shall not have the power to amend this Agreement in any respect. The arbitrator's decision shall be binding and conclusive upon the parties. The costs of any arbitration conducted pursuant to this Section 4.4 shall be borne by the non-prevailing party(s), as identified by the arbitrator, regardless of whether the subject dispute is arbitrated to completion. Each party hereto agrees to provide notice of the commencement of any such arbitration proceeding to the Escrow Agent and the other parties, as the case may be. 5. CONTROL OF LITIGATION. 5.1 Within 20 calendar days following receipt by Acquiror of notice of any claim by a third party or of the commencement of any action or proceeding by a third party which may give rise to an indemnity claim under Article XIII of the Share Exchange Agreement, Acquiror shall notify the Shareholder Agent in writing of such claim, action or proceeding; provided, that failure to give such notification shall not affect Acquiror's rights to indemnification under Article XIII of the Share Exchange Agreement, except to the extent the Shareholder Agent shall have been prejudiced as a result of such failure. Upon receipt of such written notice, the Shareholder Agent shall be entitled to participate in and, to the extent that it may wish, unless it is reasonably foreseeable that the Losses from such claim, action or proceeding will exceed the value of the Escrow Shares remaining in the Escrow Account or such claim, action or proceeding involves a claim for injunction or other specific relief, assume the defense, conduct or settlement of such claim, action or proceeding by giving written notice thereof to Acquiror within forty-five (45) days of his receipt of notice of such claim, action or proceeding. After delivery of such notice to Acquiror, the Shareholders shall not be liable to Acquiror for any legal expenses subsequently incurred by Acquiror in connection with the defense, conduct or settlement of such claim, action or proceeding; provided, that, if the Shareholder Agent fails to take reasonable steps necessary to diligently defend such claim, action or proceeding within 20 calendar days after receiving written notice from Acquiror that it believes the Shareholder Agent has failed to take such steps, then Acquiror may assume such defense, and the Shareholders shall be liable for any expenses therefor. -36- 42 Without limiting the foregoing sentence, if the Shareholder Agent assumes the defense of a third party claim, action or proceeding hereunder, then Acquiror shall have the right to participate in such defense at its own expense by giving prompt written notice thereof to the Shareholder Agent. If, after assuming the defense of a third party claim, action or proceeding hereunder, the Shareholder Agent obtains an award from the third party claimant on behalf of the Shareholders, then Acquiror shall be entitled to recover its costs, including reasonable attorney's fees of outside counsel incurred in defending such claim and obtaining such award, from the proceeds of such award; provided, that such recovery shall not be a waiver of any right, claim or amount to which Acquiror may otherwise be entitled. In the event the Shareholder Agent assumes the defense of a claim, action or proceeding hereunder, the Shareholder Agent shall be entitled to receive from the Escrow Agent distributions of cash or Escrow Shares from the Escrow Account to reimburse the Shareholder Agent (and, thereby, the Shareholders for whom he will be acting) for the reasonable costs incurred in such defense as well as the costs of any settlement or damages paid with respect to such claim, action or proceeding. The Escrow Agent shall make such a distribution to the Shareholder Agent only upon the receipt of a properly executed Escrow Disposition Notice. 5.2 To the extent that a third party may be responsible for a Loss incurred or suffered by Acquiror, Acquiror either (a) may seek recovery of the Loss from the third party, in which case the Shareholders shall be responsible only to the extent that the Loss is not recoverable from the third party (other than claims for Losses incurred in obtaining such recovery), or (b) seek indemnification from the Shareholders for the Loss pursuant to Article XIII of the Share Exchange Agreement, in which case Acquiror shall assign to the Shareholders all rights relating to the Loss that Acquiror may have against the third party, shall not release the third party from its obligations and shall cooperate with the Shareholders and take all other action reasonably requested by the Shareholders to enable them to seek recovery of the Loss from the third party. 5.3 Notwithstanding anything herein to the contrary, neither Acquiror on the one hand nor the Shareholder Agent on the other shall have the right to settle or compromise a third-party claim, action or proceeding without obtaining the prior written consent of the other, which consent shall not be unreasonably withheld. In addition, the Shareholder Agent shall not permit to exist any lien, encumbrance or other adverse charge upon any asset of, or consent to the imposition of any injunction against, Acquiror or any of its respective affiliates without obtaining its prior written consent, which consent shall not be unreasonably withheld. 6. ESCROW PROVISIONS. 6.1 Upon termination of this Agreement and delivery of the balance of the Escrow Shares to the parties entitled thereto, the Escrow Agent shall be discharged from any further obligation hereunder. 6.2 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety, validity or service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that any person purporting to give notice or receipt or advice, or make any statement or execute any document, in connection with the provisions hereof has been duly authorized to do so. 6.3 The Escrow Agent shall not be liable to the other parties hereto for any error of judgment, action taken or omitted in good faith or mistake of fact or law, or anything which it may do or refrain from doing in connection therewith, except in the case of its own gross negligence, willful misconduct or bad faith. 6.4 The Escrow Agent shall be entitled to consult with competent and responsible counsel of its choice with respect to the interpretation of the provisions hereof, and any other legal matters relating hereto, and shall be fully protected in taking any action or omitting to take any action in good faith and in accordance with the advice of such counsel. 6.5 The Escrow Agent shall be entitled to be indemnified and held harmless by Acquiror and the Shareholders, jointly and severally, for any and all claims, liabilities, costs, payments and expenses, including reasonable fees of counsel (who may be selected by the Escrow Agent), incurred by the Escrow Agent which -37- 43 arise out of or in connection with any act or omission by it in the performance of its obligations under this Agreement, except in the case of the Escrow Agent's own gross negligence, willful misconduct or bad faith. 7. TIME OF PERFORMANCE. Whenever under the terms hereof the time for performance of any provision shall fall on a date which is not a regular business day of the Escrow Agent, the performance thereof on the next succeeding regular business day of the Escrow Agent shall be deemed to be in full compliance. 8. DEATH, DISABILITY, ETC. The death, disability, bankruptcy or insolvency of any of the Shareholders shall not affect or prevent the performance by the Escrow Agent of its obligations and instructions received hereunder. Without limiting the foregoing sentence, the Shareholder Agent shall notify the Escrow Agent in writing of any person who or that, as a result of a Shareholder's death, disability, bankruptcy or insolvency, should receive distributions, if any, that would otherwise be made hereunder to such Shareholder. 9. RESOLUTION OF CONTROVERSIES. In the event any dispute or controversy arises respecting the administration or disposition of the Escrow Shares, or any part thereof, and such dispute or controversy has not been submitted to arbitration as provided in Section 4.4 hereof, the Escrow Agent shall have the right but not the obligation to interplead the parties to such dispute or controversy in any court of competent jurisdiction, including but not limited to the courts of the State of Indiana and the United States District Court for the Southern District of Indiana which shall be deemed to be courts of competent jurisdiction, and to deposit with such court the Escrow Shares remaining in the Escrow Account, or any portion thereof. Thereafter the Escrow Agent shall be fully released and discharged from all further obligations hereunder with respect to the Escrow Shares held in the Escrow Account or the portion thereof deposited with the court in such proceedings, except in the case of its own gross negligence, willful misconduct, or bad faith. Acquiror and the Shareholders, jointly and severally, shall reimburse the Escrow Agent for all expenses, fees and charges (including reasonable attorneys' fees and expenses) reasonably incurred by the Escrow Agent in any such interpleader action. 10. RESIGNATION OR REMOVAL OF ESCROW AGENT. If the Escrow Agent resigns or is removed, then Acquiror and the Shareholder Agent shall mutually agree upon and name a substitute for the Escrow Agent ("Successor Escrow Agent"), which shall be a bank or trust company and which shall perform the same duties and responsibilities, and which shall be entitled to the same protection and substantially equivalent fees, as the original Escrow Agent named herein. The Escrow Agent shall have the unequivocal right to resign as Escrow Agent upon at least sixty (60) days' prior written notice delivered to Acquiror and the Shareholder Agent; provided, that, in any event, such resignation shall not be effective until such time as a Successor Escrow Agent has been appointed, has accepted its appointment and has taken possession of the Escrow Shares. Upon mutual agreement by Acquiror and the Shareholder Agent, the Escrow Agent may be removed upon at least sixty (60) days' prior written notice; provided, that, in any event, such removal shall not be effective until such time as a Successor Escrow Agent has been appointed, has accepted its appointment and has taken possession of the Escrow Shares. In either of said events, if a Successor Escrow Agent is not appointed within said sixty (60) day period, the Escrow Agent, Acquiror or the Shareholder Agent may petition a court of competent jurisdiction to name a Successor Escrow Agent, whether by interpleader or other appropriate action, and the decision of such court shall be binding upon all parties to this Agreement. 11. ACCEPTANCE OF ESCROW: COMPENSATION OF ESCROW AGENT. The Escrow Agent hereby agrees to serve as Escrow Agent pursuant to this Agreement and to perform the duties and responsibilities conferred upon it hereunder. The Escrow Agent has agreed to serve hereunder for such fees as are set forth in Exhibit D, which fees are to be paid as described in Exhibit D. Such fees shall be borne by Acquiror. 12. TERMINATION. This Agreement shall terminate without further action of any party when all of the terms hereof shall have been fully performed. -38- 44 13. NOTICES. Any notice, request, instruction or other document to be given under this Agreement by any party shall be in writing and shall be delivered personally, by registered or certified mail, postage prepaid, return receipt requested, by overnight courier or by facsimile transmission, as follows: (a) If to Acquiror, at: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98402 Attention: General Counsel Facsimile: (206) 756-4845 With a copy to: Edmund O. Belsheim, Jr. Bogle & Gates Two Union Square 601 Union Street Seattle, WA 98101-2346 Facsimile: (206) 621-2660 (b) If to the Shareholders, at: c/o Thomas E. Phillippe, Jr. Attention: Facsimile: With a copy to: Marcus B. Chandler, Esq. ICE MILLER DONADIO & RYAN One American Square Box 82001 Indianapolis, IN 46282-0002 Facsimile: (317) 236-2219 or to such other address or person as any party may designate by a notice to the other parties which is given in the manner required above. Any such notice, request, instruction or other document shall be deemed to have been delivered and received as of the date personally delivered, or if mailed, three days after the date so mailed, or if telecopied, the date on which such telecopy is sent (as confirmed by return facsimile transmission) or if by overnight courier the day following the day on which such notice is properly placed with the courier. 14. COOPERATION WITH ESCROW AGENT. The parties to this Agreement shall cooperate with the Escrow Agent, as the Escrow Agent reasonably deems necessary or desirable to perform its duties and obligations under this Agreement. Without limiting the foregoing, the parties shall provide the Escrow Agent with all information necessary to make any distribution, including names, addresses, social security numbers and tax identification numbers. The Escrow Agent shall be entitled to rely upon the most recent information received from any party without further inquiry and each party shall be responsible for notifying the Escrow Agent of any new or changed information pertaining to such party. 15. TAXES: REPORTS TO GOVERNMENTAL AUTHORITIES. The Shareholders severally agree to assume any obligations imposed now or hereafter by any applicable tax law with respect to any payment from the Escrow Account to the Shareholders under this Agreement and undertake to instruct the Escrow Agent in writing with respect to the Escrow Agent's responsibility for withholding taxes and any other taxes, assessments or -39- 45 other governmental charges and any certifications and governmental reporting required in connection therewith. 16. MISCELLANEOUS. 16.1 This Agreement may not be amended or modified in any way except by an instrument in writing signed by all of the parties hereto. 16.2 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Indiana without reference to its conflicts of law provisions. 16.3 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 16.4 The headings contained in this Agreement are for convenience only, shall not affect this Agreement in any way, and shall not be used to construe or interpret the scope or intent of this Agreement. 16.5 This Agreement shall inure to the benefit of and shall bind the parties hereto and their respective heirs, devisees, personal representatives, successors, transferees and assigns; provided, that, except as otherwise expressly set forth in this Agreement, including without limitation Section 10, neither the rights nor the obligations of any party may be assigned or delegated without the prior written consent of the other parties. IN WITNESS WHEREOF, the parties have duly executed and have caused to be duly executed this Agreement as of the date first written above. THE HILLHAVEN CORPORATION By ------------------------------------ Name: Title: -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- BANK ONE, INDIANAPOLIS, N.A. By ------------------------------------ Name: Title: -40- 46 EXHIBIT A SHAREHOLDERS
