-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QQqkW88OyWvTa34OVG6+7tPF7rl6lUqaq9fOqfj/utwcVZ5isq1whP+cFxNCIqon L1nVByt3EhuQ6PELTs6wdg== 0000950112-96-002118.txt : 19960625 0000950112-96-002118.hdr.sgml : 19960625 ACCESSION NUMBER: 0000950112-96-002118 CONFORMED SUBMISSION TYPE: 8-K/A CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960506 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960624 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MULTICARE COMPANIES INC CENTRAL INDEX KEY: 0000890925 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 223152527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22090 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 411 HACKENSACK AVE CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2014888818 MAIL ADDRESS: STREET 1: 411 HACKENSACK AVENUE CITY: HACKENSACK STATE: NJ ZIP: 07601 8-K/A 1 THE MULTICARE COMPANIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT: MAY 6, 1996 THE MULTICARE COMPANIES, INC. (Exact name of Registrant as specified in its charter) COMMISSION FILE NO. 34-22090 DELAWARE 22-3152527 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 411 HACKENSACK AVENUE HACKENSACK, NEW JERSEY 07601 (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (201) 488-8818 This Form 8-K/A amends a filing by the Registrant on Form 8-K, Item 2, dated February 24, 1996, pursuant to which Registrant had reported the completion of its tender offer for Concord Health Group, Inc. Such Form 8-K is hereby amended by changing Item 7 thereof to read as follows, and by filing herewith the attached financial statements and information. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial statements of business acquired: . Audited consolidated balance sheets of Concord Health Group, Inc. and subsidiaries as of June 30, 1994 and 1995 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1995. . Consolidated balance sheet of Concord Health Group, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statements of operations for the three and six months ended December 31, 1994 and 1995 and cash flows for the six months ended December 31, 1994 and 1995. (b) Pro forma financial information: . Pro forma condensed consolidated balance sheet of The Multicare Companies, Inc. and subsidiaries and Concord Health Group, Inc. and subsidiaries as of December 31, 1995. . Pro forma condensed consolidated statement of operations of The Multicare Companies, Inc. and subsidiaries and Concord Health Group, Inc. for the year ended December 31, 1995. (c) Exhibits. None. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1995 has been prepared as if the acquisition of Concord Health Group, Inc. and subsidiaries (Concord) by The Multicare Companies, Inc. and subsidiaries (Company) had been consummated on January 1, 1995. The accompanying unaudited pro forma condensed consolidated balance sheet at December 31, 1995 has been prepared as if the acquisition of Concord had been consummated on December 31, 1995. The unaudited pro forma financial information has been prepared on the basis of assumptions described in the notes to the unaudited pro forma condensed consolidated financial statements. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of actual results that would have been achieved had the acquisitions actually been completed as of the dates indicated. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements of the Company and Concord and the related notes thereto. 3 The Multicare Companies, Inc. and Subsidiaries Unaudited Pro Forma Condensed Consolidated Balance Sheet December 31, 1995 (In Thousands)
Adjustments ------------------------- Concord Multicare Historical Pro Forma Multicare Historical (1) Adjustments Pro Forma ---------- ---------- ----------- ---------- Assets Current assets: Cash and cash equivalents $ 3,921 $ 2,265 $ 6,186 Marketable securities 210 210 Accounts receivable, net 86,168 6,383 92,551 Prepaid expense and other current assets 7,971 1,237 $1,009 (2) 10,217 Deferred taxes 3,353 3,353 ------------------------------------- --------- Total current assets 101,623 9,885 1,009 112,517 Property, plant, and equipment, net 286,767 41,997 40,902 (3) 369,666 Restricted investments 1,166 (1,009)(2) 157 Goodwill, net 59,610 8,841 45,450 (4) 113,901 Debt issuance costs, net 4,738 4,738 Other assets 18,220 1,770 19,990 ------------------------------------- --------- $ 470,958 $ 63,659 $ 86,352 $ 620,969 ===================================== ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $44,469 $ 4,065 $ 48,534 Current portion of long-term debt 1,094 1,185 ($651)(5) 1,628 Current portion of capitalized lease Obligations 518 518 ------------------------------------- --------- Total current liabilities 46,081 5,250 (651) 50,680 Long-term debt 255,839 44,909 83,570 (5) 384,318 Capitalized lease obligations 25,631 25,631 Deferred taxes 24,200 1,307 15,626 (6) 41,133 Other liabilites 5,312 5,312 Stockholders' equity Preferred stock Common stock 177 9 (9)(7) 177 Common stock held in escrow (412) 412 (7) Additional paid-in-capital 75,419 10,904 (10,904)(7) 75,419 Retained earnings 38,299 1,692 (1,692)(7) 38,299 ------------------------------------- --------- Total stockholders' equity 113,895 12,193 (12,193)(7) 113,895 ------------------------------------- --------- $ 470,958 $ 63,659 $ 86,352 $ 620,969 ===================================== =========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. 