INDIVIDUAL PERCENTAGE - ---------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
-41- 47 EXHIBIT B PENDING CLAIM NOTICE To: Bank One, Indianapolis, N.A. From: The Hillhaven Corporation Date: ------------------------------
This Pending Claim Notice is delivered to you pursuant to Section 4.1 of the Escrow Agreement, dated , 1995 (the "Escrow Agreement"), by and among The Hillhaven Corporation, a Nevada corporation, the Shareholders and Bank One, Indianapolis, N.A. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to those terms in the Escrow Agreement. Please be advised that you are hereby instructed to withhold from the distribution to the Shareholders that is due to be made on the Distribution Date from the Escrow Account a total of Escrow Shares. The undersigned maintains in good faith that it is entitled to indemnification in the aforementioned amount of Escrow Shares pursuant to the terms of the Share Exchange Agreement based upon the following: [LIST INDEMNIFICATION ITEMS AND THE AMOUNT OF EACH ITEM. ATTACH ANY DOCUMENTS REASONABLY DEMONSTRATING THE INDEMNIFICATION ITEMS.] The Shareholder Agent has been sent a copy of this Pending Claim Notice along with any attached information relating to the claimed right to indemnification. Signed this day of , 199 . THE HILLHAVEN CORPORATION By -------------------------------- Name: Title: -42- 48 EXHIBIT C ESCROW DISPOSITION NOTICE To: Bank One, Indianapolis, N.A. From: The Hillhaven Corporation Thomas E. Phillippe, Jr. Date: -------------------------------
This Escrow Disposition Notice is delivered to you pursuant to Section 4.2 of the Escrow Agreement, dated , 1995 (the "Escrow Agreement"), by and among The Hillhaven Corporation, a Nevada corporation, the Shareholders and Bank One, Indianapolis, N.A. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to those terms in the Escrow Agreement. Please be advised that you are hereby directed to [distribute from] [retain in] the Escrow Account the property now held in your possession and described herein in the following manner, to wit: [STATE THE NUMBER OF ESCROW SHARES TO BE DISTRIBUTED OR RETAINED AND, IF DISTRIBUTED, THE RECIPIENT(S) OF SUCH SHARES] Signed this day of , 199 . THE HILLHAVEN CORPORATION By ----------------------------------- Name: Title: -------------------------------------- Thomas E. Phillippe, Jr. -43- 49 EXHIBIT D ESCROW AGENT FEES DOLLARS ($ ) PER YEAR -44- 50 EXHIBIT 3.3(B) ESCROW AGREEMENT This ESCROW AGREEMENT (this "Agreement") is made this day of , 1995, by and among The Hillhaven Corporation, a Nevada Corporation (such corporation and its subsidiaries being referred to herein collectively as "Acquiror"), the individuals listed on Exhibit A (collectively, the "Shareholders") and Bank One, Indianapolis, N.A. (the "Escrow Agent"). EXPLANATION STATEMENT A. Acquiror and the Targets are parties to that certain Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests (the "Share Exchange Agreement"), dated as of February 27, 1995. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned thereto in the Share Exchange Agreement. B. Prior to the Effective Time, the Shareholders owned all the capital stock of Nationwide Care, Inc., an Indiana corporation. C. In order to induce Acquiror to enter into the Share Exchange Agreement and to consummate the transactions contemplated thereby, the Shareholders wish to execute and deliver this Agreement and to deposit or to cause to be deposited in escrow hereunder certificates representing five percent (5%) of the Acquiror Common Shares that comprise the Exchange Consideration (such percentage of shares being referred to herein collectively as the "Escrow Shares") to secure the indemnification obligations under Article XIV of the Share Exchange Agreement, the terms of which Article are incorporated herein by this reference. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, and in consideration of the mutual covenants herein contained, agree as follows: 1. DEPOSIT OF ESCROW SHARES; ESCROW ACCOUNT; SHAREHOLDER AGENT. 1.1 Promptly following the Effective Time, Acquiror shall withhold from the Exchange Consideration and deposit with the Escrow Agent the Escrow Shares. The Escrow Agent shall establish an account (the "Escrow Account") for the Shareholders and place the Escrow Shares therein. The Escrow Agent agrees that the Escrow Shares shall be held in the Escrow Account and disbursed by the Escrow Agent in accordance with, and subject to the terms and conditions of, this Agreement. 1.2 Acquiror and the Shareholders acknowledge and agree that, to the extent and for so long as Escrow Shares are held by the Escrow Agent hereunder, Acquiror shall have, as of and from the date such Escrow Shares are received by the Escrow Agent, a perfected, first priority security interest in such Escrow Shares to secure the payment of amounts, if any, payable pursuant to Article XIV of the Share Exchange Agreement. In connection therewith, the Shareholders expressly agree (i) that the Escrow Agent is acting solely as Acquiror's agent to the extent necessary to perfect Acquiror's first-priority security interest in the Escrow Shares and (ii) to execute and deliver such instruments as Acquiror may from time to time reasonably request for the purpose of evidencing and perfecting such security interest. 1.3 All of the Shareholders hereby appoint Thomas E. Phillippe, Jr., an individual (the "Shareholder Agent"), as their attorney-in-fact to act as their agent in the performance of all of their obligations and exercise of all of their rights under this Agreement. 2. VOTING RIGHTS; DIVIDENDS ON ESCROW SHARES; SALE OF SHARES; INVESTMENT OF CASH. 2.1 All voting rights with respect to the Escrow Shares shall remain with the Shareholders. All cash dividends on Escrow Shares shall be distributed by Acquiror to the Escrow Agent. Within three (3) business days following receipt thereof by the Escrow Agent, the Escrow Agent shall distribute such dividends in respect of the Escrow Shares to the Shareholders, respectively. -45- 51 2.2 All non-cash dividends (including, without limitation, any stock split, share dividend, rights offering or recapitalization) on any Escrow Shares shall be added to the Escrow Account as additional Escrow Shares fully subject to the terms of this Agreement. 2.3 At any time while there are Escrow Shares in the Escrow Account, the Shareholder Agent may, by delivering written instructions to the Escrow Agent, direct the Escrow Agent to sell one or more of the Escrow Shares on the NYSE and deposit the sale proceeds into the Escrow Account, which proceeds shall be distributed, designated, withheld and otherwise subject to the terms of this Agreement in the same manner and to the same extent as the Escrow Shares. 2.4 Cash deposited into the Escrow Account pursuant to Section 2.3 shall be invested and reinvested by the Escrow Agent in (a) bonds, treasury notes or other evidences of indebtedness of, and those unconditionally guaranteed as to the payment of principal and interest by, the United States, (b) certificates of deposit of banks or trust companies (including the Escrow Agent) organized under the laws of the United States, or any state thereof, each of which has a combined capital, surplus and retained earnings of at least $50,000,000 and (c) money market funds, including short term investment funds of the Escrow Agent. In investing and reinvesting any such monies, the Escrow Agent shall seek to obtain the best yields consistent with safety of principal and ready marketability. The Escrow Agent shall have no duty or right to invest cash on deposit in the Escrow Account other than as provided in the foregoing sentence. Earnings on cash so invested shall be paid to the Shareholders. 3. ACCOUNTING. The Escrow Agent shall mail to Acquiror and the Shareholder Agent a written accounting of all transactions relating to the Escrow Account not less frequently than quarterly. 4. DISPOSITION OF ESCROW SHARES. 4.1 The Escrow Agent shall distribute the Escrow Shares only in accordance with (i) written instructions contained in the form of Exhibit B (the "Escrow Disposition Notice") delivered to the Escrow Agent and executed by Acquiror and the Shareholder Agent, (ii) a final arbitration award secured under the provisions of Section 4.3 hereof, or (iii) an order of a court of competent jurisdiction pursuant to Section 9, as applicable. The Escrow Agent shall promptly comply with such instructions, award or order, as applicable, to the extent that there are sufficient Escrow Shares in the Escrow Account to so comply. The number of Escrow Shares to be distributed hereunder shall be (i) determined using the average closing price of one Acquiror Common Share as reported on the NYSE for the ten (10) trading days immediately preceding the date of such distribution and (ii) rounded to the nearest whole share. 4.2 Promptly following the earlier of the date that the [redacted] Litigation (as defined in this Section 4.2) has been settled or otherwise finally resolved or the date that a summary judgment to the effect that punitive damages will not be allowed in such litigation has been granted, either of which must be reflected in a final order of a court of competent jurisdiction from which appeal may not be taken (due to lapse of time or otherwise), Acquiror and the Shareholder Agent shall, subject to Section 4.3, prepare and deliver to the Escrow Agent the Escrow Disposition Notice, and the Escrow Agent shall distribute the Escrow Shares to the Shareholders and/or Acquiror in accordance therewith. As used herein, the "[redacted] Litigation" shall mean [redacted]. 4.3 Acquiror and the Shareholder Agent agree to use their respective best efforts to resolve any dispute that may arise with respect to this Agreement amicably and without resort to any third party dispute resolution forum. At any time Acquiror on the one hand or the Shareholder Agent on the other believes that a dispute exists among the parties with respect to this Agreement, it or he shall give prompt written notice thereof to the other party(s). Any dispute which has not been settled or resolved within thirty (30) days of receipt by Acquiror or the Shareholder Agent of the notice thereof shall be submitted for binding arbitration in Marion County, Indiana in an arbitration proceeding that, except as may otherwise be provided herein, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator chosen in accordance with such rules. All evidentiary and discovery matters shall be conducted in accordance with and governed by the applicable Federal Rules of Civil Procedure. No later than -46- 52 10 calendar days after the arbitrator is appointed, the arbitrator shall schedule the arbitration for a hearing to commence on a mutually convenient date. All discovery shall be completed no later than the commencement of the arbitration hearing or 90 calendar days after the date that a proper demand for arbitration is served, whichever occurs first, unless, upon a showing of good cause, the arbitrator extends such period. The hearing shall commence no later than 90 calendar days after the arbitrator is appointed and shall continue until completed. The arbitrator shall issue his or her award in writing no later than 20 calendar days after the conclusion of the hearing. The parties to this Agreement agree that, in rendering an award, the arbitrator shall have no jurisdiction to consider evidence with respect to or render any award of judgment for punitive damages or any other amount awarded for purposes of imposing a penalty. The arbitrator shall not have the power to amend this Agreement in any respect. The arbitrator's decision shall be binding and conclusive upon the parties. The costs of any arbitration conducted pursuant to this Section 4.3 shall be borne by the non-prevailing party(s), as identified by the arbitrator, regardless of whether the subject dispute is arbitrated to completion. Each party hereto agrees to provide notice of the commencement of any such arbitration proceeding to the Escrow Agent and the other parties, as the case may be. 5. CONTROL OF LITIGATION. 5.1 The Shareholder Agent shall control the defense, conduct or settlement of the [redacted] Litigation, and Acquiror shall have the right, at its own expense, to participate therein by giving written notice to the Shareholder Agent. If the Shareholder Agent obtains an award from the third party claimant in the [redacted] Litigation on behalf of the Shareholders, then Acquiror shall be entitled to recover its costs, including reasonable attorney's fees of outside counsel incurred in defending such claim and obtaining such award, from the proceeds of such award; provided, that such recovery shall not be a waiver of any right, claim or amount to which Acquiror may otherwise be entitled. 5.2 Notwithstanding anything herein to the contrary, the Shareholder Agent shall not have the right to settle or compromise the [redacted] Litigation without obtaining the prior written consent of Acquiror, which consent shall not be unreasonably withheld. In addition, the Shareholder Agent shall not permit to exist any lien, encumbrance or other adverse charge upon any asset of, or consent to the imposition of any injunction against, Acquiror or any of its affiliates without obtaining its prior written consent, which consent shall not be unreasonably withheld. 6. ESCROW PROVISIONS. 6.1 Upon termination of this Agreement and delivery of the balance of the Escrow Shares to the parties entitled thereto, the Escrow Agent shall be discharged from any further obligation hereunder. 6.2 The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety, validity or service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it to be genuine and may assume that any person purporting to give notice or receipt or advice, or make any statement or execute any document, in connection with the provisions hereof has been duly authorized to do so. 6.3 The Escrow Agent shall not be liable to the other parties hereto for any error of judgment, action taken or omitted in good faith or mistake of fact or law, or anything which it may do or refrain from doing in connection therewith, except in the case of its own gross negligence, willful misconduct or bad faith. 6.4 The Escrow Agent shall be entitled to consult with competent and responsible counsel of its choice with respect to the interpretation of the provisions hereof, and any other legal matters relating hereto, and shall be fully protected in taking any action or omitting to take any action in good faith and in accordance with the advice of such counsel. 6.5 The Escrow Agent shall be entitled to be indemnified and held harmless by Acquiror and the Shareholders, jointly and severally, for any and all claims, liabilities, costs, payments and expenses, including reasonable fees of counsel (who may be selected by the Escrow Agent), incurred by the Escrow Agent which -47- 53 arise out of or in connection with any act or omission by it in the performance of its obligations under this Agreement, except in the case of the Escrow Agent's own gross negligence, willful misconduct or bad faith. 7. TIME OF PERFORMANCE. Whenever under the terms hereof the time for performance of any provision shall fall on a date which is not a regular business day of the Escrow Agent, the performance thereof on the next succeeding regular business day of the Escrow Agent shall be deemed to be in full compliance. 8. DEATH, DISABILITY, ETC. The death, disability, bankruptcy or insolvency of any of the Shareholders shall not affect or prevent the performance by the Escrow Agent of its obligations and instructions received hereunder. Without limiting the foregoing sentence, the Shareholder Agent shall notify the Escrow Agent in writing of any person who or that, as a result of a Shareholder's death, disability, bankruptcy or insolvency, should receive distributions, if any, that would otherwise be made hereunder to such Shareholder. 9. RESOLUTION OF CONTROVERSIES. In the event any dispute or controversy arises respecting the administration or disposition of the Escrow Shares, or any part thereof, and such dispute or controversy has not been submitted to arbitration as provided in Section 4.3 hereof, the Escrow Agent shall have the right but not the obligation to interplead the parties to such dispute or controversy in any court of competent jurisdiction, including but not limited to the courts of the State of Indiana and the United States District Court for the Southern District of Indiana which shall be deemed to be courts of competent jurisdiction, and to deposit with such court the Escrow Shares remaining in the Escrow Account, or any portion thereof. Thereafter the Escrow Agent shall be fully released and discharged from all further obligations hereunder with respect to the Escrow Shares held in the Escrow Account or the portion thereof deposited with the court in such proceedings, except in the case of its own gross negligence, willful misconduct, or bad faith. Acquiror and the Shareholders, jointly and severally, shall reimburse the Escrow Agent for all expenses, fees and charges (including reasonable attorneys' fees and expenses) reasonably incurred by the Escrow Agent in any such interpleader action. 10. RESIGNATION OR REMOVAL OF ESCROW AGENT. If the Escrow Agent resigns or is removed, then Acquiror and the Shareholder Agent shall mutually agree upon and name a substitute for the Escrow Agent ("Successor Escrow Agent"), which shall be a bank or trust company and which shall perform the same duties and responsibilities, and which shall be entitled to the same protection and substantially equivalent fees, as the original Escrow Agent named herein. The Escrow Agent shall have the unequivocal right to resign as Escrow Agent upon at least sixty (60) days' prior written notice delivered to Acquiror and the Shareholder Agent; provided, that, in any event, such resignation shall not be effective until such time as a Successor Escrow Agent has been appointed, has accepted its appointment and has taken possession of the Escrow Shares. Upon mutual agreement by Acquiror and the Shareholder Agent, the Escrow Agent may be removed upon at least sixty (60) days' prior written notice; provided, that, in any event, such removal shall not be effective until such time as a Successor Escrow Agent has been appointed, has accepted its appointment and has taken possession of the Escrow Shares. In either of said events, if a Successor Escrow Agent is not appointed within said sixty (60) day period, the Escrow Agent, Acquiror or the Shareholder Agent may petition a court of competent jurisdiction to name a Successor Escrow Agent, whether by interpleader or other appropriate action, and the decision of such court shall be binding upon all parties to this Agreement. 11. ACCEPTANCE OF ESCROW: COMPENSATION OF ESCROW AGENT. The Escrow Agent hereby agrees to serve as Escrow Agent pursuant to this Agreement and to perform the duties and responsibilities conferred upon it hereunder. The Escrow Agent has agreed to serve hereunder for such fees as are set forth in Exhibit C, which fees are to be paid as described in Exhibit C. Such fees shall be borne by Acquiror. 12. TERMINATION. This Agreement shall terminate without further action of any party when all of the terms hereof shall have been fully performed. -48- 54 13. NOTICES. Any notice, request, instruction or other document to be given under this Agreement by any party shall be in writing and shall be delivered personally, by registered or certified mail, postage prepaid, return receipt requested, by overnight courier or by facsimile transmission, as follows: (a) If to Acquiror, at: The Hillhaven Corporation 1148 Broadway Plaza Tacoma, WA 98402 Attention: General Counsel Facsimile: (206) 756-4845 With a copy to: Edmund O. Belsheim, Jr. Bogle & Gates Two Union Square 601 Union Street Seattle, WA 98101-2346 Facsimile: (206) 621-2660 (b) If to the Shareholders, at: c/o Thomas E. Phillippe, Jr. --------------------------------------------- --------------------------------------------- Attention: Facsimile: With a copy to: Marcus B. Chandler, Esq. ICE MILLER DONADIO & RYAN One American Square Box 82001 Indianapolis, IN 46282-0002 Facsimile: (317) 236-2219 or to such other address or person as any party may designate by a notice to the other parties which is given in the manner required above. Any such notice, request, instruction or other document shall be deemed to have been delivered and received as of the date personally delivered, or if mailed, three days after the date so mailed, or if telecopied, the date on which such telecopy is sent (as confirmed by return facsimile transmission) or if by overnight courier the day following the day on which such notice is properly placed with the courier. 14. COOPERATION WITH ESCROW AGENT. The parties to this Agreement shall cooperate with the Escrow Agent, as the Escrow Agent reasonably deems necessary or desirable to perform its duties and obligations under this Agreement. Without limiting the foregoing, the parties shall provide the Escrow Agent with all information necessary to make any distribution, including names, addresses, social security numbers and tax identification numbers. The Escrow Agent shall be entitled to rely upon the most recent information received from any party without further inquiry and each party shall be responsible for notifying the Escrow Agent of any new or changed information pertaining to such party. 15. TAXES: REPORTS TO GOVERNMENTAL AUTHORITIES. The Shareholders severally agree to assume any obligations imposed now or hereafter by any applicable tax law with respect to any payment from the Escrow Account to the Shareholders under this Agreement and undertake to instruct the Escrow Agent in writing with respect to the Escrow Agent's responsibility for withholding taxes and any other taxes, assessments or -49- 55 other governmental charges and any certifications and governmental reporting required in connection therewith. 16. MISCELLANEOUS. 16.1 This Agreement may not be amended or modified in any way except by an instrument in writing signed by all of the parties hereto. 16.2 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Indiana without reference to its conflicts of law provisions. 16.3 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 16.4 The headings contained in this Agreement are for convenience only, shall not affect this Agreement in any way, and shall not be used to construe or interpret the scope or intent of this Agreement. 16.5 This Agreement shall inure to the benefit of and shall bind the parties hereto and their respective heirs, devisees, personal representatives, successors, transferees and assigns; provided, that, except as otherwise expressly set forth in this Agreement, including without limitation Section 10, neither the rights nor the obligations of any party may be assigned or delegated without the prior written consent of the other parties. IN WITNESS WHEREOF, the parties have duly executed and have caused to be duly executed this Agreement as of the date first written above. THE HILLHAVEN CORPORATION By ---------------------------------- Name: Title: ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ BANK ONE, INDIANAPOLIS, N.A. By ---------------------------------- Name: Title: -50- 56 EXHIBIT A SHAREHOLDERS INDIVIDUAL - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- -51- 57 EXHIBIT B ESCROW DISPOSITION NOTICE To: Bank One, Indianapolis, N.A. From: The Hillhaven Corporation Thomas E. Phillippe, Jr. Date: --------------------------- This Escrow Disposition Notice is delivered to you pursuant to Section 4.1 of the Escrow Agreement, dated , 1995 (the "Escrow Agreement"), by and among The Hillhaven Corporation, a Nevada corporation, the Shareholders and Bank One, Indianapolis, N.A. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to those terms in the Escrow Agreement. Please be advised that you are hereby directed to distribute from the Escrow Account the property now held in your possession and described herein in the following manner, to wit: [STATE THE NUMBER OF ESCROW SHARES/AMOUNT OF CASH TO BE DISTRIBUTED AND THE RECIPIENT(S) OF SUCH SHARES/CASH] Signed this day of , 1995. THE HILLHAVEN CORPORATION By ---------------------------------- Name: Title: ------------------------------------- Thomas E. Phillippe, Jr. -52- 58 EXHIBIT C ESCROW AGENT FEES DOLLARS ($ ) PER YEAR -53- 59 EXHIBIT 6.15 CERTIFICATE EXECUTED BY NATIONWIDE CARE, INC. This Certificate is executed and delivered in connection with the Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests, by and among The Hillhaven Corporation, a Nevada corporation ("Acquiror"), Nationwide Care, Inc., an Indiana corporation ("Nationwide"), Phillippe Enterprises, Inc., an Indiana corporation ("PEI"), Meadowvale Skilled Care Center, Inc., an Indiana corporation ("Meadowvale") (Nationwide, PEI and Meadowvale are collectively referred to as the "Targets"), the partners of Camelot Care Centers, an Indiana general partnership ("Camelot"), the partners of Shangri-La Partnership, an Indiana general partnership ("Shangri-La"), and the limited partners of Evergreen Woods, Ltd., a Florida limited partnership ("Evergreen") (Camelot, Shangri-La and Evergreen are collectively referred to as the "Partnerships"), dated as of February 27, 1995 ("Reorganization Agreement"); and the documents executed and delivered in connection therewith (collectively with the Reorganization Agreement, the "Transaction Documents"). Terms which are not defined herein and are used with initial capitalization when the rules of grammar would not otherwise so require and which are defined in the Transaction Documents shall have the meanings assigned to such terms in the Transaction Documents. In accordance with Section 9.10 of the Reorganization Agreement, the undersigned has requested the opinions of Ice Miller Donadio & Ryan as to certain federal income tax consequences of the Share Exchange as a condition precedent to Closing. In rendering its opinion, Ice Miller Donadio & Ryan may assume that, and the undersigned hereby certifies, represents, and warrants to Ice Miller Donadio & Ryan that: (1) the Share Exchange will be consummated in accordance with the terms, conditions, and other provisions of the Transaction Documents; and (2) all of the factual information, descriptions, representations, and assumptions set forth in the Transaction Documents, in the Form S-4 Registration Statement to be filed with the Securities and Exchange Commission on April , 1995 in connection with the Share Exchange (the "Registration Statement"), and in this Certificate are accurate and complete in all respects and will be accurate and complete in all respects at the time the Registration Statement becomes effective and at the Effective Time of the Share Exchange (the "Effective Time"). Pursuant to the foregoing, the undersigned hereby certifies, represents, and warrants to Ice Miller Donadio & Ryan as follows: THE SHARE EXCHANGE Nationwide operates long-term health care centers primarily located in Indiana, Ohio and Florida. Dr. Thomas E. Phillippe, Sr. and Thomas E. Phillippe, Jr. are the majority owners of Nationwide. The capital structure of Nationwide consists of: 48,000,000 authorized shares of Common Stock, without par value, of which approximately 7,431,458 shares are issued and outstanding (the "Nationwide Voting Common"); 2,000,000 authorized shares of Nonvoting Common Stock, without par value, of which 76,592 shares are issued and outstanding (the "Nationwide Nonvoting Common") (the Nationwide Voting Common and the Nationwide Nonvoting Common are collectively referred to herein as the "Nationwide Common Shares"); and 2,000,000 authorized shares of Preferred Stock, without par value, of which 300,000 shares of Redeemable Preferred Stock are issued and outstanding (the "Nationwide Preferred Stock"). Nationwide also has outstanding warrants to purchase 987,188 shares of Nationwide Nonvoting Common (the "Nationwide Warrants"). Nationwide files a consolidated return with its one subsidiary, and Nationwide does not have an excess loss account with respect to the stock of, or gains deferred under Treasury Regulation sec. 1502-13 with respect to, any such subsidiary. The Share Exchange is totally unrelated to the Nationwide 1993 reorganization. The Transaction Documents provide that all of the outstanding Nationwide Common Shares will be exchanged solely for shares of Acquiror Common Stock. The Share Exchange will be consummated in accordance with the Indiana Business Corporation Law, as amended ("BCL"), and the Nevada General Corporation Law, as amended ("NCL"). The Share Exchange was approved by the Board of Directors of -54- 60 Nationwide on April , 1995 and is subject to the approval of the holders of a majority of the outstanding shares of Nationwide stock at a duly called and held meeting of the Nationwide shareholders on June , 1995. At the Effective Time, each Nationwide Common Share then outstanding will be exchanged for that number of shares of Acquiror Common Stock determined in accordance with the Reorganization Agreement, rounded to the nearest whole share. Other than shares of Acquiror Common Stock, there will be no cash or other property exchanged in the Share Exchange. Prior to the Effective Time, the Nationwide Preferred Stock will be redeemed by Nationwide with its own funds and without reimbursement directly or indirectly from Acquiror. Prior to the Effective Time, the Nationwide Warrants shall be exercised into the corresponding number of Nationwide Nonvoting Common pursuant to the terms of the Warrants, and the resulting Nationwide Nonvoting Common will be exchanged for that number of shares of Acquiror Common Stock determined in accordance with the Reorganization Agreement, rounded to the nearest whole share. At the Closing, the Nationwide Subordinated Notes will be prepaid directly by Acquiror. The Nationwide Subordinated Notes are debt (not stock or equity) under general principles of federal taxation law, and Acquiror will not pay any amounts in excess of such indebtedness. The Nationwide Common Shares held by the holders of the Nationwide Subordinated Notes shall be valued in the Share Exchange in the same manner as other Nationwide Common Shares. Except for the redemption of the Nationwide Preferred Stock, there have been and will be no distributions to any of the Nationwide shareholders with respect to their Nationwide stock in contemplation of the Share Exchange, and no Nationwide stock has been or will be sold, redeemed or otherwise disposed of in contemplation of the Share Exchange. Nationwide shareholders are entitled to dissenters' rights in connection with the proposed Share Exchange. Any payments to dissenters in connection with the Share Exchange shall be made by Nationwide out of its own funds without reimbursement directly or indirectly from Acquiror. Except for the Nationwide Warrants, there are no outstanding options or warrants to purchase any Nationwide stock or outstanding securities or other instruments or rights convertible into any Nationwide stock or which constitute equity under general principles of federal tax law, and no such options, warrants, securities, instruments, or rights have been or will be issued or cancelled in contemplation of the Share Exchange. At the Effective Time, the Partnership Interests shall be assigned to Nationwide. All of the parties to the Reorganization Agreement agree that the Partnership Interests have no value, nor do they represent liabilities. None of the Acquiror Common Stock is being transferred pursuant to the Reorganization Agreement in exchange for such Partnership Interests. The parties agree that the shareholders of the Targets and Partners of the Partnerships were not the primary obligors with respect to the obligations which they personally guaranteed and which will be released prior to the Share Exchange. The Nationwide Common Shares held by the Partners and by the guarantors shall be valued in the Share Exchange in the same manner as the other Nationwide Common Shares. Any debts owed by any Partnership to any of the Target shareholders (including without limitation the debt owed by Shangri-La to Thomas E. Phillippe, Sr.) shall be paid by Nationwide out of its own funds without reimbursement directly or indirectly from Acquiror. Acquiror is making no payment of cash or Acquiror Common Stock or other property or assuming any liabilities in connection with or pursuant to the assumption of the Partnership Interests, releases of guarantees or the Noncompetition Agreements, and will not directly or indirectly reimburse Nationwide for any such payments. ADDITIONAL REPRESENTATIONS 1. The fair market value of the shares of Acquiror Common Stock received by each Nationwide shareholder will be approximately equal to the fair market value of the shares of Nationwide stock surrendered in exchange therefor. 2. There is no plan or intention by the shareholders of Nationwide who own one percent or more of the shares of Nationwide stock, and to the best of the knowledge of the management of Nationwide, there is no plan or intention on the part of the remaining shareholders of Nationwide to sell, exchange, or otherwise dispose of a number of shares of Acquiror Common Stock received in the Share Exchange that -55- 61 would reduce the Nationwide shareholders' ownership of such shares of Acquiror Common Stock (i.e., the shares of Acquiror Common Stock received in the Share Exchange) to a number of shares having an aggregate value, as of the Effective Time, of less than 50 percent of the value of all of the formerly outstanding shares of Nationwide stock as of the same date. For purposes of this representation, shares of Nationwide stock surrendered by dissenters will be treated as outstanding shares of Nationwide stock at the Effective Time. Moreover, shares of Nationwide stock and shares of Acquiror Common Stock held by Nationwide shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Share Exchange (including the Nationwide Preferred Stock) will be considered in making this representation. Except for the redemption of the Nationwide Preferred Stock, there have been and will be no distributions to the Nationwide shareholders with respect to their Nationwide stock made in contemplation of the Share Exchange, and no Nationwide stock has been or will be sold, redeemed or otherwise disposed of in contemplation of the Share Exchange. 3. Nationwide has no plan or intention to issue additional shares of its stock that would result in Acquiror losing control of Nationwide within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 4. Acquiror will acquire Nationwide stock solely in exchange for Acquiror voting stock (Acquiror Common Shares). For purposes of this representation, Nationwide stock redeemed for cash or other property furnished by Acquiror will be considered as acquired by Acquiror. Further, no liabilities of Nationwide or the Nationwide shareholders will be assumed by Acquiror, nor will any of the Nationwide stock be subject to any liabilities. 5. At the Effective Time, Nationwide will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in Nationwide that, if exercised or converted, would affect Acquiror's acquisition or retention of control of Nationwide, as defined in Code Section 368(c). 6. Nationwide will pay its dissenting shareholders the value of their stock out of its own funds. No funds will be supplied for that purpose, directly or indirectly, by Acquiror, nor will Acquiror directly or indirectly reimburse Nationwide for any payments to dissenters. 7. The liabilities of Nationwide were incurred by Nationwide in the ordinary course of its business. 8. Acquiror does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any Nationwide stock, including ownership by any Acquiror subsidiary. 9. Nationwide will pay its expenses incurred in connection with the Share Exchange. Nationwide will not pay the expenses of Acquiror or the Nationwide shareholders incurred in connection with the Share Exchange; provided, however, that Nationwide may pay certain expenses it was previously obligated to pay by contract in connection with the issuance of the Nationwide Warrants, Nationwide Subordinated Notes and Nationwide Preferred Stock out of its own funds and without reimbursement directly or indirectly from Acquiror. 10. There is no intercorporate indebtedness existing between Acquiror and Nationwide or between Acquiror and any Nationwide subsidiary that was issued, acquired, or will be settled at a discount. 11. Neither Nationwide nor any Nationwide subsidiary is an investment company as defined in Code Sections 368 (a)(2)(F)(iii) and 368(a)(2)(F)(iv). 12. Neither Nationwide nor any Nationwide subsidiary is under the jurisdiction of a court in a Title 11 or similar case within the meaning of Code Section 368(a)(3)(A). 13. At the Effective Time, the fair market value of the assets of Nationwide will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 14. None of the compensation received by any shareholder who is an employee of Nationwide will be separate consideration for, or allocable to, any of their shares of Nationwide stock. None of the shares of Acquiror Common Stock received by any shareholder who is an employee of Nationwide will be separate consideration for, or allocable to, any employment agreement. The compensation paid to any shareholder who is an employee of Nationwide will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. -56- 62 15. The Share Exchange is being effected for bona fide business reasons, including without limitation the reasons set forth in the Registration Statement. Nationwide has looked for opportunities to expand its nursing care operations and increase its operating efficiencies. Nationwide also recognizes that some of its senior management executives, who are both officers and directors, are approaching retirement age, and others have expressed a desire to reduce or discontinue their role in the management of Nationwide. Consequently, Nationwide, in considering business expansion opportunities, has looked for businesses with strong senior management with experience in the nursing care industry. Nationwide determined that Acquiror offers an opportunity for it to meet these objectives. Nationwide believes that a combination of its operations with Acquiror will provide increased opportunity and flexibility for profitable expansion and diversification, will enhance its ability to provide more efficient and dependable service, and will result in operating efficiencies and cost savings. 