4 The Multicare Companies, Inc. and Subsidiaries Unaudited Pro Forma Condensed Consolidated Statement of Operations Year ended December 31, 1995 (In thousands, except per share data)
Adjustments ----------------------------------------------------------------------- Concord Year ended Six months ended Six months ended Year ended Multicare June 30, 1995 December 31, 1994 December 31, 1995 December 31, 1995 Historical (1a) (1b) (1c) (1d) --------- -------------- ---------------- ----------------- ----------------- Net revenues $353,048 $38,430 $14,389 $28,568 $52,609 Expenses: Facility operating expenses 270,224 28,515 10,464 21,153 39,204 Corporate, general and administrative 17,643 2,698 1,054 1,930 3,574 Depreciation and amortization 13,171 1,703 630 1,213 2,286 --------- -------------- ---------------- ----------------- ----------------- Total expenses 301,038 32,916 12,148 24,296 45,064 --------- -------------- ---------------- ----------------- ----------------- Income from operations 52,010 5,514 2,241 4,272 7,545 Other income (expense) (16,065) (2,268) (746) (2,041) (3,563) Income (loss) before income taxes --------- -------------- ---------------- ----------------- ----------------- and extraordinary item 35,945 3,246 1,495 2,231 3,982 Income tax expense (benefit) 13,798 1,180 654 764 1,290 ========= ============== ================ ================= ================= Income before extraordinary item $22,147 $2,066 $841 $1,467 $2,692 ========= ============== ================ ================= ================= Income before extraordinary item per share $1.25 Weighted average shares outstanding 17,675 Pro Forma Multicare Adjustments Pro Forma ----------- ---------- Net revenues $405,657 Expenses: Facility operating expenses 309,428 Corporate, general and administrative ($1,000)(2) 20,217 Depreciation and amortization 1,438 (3) 16,895 ----------- ---------- Total expenses 438 346,540 ----------- ---------- Income from operations (438) 59,117 Other income (expense) (5,468)(4) (25,096) Income (loss) before income taxes ----------- ---------- and extraordinary item (5,906) 34,021 Income tax expense (benefit) (1,516)(5) 13,572 =========== ========== Income before extraordinary item ($4,390) $20,449 =========== ========== Income before extraordinary item per share $1.16 Weighted average shares outstanding 17,675
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. 5 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro Forma Balance Sheet In February 1996, the Company completed the acquisition of Concord. The Company acquired the outstanding capital stock and warrants of Concord for approximately $75,000 including transaction costs, repaid approximately $41,000 of debt, and assumed historical debt of approximately $4,000. The acquisition was financed through the Company's credit facility. The acquisition has been accounted for using the purchase method of accounting. The pro forma balance sheet has been presented assuming the acquisition of Concord occurred on December 31, 1995. The pro forma adjustments are as follows: (1) Reflects the historical balance sheet of Concord at December 31, 1995. (2) To reclassify cash balances previously restricted as to use by loan agreement which was repaid in connection with acquisition. (3) The allocation of a portion of the purchase price to property, plant and equipment, reflecting fair market value of facilities acquired based on appraised values. (4) Increase in goodwill resulting from purchase price in excess of fair market value of net assets acquired and elimination of Concord assets with no future value. (5) Additional borrowings under the Company's revolving credit facility to complete the acquisition and repayment of certain Concord existing debt. (6) Increase in deferred taxes to reflect the difference in fair values assigned and tax basis of assets and liabilities acquired. (7) Elimination of shareholders' equity of Concord. Pro Forma Statement of Operations The pro forma adjustments to the statement of operations are as follows: (1a) Reflects the historical results of operations of Concord for the year ended June 30, 1995. (1b) Reflects the historical results of operations of Concord for the six months ended December 31, 1994. (1c) Reflects historical results of operations of Concord for the six months ended December 31, 1995. (1d) Reflects the historical results of operations of Concord for the year ended December 31, 1995. (2) Corporate, general and administrative expense has been adjusted to reflect the elimination of duplicative positions at Concord which have been vacated and will not be replaced, consolidation of Concord corporate offices, and elimination of various public company costs incurred by Concord. 6 THE MULTICARE COMPANIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (3) Depreciation and amortization expense has been increased by amortization of goodwill incurred in the acquisition, depreciation resulting from the allocation of the Company's purchase price to Concord property, plant and equipment, and adjustments to conform Concord's accounting policies to those of the Company. (4) For the year ended December 31, 1995, net interest expense has been increased to reflect the financing of the acquisition with the Company's credit facility bearing interest at an average rate of 7%, and the assumption of Concord debt at fair market value of approximately 8%. (5) Income tax expense has been adjusted to reflect an effective tax rate of approximately 40% for federal and state taxes. 7 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. The Multicare Companies, Inc. /s/ STEPHEN R. BAKER ------------------------------------------------- Stephen R. Baker Executive Vice President, Chief Financial Officer May 6, 1996 8 CONCORD HEALTH GROUP, INC. Consolidated Financial Statements as of June 30, 1995 and 1994 and for the years ended June 30, 1995, 1994, and 1993 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Concord Health Group, Inc: We have audited the accompanying consolidated balance sheets of Concord Health Group, Inc. as of June 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Concord Health Group, Inc. as of June 30, 1995 and 1994, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand LLP COOPERS & LYBRAND LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania August 15, 1995, except for Note 17 as to which the date is September 12, 1995 CONCORD HEALTH GROUP, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
June 30, ------------------------ 1995 1994 ---- ---- Current assets Cash and cash equivalents $ 1,534 $ 1,237 Accounts receivable, net of allowance for doubtful accounts of $376 and $156, respectively 5,473 2,639 Receivables from related parties 8 512 Restricted investments 65 603 Subordinated notes receivable 78 321 Deferred income taxes 142 -- 679 343 Other current assets --- --- Total current assets 7,979 5,655 Restricted investments 667 -- Property, plant and equipment, net 41,052 21,748 Intangible assets, net 7,940 190 Subordinated notes receivable 348 1,062 Other assets 1,230 447 ------ ----- Total assets $59,216 $29,102 ====== ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term borrowings -- 920 Current maturities of long-term debt 1,089 798 Accounts payable and accrued expenses 5,002 2,179 Accrued salaries and payroll 549 610 Payable to related parties 19 705 ---- ---- Total current liabilities 6,659 5,212 Deferred income taxes 1,309 -- Payable to related parties -- 559 Long-term debt 39,560 24,494 ------ ------ Total liabilities 47,528 30,265 ------ ------ Commitments and contingencies Mandatorily redeemable common stock -- 1,375 ----- Shareholders' equity (deficit): Preferred stock, 1,000,000 shares authorized; none issued -- -- Common stock and partners' capital -- 4 Common stock, $.001 par value - 30,000,000 shares authorized; 7,662,203 outstanding 7 -- Additional paid-in capital 11,811 (190) Retained earnings (deficit) 281 (1,644) ----- ------ 12,099 (1,830) Shares held in escrow (411) -- Due from shareholders -- (708) ----- ------ Total shareholders' equity (deficit) 11,688 (2,538) ------ ------- Total liabilities and shareholders' equity (deficit) $59,216 $29,102 ====== ======
The accompanying notes are an integral part of the consolidated financial statements. - 2 - CONCORD HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARE AMOUNTS IN THOUSANDS) -------