16. To the extent that a portion of the shares of Acquiror Common Stock issued by Acquiror in exchange for Nationwide stock will be placed in escrow by the Nationwide shareholders and will be made subject to a condition pursuant to the Reorganization Agreement and the Escrow Agreement, for possible return to Acquiror under specified conditions: (1) there is a valid business reason for establishing the arrangement in that the escrow is a mechanism to accomplish an exchange price adjustment, bargained for at arm's length, in the event of a breach by Nationwide, and no Nationwide shareholder is liable for any such breach; (2) the shares of Acquiror Common Stock subject to such arrangement will appear as issued and outstanding on the balance sheet of Acquiror and such shares of Acquiror Common Stock will be legally outstanding under applicable state law; (3) all dividends paid on such shares of Acquiror Common Stock will be distributed currently to the Nationwide shareholders; (4) all voting rights of such shares of Acquiror Common Stock will be exercisable by or on behalf of the Nationwide shareholders or their authorized agent; (5) no shares of such Acquiror Common Stock will be subject to restrictions requiring their return to Acquiror because of death, failure to continue employment, or similar restrictions; (6) all such shares of Acquiror Common Stock will be released from the arrangement within five years from the date of consummation of the Share Exchange (except where there is a bona fide dispute as to whom the shares of Acquiror Common Stock should be released); (7) at least 50 percent of the number of shares of each class of Acquiror Common Stock issued initially to the Nationwide shareholders will not be subject to the arrangement; (8) the return of the shares of Acquiror Common Stock will not be triggered by an event the occurrence or nonoccurrence of which is within the control of the Nationwide shareholders; (9) the return of shares of Acquiror Common Stock will not be triggered by the payment of additional tax or reduction in tax paid as a result of an Internal Revenue Service audit of the Nationwide shareholders or the corporations either (a) with respect to the Share Exchange, or (b) when the Share Exchange involves persons related within the meaning of Code Section 267(c)(4); and (10) the mechanism for the calculation of the number of shares of Acquiror Common Stock to be returned is objective and will be readily ascertainable. The foregoing is provided to Ice Miller Donadio & Ryan in connection with the preparation of its opinions. We understand that its opinions will be premised on the basis that all of the facts, representations, and assumptions on which it is relying, whether contained herein or elsewhere, are accurate and complete in all respects and will be accurate and complete in all respects at the time the Registration Statement becomes effective and at the Effective Time. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of this day of , 1995. NATIONWIDE CARE, INC. By: ------------------------------- Dr. Thomas E. Phillippe, Sr., Chairman of the Board -57- 63 EXHIBIT 6.6(A) , 1995 The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Gentlemen: Reference is made to the Restated and Amended Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests dated as of , 1995, as amended (the "Agreement"), by and among The Hillhaven Corporation ("Acquiror"), Nationwide Care, Inc. ("Nationwide"), Phillippe Enterprises, Inc. ("PEI"), Meadowvale Skilled Care Center, Inc. ("Meadowvale") and specified Partners of Camelot Care Centers ("Camelot"), Evergreen Woods, Ltd. ("Evergreen") and Shangri-La Partnership ("Shangri-La")(Nationwide, PEI and Meadowvale are collectively referred to herein as the "Corporate Targets"; Camelot, Evergreen and Shangri-La are collectively referred to herein as the "Partnership Targets"; the Corporate Targets and Partnership Targets are collectively referred to herein as the "Targets"), providing for the exchange of all of the outstanding common stock of each of the Corporate Targets for common stock of the Acquiror and the assignment of all interests in the Partnership Targets to Nationwide (collectively, the "Acquisitions"). Pursuant to the Agreement, I may receive a certain number of shares of Common Stock, par value $0.75 per share, of Acquiror in exchange for the shares of Common Stock of the Corporate Targets (the "Target Common Shares") or interests in the Partnership Targets (the "Target Interests") owned by me (all shares of Acquiror Common Stock to be acquired by me pursuant to the Agreement being hereinafter referred to as "Acquiror Common Shares"). I have been advised that I may be deemed to be an "affiliate" of at least one of the Targets within the meaning of Rule 144 of the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Act"), and as that term is used in paragraphs (c) and (d) of Rule 145 under the Act. For all purposes of this letter, the term "affiliate" shall have the foregoing meaning. I understand that the Targets are obligated, pursuant to Section 6.6 of the Agreement, to use their best efforts to cause me, and each person identified as a possible affiliate, to deliver this letter (hereinafter referred to as an "Affiliate Letter") to Acquiror. A. In connection with, and in consideration of, the matters set forth above: 1. I confirm that I have no agreement (oral or written) with any other affiliate of the Targets pursuant to which I am subject to restrictions on sales similar to the restrictions in this Affiliate Letter. I represent and warrant that as of the date hereof I beneficially own such Target Common Shares and Target Interests as are listed on Schedule A attached hereto. 2. I understand that the Acquiror Common Shares will, upon the effectiveness of the Acquisitions, be registered with the SEC under the Act. However, I also understand that, since I may be an affiliate of one of the Targets at the time the Agreement is submitted to the stockholders and partners of the Targets for approval and the distribution by me as a former affiliate of a Target of Acquiror Common Shares has not been registered under the Act, any sale or disposition by me of any of the Acquiror Common Shares may, under current law, be made only in conformity with the provisions of Rule 145(d) under the Act, pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration thereunder. I understand that the provisions of Rule 145(d) restrict my sales, during the two-year period after the effective date of the Acquisitions, and permit sales, in general, while Acquiror is subject to the requirements to file, and is filing, periodic reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, only in brokers' transactions or transactions directly with a market maker where the aggregate number of shares sold at any time together with all sales of restricted Acquiror securities sold for my account during the preceding three-month period, does not exceed, generally, the greater of (i) one percent of the outstanding shares of Common Stock of Acquiror, or (ii) the average weekly volume of trading in such securities on all national securities exchanges and/or -58- 64 reported through the automated quotation system of a registered securities association during the four-week period preceding any such sale, all as set forth in more detail in Rules 144 and 145 under the Act. 3. In view of the foregoing paragraph 2, unless the Agreement is terminated, I agree that after the effective date of the Acquisitions, I will not offer to sell, sell or otherwise dispose of Acquiror Common Shares except (i) pursuant to an effective registration statement; (ii) pursuant to the provisions of Rule 145 under the Act; or (iii) pursuant to another exemption from registration under the Act. 4. I have carefully read this letter and understand the limitations stated herein upon the sale, transfer or other disposition of (i) Target Common Shares and Target Interests beneficially owned by me or hereafter acquired by me and (ii) Acquiror Common Shares that I may acquire pursuant to the Agreement. B. In connection herewith, Acquiror represents, warrants, acknowledges and agrees as follows: 1. Acquiror shall not give, or cause to be given, stop transfer instructions to the transfer agent of Acquiror with respect to any of the Acquiror Common Shares issued in connection with the Acquisitions except for such instructions as shall be in conformity with the provisions hereof, and shall place, or cause to be placed, on any certificate representing such Acquiror Common Shares only the following legend: The shares represented by this certificate were issued in a transaction to which Rule 145 under the Securities Act of 1933 applies. The shares represented by this certificate may be transferred only in accordance with the terms of a letter agreement dated , 1995 between the registered holder and The Hillhaven Corporation, a copy of which is on file at the principal offices of The Hillhaven Corporation. 2. Acquiror shall use its best efforts to file, in a timely manner, all reports with the SEC necessary for the current public information requirement of Rule 144 under the Act to be satisfied. Very truly yours, -------------------------------------- Agreed this day of , 1995: The Hillhaven Corporation - --------------------------------------------------------- Name: Title: -59- 65 EXHIBIT 6.6 (B) , 1995 The Hillhaven Corporation 1148 Broadway Plaza Tacoma, Washington 98402 Gentlemen: Reference is made to the Restated and Amended Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests dated as of , 1995, as amended (the "Agreement"), by and among The Hillhaven Corporation ("Acquiror"), Nationwide Care, Inc. ("Nationwide"), Phillippe Enterprises, Inc. ("PEI"), Meadowvale Skilled Care Center, Inc. ("Meadowvale") and specified Partners of Camelot Care Centers ("Camelot"), Evergreen Woods, Ltd. ("Evergreen") and Shangri-La Partnership ("Shangri-La")(Nationwide, PEI and Meadowvale are collectively referred to herein as the "Corporate Targets"; Camelot, Evergreen and Shangri-La are collectively referred to herein as the "Partnership Targets"; the Corporate Targets and Partnership Targets are collectively referred to herein as the "Targets"), providing for the exchange of all of the outstanding common stock of each of the Corporate Targets for common stock of the Acquiror and the assignment of all interests in the Partnership Targets to Nationwide (collectively, the "Acquisitions"). Pursuant to the Agreement, I may receive a certain number of shares of Common Stock, par value $0.75 per share, of Acquiror in exchange for the shares of Common Stock of the Corporate Targets (the "Target Common Shares") or interests in the Partnership Targets (the "Target Interests") owned by me (all shares of Acquiror Common Stock to be acquired by me pursuant to the Agreement being hereinafter referred to as "Acquiror Common Shares"). I understand that the Targets are obligated, pursuant to Section 6.6 of the Agreement, to use their best efforts to cause each shareholder of the Corporate Targets and each partner of the Partnership Targets to deliver this letter (hereinafter referred to as the a "Pooling Letter") to Acquiror. In connection with, and in consideration of, the matters set forth above: 1. I confirm that I have no agreement (oral or written) with any other shareholder or partner of the Targets pursuant to which I am subject to restrictions on sales similar to the restrictions in this Pooling Letter. I represent and warrant that as of the date hereof I beneficially own such Target Common Shares and Target Interests as are listed on Schedule A attached hereto. 2. I understand that, for accounting purposes, it is anticipated that the Acquisitions will qualify for pooling-of-interests accounting treatment under generally accepted accounting principles and that, in order for the Acquisitions to so qualify, shareholders or partners of any Target can sell Target Common Shares, Target Interests and Acquiror Common Shares only in accordance with certain restrictions. In this connection, I will not make any sales of Target Common Shares or Target Interests prior to the effective date of the Acquisitions, or sales of Acquiror Common Shares after the effective date of the Acquisitions, that would cause the criteria for pooling-of-interests accounting treatment to be violated, it being understood that sales of shares in accordance with paragraph 3 below shall be deemed not to violate my obligations under this Pooling Letter. 