For the Years Ended June 30, ------------------------------------ 1995 1994 1993 ---- ---- ---- Operating revenue: Basic services $19,441 $14,888 $ 11,221 Specialty medical services 16,663 7,288 3,532 Management services 1,524 900 1,447 Rental income 360 360 360 Other income 442 488 402 ------ ------ ------ Total operating revenues 38,430 23,924 16,962 ------ ------ ------ Operating expenses: Salaries, wages and benefits 16,013 10,731 7,011 Supplies and other operating expenses (includes $237, $108 and $223 of related parties) 9,336 5,463 4,622 Purchased services (includes $2,007, $1,312 and $1,263 of related parties) 3,166 1,967 1,188 General corporate expense (includes $155, $115 and $43 of related parties) 2,698 1,361 1,429 Interest expense, net (includes $46, $122 and $53 of related parties) 2,268 2,503 2,147 Depreciation and amortization 1,703 1,217 950 ------ ------ ------ Total expenses 35,184 23,242 17,347 ------ ------ ------ 3,246 682 (385) Non-operating income -- -- 322 ------ ------ ------ Income (loss) before income taxes and extraordinary item 3,246 682 (63) Provision for income taxes 1,180 -- -- ------ ------ ------ Income (loss) before extraordinary item 2,066 682 (63) Extraordinary loss on debt refunding, net of taxes of $74 in 1995 (141) (683) -- ------ ------ ------ Net Income (loss) $ 1,925 $ (1) $ (63) ====== ====== ====== Earnings per share data: Earnings before extraordinary item $ .27 Extraordinary loss $ (.01) Net income $ .26 Weighted average common and common share equivalents outstanding 12,917 Pro forma income data (unaudited): Income (loss) before income taxes and extraordinary loss $ 3,246 $ 682 $ (63) Pro forma income tax provision (1,206) (186) (197) Extraordinary loss net of pro forma tax benefit (141) (652) -- ----- ------ ------ Net income (loss) after pro forma tax provisions $ 1,899 $ (156) $ (260) ====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements. - 3 -
CONCORD HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 (DOLLARS IN THOUSANDS) ---------------- Common Stock Additional Retained Shares and Partners' Paid-In Earnings Held Due from Capital Capital (Deficit) in Escrow Shareholders Total ------- ------- --------- --------- ------------ ----- Balance at June 30, 1992 4 2,366 (1,580) -- (450) 340 Net loss (63) (63) Distributions to shareholders (407) (407) Changes in due from shareholders (258) (258) ------ ------- ------ ------- ----- ------- Balance at June 30, 1993 4 1,959 (1,643) -- (708) (388) Net loss (1) (1) Payments to repurchase common stock (215) (215) Reclassification of mandatorily redeemable common stock (1,375) (1,375) Distributions to shareholders (559) (559) ------ ------- ------ ------- ----- ------- Balance at June 30, 1994 4 (190) (1,644) -- (708) (2,538) Effects of Reorganization with KBLHAC 3 11,936 11,939 Cancellations of amounts due from shareholders (708) 708 -- Distributions to shareholders (624) (624) Shares issued for acquisitions 1,397 (411) 986 Net income 1,925 1,925 ------ ------- ------ ------- ------ ------- Balance at June 30, 1995 $ 7 $ 11,811 $ 281 $ (411) $ -- $ 11,688 ====== ======= ====== ======= ====== =======
The accompanying notes are an integral part of the consolidated financial statements. - 4 - CONCORD HEALTH GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) -----------
For the Years Ended June 30, ------------------------------- 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 1,925 $ (1) $ (63) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,748 1,328 1,079 Provision for losses on accounts receivable 312 99 81 Accretion of discount on subordinated note receivable (41) (38) (29) Charge-off of deferred financing fees 152 146 -- Charge-off of subordinated note receivable 925 -- -- Write-off of payable to shareholders (880) -- -- Deferred income taxes 338 -- -- Changes in operating assets and liabilities: (Increase) in accounts receivable (2,012) (1,083) (943) (Increase) decrease in receivables from related parties -- (384) 453 (Increase) in prepaid expenses, inventory and other assets (793) (324) (99) Increase in accounts payable, accrued expenses and accrued payroll 1,490 1,073 (179) (Decrease) increase in payable to related parties 19 (16) 16 Other changes -- 19 -- --- ----- ----- Net cash provided by operating activities 3,183 819 316 ----- ----- ----- Cash flows from investigating activities: Purchase of property, plant and equipment (1,968) (699) (5,144) (Increase) or decrease in subordinated notes receivable 73 -- (1,316) Decrease in receivable from related parties 504 -- -- (Increase) or decrease in restricted investments (124) (8) (593) (Increase) in intangible assets (5) (78) Acquisitions, net of cash acquired (8,213) -- -- ------ ----- ----- Net cash used for investing activities (9,713) (712) (7,131) ------ ----- ----- Cash flows from financing activities: Increase (decrease) in short-term borrowings (920) 170 616 Proceeds from issuance of long-term debt 8,559 1,937 6,191 Payments on long-term debt (10,368) (655) (706) Change in payable to shareholders (384) (374) 1,121 Distributions to shareholders (624) (559) (407) Change in due from shareholders -- -- (194) Payments to repurchase common stock (1,375) (215) -- Net proceeds from Reorganization after transaction costs 11,939 -- -- ------ ----- ----- Net cash provided by financing activities 6,827 304 6,621 ------ ----- ----- Increase (decrease) in cash and cash equivalents 297 411 (194) Cash and cash equivalents at beginning of period 1,237 826 1,020 ------ ----- ----- Cash and cash equivalents at end of period $1,534 $ 1,237 $ 826 ====== ===== =====