3. In view of the foregoing paragraph 2, unless the Agreement is terminated, I agree that with respect to the period beginning on the effective date of the Acquisitions and ending at such time as financial results covering at least 30 days of post-Acquisition combined operations have been published, I will not sell, transfer or otherwise dispose of, or reduce my interest in, or risk relating to, any Acquiror Common Shares received by me pursuant to the Agreement, unless prior to any such transaction I have obtained a letter from an independent public accounting firm satisfactory to Acquiror to the effect that such transactions will not cause the criteria for pooling-of-interests accounting to be violated. -60- 66 4. I have carefully read this letter and understand the limitations stated herein upon the sale, transfer or other disposition of (i) Target Common Shares and Target Interests beneficially owned by me or hereafter acquired by me and (ii) Acquiror Common Shares that I may acquire pursuant to the Agreement. Very truly yours, ------------------------------------- -61- 67 EXHIBIT 7.7 CERTIFICATE EXECUTED BY THE HILLHAVEN CORPORATION FOR NATIONWIDE CARE, INC. This Certificate is executed and delivered in connection with the Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests, by and among The Hillhaven Corporation, a Nevada corporation ("Acquiror"), Nationwide Care, Inc., an Indiana corporation ("Nationwide"), Phillippe Enterprises, Inc., an Indiana corporation ("PEI"), Meadowvale Skilled Care Center, Inc., an Indiana corporation ("Meadowvale") (Nationwide, PEI and Meadowvale are collectively referred to as the "Targets"), the partners of Camelot Care Centers, an Indiana general partnership ("Camelot"), the partners of Shangri-La Partnership, an Indiana general partnership ("Shangri-La"), and the limited partners of Evergreen Woods, Ltd., a Florida limited partnership ("Evergreen") (Camelot, Shangri-La and Evergreen are collectively referred to as the "Partnerships"), dated as of February 27, 1995 ("Reorganization Agreement"); and the documents executed and delivered in connection therewith (collectively with the Reorganization Agreement, the "Transaction Documents"). Terms which are not defined herein and are used with initial capitalization when the rules of grammar would not otherwise so require and which are defined in the Transaction Documents shall have the meanings assigned to such terms in the Transaction Documents. In accordance with Section 9.10 of the Reorganization Agreement, Nationwide has requested the opinions of Ice Miller Donadio & Ryan as to certain federal income tax consequences of the Share Exchange as a condition precedent to Closing. This Certificate is issued by Acquiror in accordance with Section 7.7 of the Reorganization Agreement. In rendering its opinion, Ice Miller Donadio & Ryan may assume that, and the undersigned hereby certifies, represents, and warrants to Ice Miller Donadio & Ryan that: (1) the Share Exchange will be consummated in accordance with the terms, conditions, and other provisions of the Transaction Documents; and (2) all of the factual information, descriptions, representations, and assumptions set forth in the Transaction Documents, in the Form S-4 Registration Statement to be filed with the Securities and Exchange Commission on April , 1995 in connection with the Share Exchange (the "Registration Statement"), and in this Certificate are accurate and complete in all respects and will be accurate and complete in all respects at the time the Registration Statement becomes effective and at the Effective Time of the Share Exchange (the "Effective Time"). Pursuant to the foregoing, the undersigned hereby certifies, represents, and warrants to Ice Miller Donadio & Ryan as follows: THE SHARE EXCHANGE Acquiror and its subsidiaries operate nursing centers, pharmacies and retirement housing communities. The capital structure of Acquiror consists of 60 million authorized shares of voting Common Stock, par value $.75 per share of which approximately 32,824,863 are outstanding (the "Acquiror Common Shares"); 25 million authorized shares of preferred stock, par value $0.15 per share, of which the following series have been designated: 3 million authorized shares of Series A Preferred Stock, of which no shares are outstanding; 950 authorized shares of Series B Convertible Preferred Stock, of which 618 shares have been designated as Subseries 1, of which no shares are outstanding; 35,000 authorized shares of Series C Preferred Stock, all of which are outstanding; and 300,000 authorized shares of Series D Preferred Stock, of which approximately 63,403 are outstanding. The Transaction Documents provide that all of the outstanding shares of common stock of Nationwide will be exchanged solely for Acquiror Common Shares. The Share Exchange will be consummated in accordance with the Indiana Business Corporation Law, as amended ("BCL"), and the Nevada General Corporation Law, as amended ("NCL"). The Share Exchange was approved by the Board of Directors of Acquiror on April 12, 1995, and does not require the approval of the Acquiror shareholders. -62- 68 At the Effective Time, each Nationwide Common Share then outstanding will be exchanged for that number of shares of Acquiror Common Stock determined in accordance with the Reorganization Agreement, rounded to the nearest whole share. Other than shares of Acquiror Common Stock, there will be no cash or other property exchanged in the Share Exchange. Prior to the Effective Time, the Nationwide Preferred Stock will be redeemed by Nationwide with its own funds and without reimbursement directly or indirectly from Acquiror. Immediately prior to the Effective Time, the Nationwide Warrants shall be exercised into the corresponding number of Nationwide Nonvoting Common pursuant to the terms of the Warrants, and the resulting Nationwide Nonvoting Common will be exchanged for that number of shares of Acquiror Common Stock determined in accordance with the Reorganization Agreement, rounded to the nearest whole share. At the Closing, the Nationwide Subordinated Notes will be prepaid directly by Acquiror. The Nationwide Subordinated Notes are debt (not stock or equity) under general principles of federal taxation law, and Acquiror will pay only the fair market value of such indebtedness, and will not pay any amounts in excess of such indebtedness. The Nationwide Common Shares held by the holders of the Nationwide Subordinated Notes shall be valued in the Share Exchange in the same manner as the other Nationwide Common Shares. At the Effective Time, the Partnership Interests shall be assigned to Nationwide. All of the parties to the Reorganization Agreement agree that the Partnership Interests have no value, nor do they represent liabilities. None of the Acquiror Common Stock is being transferred pursuant to the Reorganization Agreement in exchange for such Partnership Interests. The parties agree that the shareholders of the Targets and Partners of the Partnerships were not the primary obligors with respect to the obligations which they personally guaranteed and which will be released prior to the Share Exchange. The Nationwide Common Shares held by the Partners and by the guarantors shall be valued in the Share Exchange in the same manner as the other Nationwide Common Shares. Any debts owed by any Partnership to any of the Target shareholders (including without limitation the debt owed by Shangri-La to Thomas E. Phillippe, Sr.) shall be paid by Nationwide out of its own funds without reimbursement directly or indirectly from Acquiror. Acquiror is making no payment of cash or Acquiror Common Stock or other property or assuming any liabilities in connection with or pursuant to the assumption of the Partnership Interests, releases of gurantees or the Noncompetition Agreements, and will not directly or indirectly reimburse Nationwide for any such payments. Acquiror will not make, directly or indirectly, any payments to dissenters or any other distributions to the Nationwide shareholders with respect to their Nationwide stock in contemplation of the Share Exchange. Except for the Nationwide Warrants, Acquiror is not aware of any outstanding options or warrants to purchase Nationwide shares or outstanding securities or other instruments or rights, convertible into Nationwide shares or which constitute equity under general principles of federal tax law, and no such options, warrants, securities, instruments or rights have been or will be issued or cancelled in contemplation of the Share Exchange. ADDITIONAL REPRESENTATIONS 1. The fair market value of the shares of Acquiror Common Stock received by each Nationwide shareholder will be approximately equal to the fair market value of the shares of Nationwide stock surrendered in exchange therefor. 2. Following the Share Exchange, Acquiror will not permit Nationwide to issue additional shares of its stock that would result in Acquiror losing control of Nationwide within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. Acquiror has no plan or intention to reacquire any of its stock issued in the Share Exchange. 4. Acquiror has no plan or intention to liquidate Nationwide or any Nationwide subsidiary; to merge Nationwide or any Nationwide subsidiary with and into another corporation; to cause or permit Nationwide to sell or otherwise dispose of any of its assets, or the assets of any Nationwide subsidiary, -63- 69 except for dispositions made in the ordinary course of business; or to sell or otherwise dispose of the stock of Nationwide or any Nationwide subsidiary except for transfers described in Code Section 368 (a)(2)(C). 5. Following the Share Exchange, Nationwide will continue its historic business or use a significant portion of its historic business assets in a business. 6. Acquiror will pay its expenses incurred in connection with the Share Exchange. Acquiror will not pay the expenses of Nationwide or the Nationwide shareholders, if any, incurred in connection with the Share Exchange. 7. Acquiror will acquire Nationwide stock solely in exchange for Acquiror voting stock (Acquiror Common Shares). For purposes of this representation, Nationwide stock redeemed for cash or other property furnished by Acquiror will be considered as acquired by Acquiror. Further, no liabilities of Nationwide or the Nationwide shareholders will be assumed by Acquiror, nor will any of the Nationwide stock be subject to any liabilities. 8. Nationwide will pay its dissenting shareholders the value of their stock out of its own funds. No funds will be supplied for that purpose, directly or indirectly, by Acquiror, nor will Acquiror directly or indirectly reimburse Nationwide for any payments to dissenters. 9. There is no intercorporate indebtedness existing between Acquiror and Nationwide or between Acquiror and any Nationwide subsidiaries that was issued, acquired, or will be settled at a discount. 10. Acquiror is not an investment company as defined in Code Sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv). 11. Acquiror is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Code Section 368(a)(3)(A). 12. Acquiror does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any shares of Nationwide stock, including any ownership by any Acquiror subsidiary. Acquiror will not acquire, directly or indirectly, any shares of Nationwide stock prior to the Effective Time. 13. The Share Exchange is being effected for bona fide business reasons, including without limitation the reasons set forth in the Registration Statement and for the reasons that Acquiror and its subsidiaries have looked for growth opportunities which would increase their percentage share of the nursing care market while increasing their operating efficiencies by achieving economies of scale as a larger service provider. Due in part to the proximity of the service areas, Acquiror determined that Nationwide represented such an opportunity and expressed an interest in combining the resources of the companies. Acquiror believes that a combination of its operations with Nationwide will provide increased opportunity and flexibility for profitable expansion and diversification, will enhance their ability to provide more efficient and dependable service, and will result in operating efficiencies and cost savings. 14. At the Effective Time, the fair market value of the assets of Nationwide will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 15. None of the compensation received by any shareholder who is an employee of Nationwide will be separate consideration for, or allocable to, any of such shareholder's shares of Nationwide stock. None of the shares of Acquiror Common Stock received by any shareholder who is an employee of Nationwide will be separate consideration for, or allocable to, any employment agreement. The compensation paid to any shareholder who is an employee of Nationwide will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 16. To the extent that a portion of the shares of Acquiror Common Stock issued in exchange for the Nationwide stock will be placed in escrow by the Nationwide shareholders and will be made subject to a condition pursuant to the Reorganization Agreement and the Escrow Agreement, for possible return to Acquiror under specified conditions: (1) there is a valid business reason for establishing the arrangement -64- 70 in that the escrow is a mechanism to accomplish an exchange price adjustment, bargained for at arm's length, in the event of a breach by Nationwide, and no Nationwide shareholder is liable for any such breach; (2) the shares of Acquiror Common Stock subject to such arrangement will appear as issued and outstanding on the balance sheet of Acquiror and such shares of Acquiror Common Stock will be legally outstanding under applicable state law; (3) all dividends paid on such shares of Acquiror Common Stock will be distributed currently to the Nationwide shareholders; (4) all voting rights of such shares of Acquiror Common Stock will be exercisable by or on behalf of the Nationwide shareholders or their authorized agent; (5) no shares of such Acquiror Common Stock will be subject to restrictions requiring their return to Acquiror because of death, failure to continue employment, or similar restrictions; (6) all such shares of Acquiror Common Stock will be released from the arrangement within five years from the date of consummation of the Share Exchange (except where there is a bona fide dispute as to whom the shares of Acquiror Common Stock should be released); (7) at least 50 percent of the number of shares of each class of Acquiror Common Stock issued initially to the Nationwide shareholders will not be subject to the arrangement; (8) the return of the shares of Acquiror Common Stock will not be triggered by an event the occurrence or nonoccurrence of which is within the control of the Nationwide shareholders; (9) the return of shares of Acquiror Common Stock will not be triggered by the payment of additional tax or reduction in tax paid as a result of an Internal Revenue Service audit of the Nationwide shareholders or the corporations either (a) with respect to the Share Exchange, or (b) when the Share Exchange involves persons related within the meaning of Code Section 267(c)(4); and (10) the mechanism for the calculation of the number of shares of Acquiror Common Stock to be returned is objective and will be readily ascertainable. 17. The purpose of the Hillhaven rights plan is to provide a mechanism by which Hillhaven, a publicly traded corporation, can, in the future, provide shareholders with rights to purchase Hillhaven stock at substantially less than fair market value as a means of responding to unsolicited offers to acquire Hillhaven. The plan provides that in the event of an unsolicited offer in the future to acquire Hillhaven under certain circumstances (a "triggering event"), the Hillhaven shareholders will have the right to purchase Hillhaven stock. The rights until they become exercisable may be redeemed at any time by Hillhaven for one cent per right until a specified date. Until a triggering event, the rights are not exercisable or separately tradeable, transferrable, or detachable, nor are they represented by any certificate other than the Acquiror Common Share certificate. Until a triggering event occurs, the exercise price is anticipated to exceed the value of the Hillhaven stock at all times during the life of the right. The likelihood that the rights would, at any time, be exercised is both remote and speculative. No event has occurred, or is anticipated to occur, that would make the rights exercisable. The foregoing is provided to Ice Miller Donadio & Ryan in connection with the preparation of its opinions. We understand that its opinions will be premised on the basis that all of the facts, representations, and assumptions on which it is relying, whether contained herein or elsewhere, are accurate and complete in all respects and will be accurate and complete in all respects at the time the Registration Statement becomes effective. IN WITNESS WHEREOF, the undersigned have executed this Certificate as of this day of , 1995. THE HILLHAVEN CORPORATION By: ------------------------------- Printed: -------------------------- Title: ---------------------------- -65- 71 EXHIBIT 12.2(H) PART 1 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (this "Agreement"), dated [ ], 1995, is made among The Hillhaven Corporation, a Nevada corporation ("Acquiror"), and Dr. Thomas E. Phillippe, Sr. ("Phillippe"), an individual. WHEREAS, Phillippe and certain other persons have, on this date, as part of a single transaction, delivered to Acquiror all the issued and outstanding shares of the capital stock of Nationwide Care, Inc. ("Nationwide"), Phillippe Enterprises, Inc., and Meadowvale Skilled Care Center, Inc., each an Indiana corporation (collectively, the "Corporate Targets"), and delivered to Nationwide all the outstanding interests in Camelot Care Centers, a general partnership governed by the laws of Indiana, Shangri-La Partnership, a general partnership governed by the laws of Indiana, and Evergreen Woods, Ltd., a Florida limited partnership (together, the "Partnership Targets") (the Corporate Targets and the Partnership Targets being referred to herein collectively as the "Targets"), pursuant to that certain Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests among Acquiror and the Targets, dated as of February 27, 1995 (the "Share Exchange Agreement"; such transaction contemplated therein hereinafter referred to as the "Transaction"); WHEREAS, Acquiror and the Targets are engaged in various locations in the following businesses (i) owning, operating and managing nursing homes and assisted living centers and (ii) providing home health care and rehabilitation therapy care (the foregoing businesses being referred to herein collectively as the "Business Activities"); WHEREAS, Phillippe has acquired knowledge relating to the Business Activities as a result of Phillippe's relationship with the Targets; and WHEREAS, as part of, and a condition precedent to, the Transaction, Phillippe has agreed to enter into this Agreement. NOW, THEREFORE, in consideration of the mutual premises and agreements herein set forth, the parties hereto, intending to be legally bound, agree as follows: 1. Definitions. All capitalized terms used and not defined herein shall have the meanings given such terms in the Share Exchange Agreement. References to "Phillippe" herein shall mean Phillippe and any of his Affiliates. 2. Rights of Acquiror. Covenants herein contained are cumulative to the rights of Acquiror under the laws of the United States, the states of Washington, Indiana, Ohio and Florida and other states, as applicable, respecting Acquiror's rights to protect itself from the competition of Phillippe. 3. Non-Competition. Phillippe agrees that, for a period of five (5) years from the date of the Effective Time, Phillippe shall not, directly or indirectly: (a) have an interest in, own, manage, operate, control, be connected with as a stockholder (other than as a stockholder of less than 5% of the issued and outstanding stock of a publicly held corporation), joint venturer, partner, limited liability company member or manager, or consultant, or otherwise engage or invest or participate in, or enjoy a financially beneficial relationship with, any business which conducts any of the Business Activities within a five (5) mile radius of any facility or other location at or from which Acquiror, a Target or any of their respective Affiliates conducts any of the Business Activities as of the date hereof. (b) (i) solicit, recruit or hire any employee of Acquiror, a Target or any of their respective Affiliates or any person who has worked for Acquiror, a Target or any of their respective Affiliates -66- 72 within the six months preceding such solicitation, recruitment or hire; or (ii) solicit or encourage any employee of Acquiror, a Target or any of their respective Affiliates to leave such employment. 4. Specific Performance. Phillippe acknowledges that his failure to comply with the provisions of this Agreement will result in irreparable and continuing damage to Acquiror for which there will be no adequate remedy at law and that, in the event of a failure of Phillippe so to comply, Acquiror and its successors and assigns shall be entitled to injunctive relief and to such other and further relief as may be proper and necessary to ensure compliance with the provisions of this Agreement. 5. Amendments. No amendment to this Agreement shall be effective unless it shall be in writing and signed by each party hereto. 6. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to each other party. 7. Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 8. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof or other applications of such provision. 9. Governing Law. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of Indiana, without regard to the conflicts of law principles of such state. 10. Arbitration. Any claim or controversy relating to the breach, interpretation or enforcement of this Agreement shall be submitted to final and binding arbitration in Marion County, Indiana, in an arbitration proceeding that, except as may otherwise be provided herein, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator chosen in accordance with such rules. All evidentiary and discovery matters shall be conducted in accordance with and governed by the applicable Federal Rules of Civil Procedure. No later than 10 calendar days after the arbitrator is appointed, the arbitrator shall schedule the arbitration for a hearing to commence on a mutually convenient date. All discovery shall be completed no later than the commencement of the arbitration hearing or 90 calendar days after the date that a proper demand for arbitration is served, whichever occurs first, unless, upon a showing of good cause, the arbitrator extends such period. The hearing shall commence no later than 90 calendar days after the arbitrator is appointed and shall continue until completed. The arbitrator shall issue his or her award in writing no later than 20 calendar days after the conclusion of the hearing. The arbitrator shall not have the power to amend this Agreement in any respect. The arbitrator's decision shall be binding and conclusive upon the parties. -67- 73 IN WITNESS WHEREOF, the parties have duly executed and have caused to be duly executed this Agreement as of the date first above written. THE HILLHAVEN CORPORATION By: -------------------------------- Robert F. Pacquer Senior Vice President and Chief Financial Officer ------------------------------------ Dr. Thomas E. Phillippe, Sr. -68- 74 EXHIBIT 12.2(H) PART 2 NONCOMPETITION AGREEMENT This NONCOMPETITION AGREEMENT (this "Agreement"), dated [ ], 1995, is made among The Hillhaven Corporation, a Nevada corporation ("Acquiror"), and Thomas E. Phillippe, Jr. ("Phillippe"), an individual. WHEREAS, Phillippe and certain other persons have, on this date, as part of a single transaction, delivered to Acquiror all the issued and outstanding shares of the capital stock of Nationwide Care, Inc. ("Nationwide"), Phillippe Enterprises, Inc., and Meadowvale Skilled Care Center, Inc., each an Indiana corporation (collectively, the "Corporate Targets"), and delivered to Nationwide all the outstanding interests in Camelot Care Centers, a general partnership governed by the laws of Indiana, Shangri-La Partnership, a general partnership governed by the laws of Indiana, and Evergreen Woods, Ltd., a Florida limited partnership (together, the "Partnership Targets") (the Corporate Targets and the Partnership Targets being referred to herein collectively as the "Targets"), pursuant to that certain Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests among Acquiror and the Targets, dated as of February 27, 1995 (the "Share Exchange Agreement"; such transaction contemplated therein hereinafter referred to as the "Transaction"); WHEREAS, Acquiror and the Targets are engaged in various locations in the following businesses (i) owning, operating and managing nursing homes and assisted living centers and (ii) providing home health care and rehabilitation therapy care (the foregoing businesses being referred to herein collectively as the "Business Activities"); WHEREAS, Phillippe has acquired knowledge relating to the Business Activities as a result of Phillippe's relationship with the Targets; and WHEREAS, as part of, and a condition precedent to, the Transaction, Phillippe has agreed to enter into this Agreement. NOW, THEREFORE, in consideration of the mutual premises and agreements herein set forth, the parties hereto, intending to be legally bound, agree as follows: 1. Definitions. All capitalized terms used and not defined herein shall have the meanings given such terms in the Share Exchange Agreement. References to "Phillippe" herein shall mean Phillippe and any of his Affiliates. 2. Rights of Acquiror. Covenants herein contained are cumulative to the rights of Acquiror under the laws of the United States, the states of Washington, Indiana, Ohio and Florida and other states, as applicable, respecting Acquiror's rights to protect itself from the competition of Phillippe. 3. Non-Competition. Phillippe agrees that, for a period of five (5) years from the date of the Effective Time, Phillippe shall not, directly or indirectly: (a) have an interest in, own, manage, operate, control, be connected with as a stockholder (other than as a stockholder of less than 5% of the issued and outstanding stock of a publicly held corporation), joint venturer, partner, limited liability company member or manager, or consultant, or otherwise engage or invest or participate in, or enjoy a financially beneficial relationship with, any business which conducts any of the Business Activities within a five (5) mile radius of any facility or other location at or from which Acquiror, a Target or any of their respective Affiliates conducts any of the Business Activities as of the date hereof. (b) (i) solicit, recruit or hire any employee of Acquiror, a Target or any of their respective Affiliates or any person who has worked for Acquiror, a Target or any of their respective Affiliates -69- 75 within the six months preceding such solicitation, recruitment or hire; or (ii) solicit or encourage any employee of Acquiror, a Target or any of their respective Affiliates to leave such employment. 