The accompanying notes are an integral part of the consolidated financial statements. - 5 - CONCORD HEALTH GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------- 1. Company Background and Significant Accounting Policies: ------------------------------------------------------ CHG and its wholly-owed subsidiaries (the Company) are engaged primarily in the development, ownership and management of facilities which provide subacute, skilled, rehabilitative and intermediate nursing care, residential care and personalized services to the elderly in independent living and assisted living units. The Company also provides management, institutional pharmacy and other services for its own facilities and to unaffiliated facilities. In August 1994, KBL Healthcare Acquisition Corp. (KBLHAC) merged with Concord Service Corporation and Affiliates (Concord), a group of commonly controlled S-Corporations and a partnership (the Reorganization). Upon consummation of the Reorganization, KBLHAC changed its name to Concord Health Group, Inc. (CHG), which became the parent company of the Concord entities which are now C-Corporations. Upon consummation of the Reorganization, KBLHAC issued 3,500,000 shares of its common stock and paid cash of $1,375,000 to a minority shareholder of Concord to acquire all of the outstanding common stock and partnership interests of the Concord entities. CHG changed its year end to June 30 immediately after the Reorganization which has been treated as a capital stock transaction by the Company for accounting purposes. Under this method of accounting, the transaction is considered to be equivalent to the issuance of stock by Concord in exchange for the net assets of KBLHAC as of the closing date, accompanied by a recapitalization of Concord. The historical financial statements of KBLHAC on a prospective basis are the historical financial statements of Concord. KBLHAC's cash and trust fund assets as of the closing date of approximately $14,826,000 were used by the Company to retire $10,506,000 of long and short-term debt, to pay $58,000 of accrued interest on the debt retired, to redeem the common stock and the partnership interest of a minority shareholder of Concord for $1,375,000 and to pay transaction and other costs of the Reorganization of approximately $2,887,000. (a) Principles of Consolidation and Basis of Presentation: ----------------------------------------------------- The financial statements as of June 30, 1995 and 1994 and for the three years ended June 30, 1995 are consolidated financial statements which include the accounts of CHG and its wholly-owned subsidiaries. The 1995 financial statements include the accounts of the acquired companies discussed in Note 2 from their respective acquisition dates. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. (b) Cash and Cash Equivalents: ------------------------- Cash and cash equivalents consist of cash and short-term investments purchased with original maturities of three months or less. Cash equivalents are stated at cost which approximates market value. (c) Inventory: --------- Inventories of pharmaceuticals and supplies are included in other current assets and are stated at the lower of cost or market. Cost is determined primarily on the first-in, first-out method. (d) Property, Plant and Equipment: ----------------------------- Property, plant and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives ranging from four years to 40 years. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations. Costs of additions and betterments are capitalized. Interest costs associated with construction or renovations are capitalized in the period in which they are incurred. - 6 - (e) Intangible Assets: ----------------- Goodwill is being amortized on a straight-line basis over lives ranging from 15 to 20 years. Organization costs and costs incurred in connection with the arrangement of certain financings have been capitalized and are being amortized on a straight-line basis over five years and the term of the related debt, respectively. The Company evaluates the realizability of goodwill based upon expectations of nondiscounted cash flows and operating income for each subsidiary having a material goodwill balance. (f) Basic Services and Specialty Medical Services Revenues: ------------------------------------------------------ Basic services and specialty medical services