4. Specific Performance. Phillippe acknowledges that his failure to comply with the provisions of this Agreement will result in irreparable and continuing damage to Acquiror for which there will be no adequate remedy at law and that, in the event of a failure of Phillippe so to comply, Acquiror and its successors and assigns shall be entitled to injunctive relief and to such other and further relief as may be proper and necessary to ensure compliance with the provisions of this Agreement. 5. Amendments. No amendment to this Agreement shall be effective unless it shall be in writing and signed by each party hereto. 6. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to each other party. 7. Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 8. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof or other applications of such provision. 9. Governing Law. This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of Indiana, without regard to the conflicts of law principles of such state. 10. Arbitration. Any claim or controversy relating to the breach, interpretation or enforcement of this Agreement shall be submitted to final and binding arbitration in Marion County, Indiana, in an arbitration proceeding that, except as may otherwise be provided herein, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator chosen in accordance with such rules. All evidentiary and discovery matters shall be conducted in accordance with and governed by the applicable Federal Rules of Civil Procedure. No later than 10 calendar days after the arbitrator is appointed, the arbitrator shall schedule the arbitration for a hearing to commence on a mutually convenient date. All discovery shall be completed no later than the commencement of the arbitration hearing or 90 calendar days after the date that a proper demand for arbitration is served, whichever occurs first, unless, upon a showing of good cause, the arbitrator extends such period. The hearing shall commence no later than 90 calendar days after the arbitrator is appointed and shall continue until completed. The arbitrator shall issue his or her award in writing no later than 20 calendar days after the conclusion of the hearing. The arbitrator shall not have the power to amend this Agreement in any respect. The arbitrator's decision shall be binding and conclusive upon the parties. -70- 76 IN WITNESS WHEREOF, the parties have duly executed and have caused to be duly executed this Agreement as of the date first above written. THE HILLHAVEN CORPORATION By: --------------------------------- Robert F. Pacquer Senior Vice President and Chief Financial Officer ------------------------------------ Thomas E. Phillippe, Jr. -71- 77 EXHIBIT 12.2(i) AGREEMENT AMONG SHAREHOLDERS THIS AGREEMENT AMONG SHAREHOLDERS ("Agreement") is entered into as of , 1995, by and among all of the shareholders (the "Shareholders") of Nationwide Care, Inc., an Indiana corporation ("Nationwide"). PRELIMINARY STATEMENTS Nationwide, The Hillhaven Corporation, a Nevada corporation ("Acquiror"), Phillippe Enterprises, Inc., an Indiana corporation ("PEI"), Meadowvale Skilled Care Center, Inc., an Indiana corporation ("Meadowvale") (Nationwide, PEI and Meadowvale are collectively referred to as the "Corporate Targets"), the partners of Camelot Care Centers, an Indiana general partnership ("Camelot"), the partners of Shangri-La Partnership, an Indiana general partnership ("Shangri-La"), and the limited partners of Evergreen Woods, Ltd., a Florida limited partnership ("Evergreen") (Camelot, Shangri-La and Evergreen are collectively referred to as the "Partnerships"), have entered into that certain Amended and Restated Agreement and Plan of Share Exchange and Agreements to Assign Partnership Interests, dated as of February 27, 1995 (the "Reorganization Agreement"), and the documents executed and delivered in connection therewith (collectively with the Reorganization Agreement, the "Transaction Documents"), pursuant to which all of the shares of common stock of Nationwide will be exchanged solely for Acquiror Voting Common Stock (the "Share Exchange") in a reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). Voting Acquiror Common Shares will be the only consideration issued to the Shareholders in the Share Exchange. Section 9.10 of the Reorganization Agreement provides that, as a condition precedent to the consummation of the Share Exchange, Nationwide shall receive opinions of counsel that the Share Exchange will qualify as a reorganization within the meaning of Code Section 368(a)(1)(B). The Shareholders desire to set forth their agreement concerning ownership of the Acquiror Common Shares received in the Share Exchange in order to facilitate the issuance of the opinions referred to in Section 9.10 of the Reorganization Agreement and to otherwise ensure that the continuity of shareholder interest requirement set forth in Treasury Regulation sec. 1.368-1(b) will be satisfied with respect to the Share Exchange. Terms which are not defined herein and are used with initial capitalization when the rules of grammar would not otherwise so require and which are defined in the Transaction Documents shall have the meanings assigned to such terms in the Transaction Documents. NOW, THEREFORE, in consideration of the mutual covenants, undertakings and promises set forth in this Agreement, the Shareholders agree as follows: TERMS AND CONDITIONS SECTION 1. Representations, Warranties, and Covenants of the Shareholders. Each Shareholder severally represents, warrants, and covenants to the other Shareholders that the Shareholder has no plan, intention, or arrangement to sell, exchange or otherwise dispose of a number of the Acquiror Common Shares received in the Share Exchange that would reduce that Shareholder's ownership of the Acquiror Common Shares to a number of Acquiror Common Shares having a value, determined as of the Effective Time of the Share Exchange (the "Effective Time"), of less than 50 percent of the value of the Nationwide stock held by that Shareholder immediately before the Share Exchange. For purposes of this representation, warranty, and covenant, Nationwide stock (including voting and nonvoting common stock and preferred stock) and Acquiror Common Shares held by the Shareholder and otherwise sold, redeemed, or disposed of prior or subsequent to the Share Exchange have been considered in making this representation, warranty, and covenant. Each Shareholder further represents, warrants, and covenants that such Shareholder has no plan, intention, or arrangement to sell, exchange, or otherwise dispose of any Acquiror Common Shares received in the Share Exchange except as set forth on Exhibit A. -72- 78 SECTION 2. Prohibition on Disposition within Two Years. No Shareholder shall, within two years of the Effective Time, sell, exchange, or otherwise dispose of any of the Acquiror Common Shares received in the Share Exchange, except as set forth on Exhibit A, unless and until (a) such sale, exchange or disposition would not reduce the fair market value of the Acquiror Common Shares (determined as of the Effective Time) retained by that Shareholder to an amount less than fifty percent (50%) of the fair market value of the Nationwide stock held by that Shareholder immediately before Share Exchange (determined in the same manner as set forth in Section 1 of this Agreement); or (b) in the event such sale, exchange or disposition would reduce the fair market value of the Acquiror Common Shares (determined as of the Effective Time) retained by that Shareholder to an amount less than fifty percent (50%) of the fair market value of the Nationwide stock held by that Shareholder immediately before the Share Exchange, (i) such Shareholder obtains and delivers to Thomas E. Phillippe, Jr., acting as representative of all the Shareholders (the "Representative"), an unqualified opinion of counsel (from counsel reasonably acceptable to the Representative, and in a form acceptable to the Representative) to the effect that such sale, exchange or disposition would not adversely affect the tax-free status of the Share Exchange; and (ii) the Representative and Thomas E. Phillippe, Sr. (the "Phillippes") jointly consent in writing to such sale, exchange or disposition. The Phillippes shall use reasonable efforts to reply to a request for a disposition of shares pursuant to clause (b) above within 30 days of receipt of a written notice of a Shareholder's request to sell shares pursuant to such clause. SECTION 3. Nonwaiver. The failure of any Shareholder or of the Representative to insist in any one or more instances upon performance of any provisions of this Agreement or to pursue rights under this Agreement shall not be construed as a waiver of any such provisions or the relinquishment of any such rights. SECTION 4. Governing Law. The laws of the State of Indiana shall govern the validity, performance, enforcement, interpretation and any other aspect of this Agreement. SECTION 5. Modification. This Agreement may not be modified or altered except by written instrument duly executed by all of the Shareholders. SECTION 6. Entire Agreement. The Transaction Documents and this Agreement contain the entire agreement of the Shareholders with respect to the subject matter of this Agreement and shall be deemed to supersede all prior agreements, whether written or oral, and the terms and provisions of any such prior agreements shall be deemed to have been merged into this Agreement. SECTION 7. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------ - ------------------------------------------ ------------------------------------------
-73- 79 EXHIBIT A
NUMBER OF SHARES WHICH THE SHAREHOLDER HAS A PLAN, INTENTION, OR ARRANGEMENT TO SELL, EXCHANGE, NUMBER OF OR OTHERWISE SHAREHOLDER SHARES HELD DISPOSE OF ----------- ----------- ---------------- VOTING COMMON SHARES Lorene Burns..................................... 35,418 Rod Benson....................................... 159,694 Kathy Benson..................................... 60,000 Joe Edwards...................................... 66,570 Don Polston...................................... 30,000 Kaylynn Cheesman................................. 7,500 Mark Benson...................................... 7,500 Dan Benson....................................... 7,500 David Benson..................................... 7,500 Lorayn Hoop...................................... 113,172 Phil Caldwell.................................... 3,750 Chuck Cooper..................................... 3,750 William Phillippe................................ 79,206 Joe Phillippe.................................... 22,540 Mike Goodspeed................................... 24,624 Tom Phillippe, Jr................................ 1,475,812 Tom Phillippe, Sr................................ 1,982,967 Tom Phillippe, Sr., as Trustee under Annuity Trust for the benefit of Tom Phillippe, Jr..... 850,000 Tom Phillippe, Sr., as Trustee under Annuity Trust for the benefit of Towana Moore.......... 850,000 Tom Phillippe, Sr., as Trustee under Annuity Trust for the benefit of Stacey Mervine........ 850,000 Indiana Wesleyan................................. 50,000 Towana Moore..................................... 264,865 Craig Moore...................................... 110,736 Greg & Stacy Mervine............................. 368,354 Warrants to be exercised......................... 987,188 TOTAL FOR VOTING COMMON SHARES:................ 8,418,646 NONVOTING COMMON SHARES Ford S. Bartholomew.............................. 3,192 Matthew W. Clary................................. 1,596 Jeffrey M. Mann.................................. 2,394 M. Ann O'Brien................................... 16,754 Robert F. Perille................................ 18,350 Christopher J. Perry............................. 32,710 Thomas E. Van Pelt............................... 1,596 TOTAL FOR NONVOTING COMMON SHARES:............. 76,592
-74- EX-23.01 3 EXHIBIT 23.01 1 EXHIBIT 23.01 INDEPENDENT AUDITORS' CONSENT The Board of Directors The Hillhaven Corporation: We consent to incorporation by reference in the Registration Statement on Form S-4 of The Hillhaven Corporation of our report dated July 8, 1994 relating to the consolidated balance sheets of The Hillhaven Corporation and subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the years in the three-year period ended May 31, 1994, and all related schedules, which report appears in the May 31, 1994 annual report on Form 10-K of The Hillhaven Corporation and to the reference to our firm under the headings "Experts," "Terms and Conditions of the Share Exchange Agreement--Certain Federal Income Tax Consequences" and "Terms and Conditions of the Share Exchange Agreement--Accounting Treatment" in the prospectus/information statement. Our report refers to a change in the method of accounting for income taxes effective June 1, 1992. KPMG Peat Marwick LLP Seattle, Washington April 12, 1995 EX-23.02 4 EXHIBIT 23.02 1 EXHIBIT 23.02 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 10, 1994, except for Note 9 as to which the date is February 27, 1995, with respect to the financial statements of Nationwide Care, Inc. included in the Registration Statement (Form S-4) and the related Prospectus/Information Statement of The Hillhaven Corporation for the registration of 5,500,000 shares of its common stock. ERNST & YOUNG LLP Indianapolis, Indiana April 7, 1995 -----END PRIVACY-ENHANCED MESSAGE-----