revenues are recorded at the estimated net realizable amounts from residents, third-party payors (e.g. Medicare, Medicaid, managed care companies and insurers) and other for services rendered. Revenues under Medicare and Medicaid payor agreements are subject to audit and retroactive adjustment. Provisions for estimated third- party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and the interim or final settlements are reported in operations in the year of settlement. (g) Management Services and Rental Income: ------------------------------------- Management service revenues are recorded when the services are rendered and rental income is recorded on the accrual basis over the term of the lease. (h) Income Taxes: ------------ The Subchapter S and partnership elections were automatically terminated when the entities became wholly-owned subsidiaries of CHG. Accordingly, a pro forma provision for income taxes is presented as if the Company were taxed as a C Corporation during the periods prior to the Reorganization. Upon termination of the Concord entities' S-Corporation and partnership elections, the Company became subject to the provisions of Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes". As a result, the Company records deferred taxes for the effect of cumulative temporary differences between the tax and book bases of its assets and liabilities. (i) Earnings Per Share: ------------------ The weighted average shares outstanding for the year ended June 30, 1995 have been determined in accordance with the modified treasury stock method which limits the repurchase common shares to 20% of the Company's outstanding shares as of the end of the period at the average market price during the period. (j) Pro Forma Earnings Per Share: ---------------------------- The pro forma earnings per share for the year ended June 30, 1994 of $.14 before extraordinary loss and $(.04) on net income reflect the Company's results assuming that the Concord entities would have been taxed as C-Corporations and are computed assuming 3,500,000 shares were outstanding for the period in the same manner as described in Note 1(i) above. (k) Supplementary Earnings Per Share Data (unaudited): ------------------------------------------------- For the year ended June 30, 1995, supplementary earnings per share was $.27 on income before extraordinary loss on debt refunding and $.26 on net income based on 13,472,000 weighted average shares outstanding. For the year ended June 30, 1994, supplementary earnings per share was $.16 on income before extraordinary loss and $.10 on net income based on 7,028,000 weighted average shares outstanding. Supplementary earnings per share for the years ended June 30, 1995 and 1994 are calculated assuming that Continued - 7 - the Reorganization was consummated at the beginning of the respective periods and the Company retired $10,506,000 of its outstanding debt on July 1, 1994 and 1993, respectively. The weighted average shares outstanding and the method used for computing earnings per share is the same as that described in Note 1(i) above. Shares issuable pursuant to the warrants aggregating 6,050,000 and 590,000 options have been excluded from the computations for the year ended June 30, 1994 because their effect is not dilutive. (l) Recently Issued Pronouncements: ------------------------------ Statement of Financial Accounting Standards No. 121 on Impairments of Long Lived Assets will apply to the Company beginning in the year ending June 30, 1995, but will not have a material impact. (m) Reclassifications: ----------------- Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the 1995 presentation. 2. Acquisitions: ------------ (a) Acquisition of Berks Nursing Homes, Inc. and Lehigh Nursing Homes, ------------------------------------------------------------------ Inc.: ---- The Company developed two 120-bed skilled nursing facilities for Berks Nursing Homes, Inc. (Berks) and Lehigh Nursing Homes, Inc. (Lehigh) which were owned by certain of the Company's executive officers and shareholders. The facilities were developed for sale to Berks/Lehigh Healthcare Corporation (BLHC), an unrelated nonprofit organization. The Company assisted with completing tax-exempt financing of approximately $17 million for BLHC in May 1993 and the bond proceeds were placed in escrow to provide for the purchase of the facilities by BLHC from the Berks and Lehigh shareholders on or before February 1, 1995. This transaction structure provided the Berks and Lehigh shareholders the opportunity to develop and manage the facilities since they were unable to obtain the financing necessary to own the facilities represented by their Certificates of Need. In connection with this financing, the Company made a loan of approximately $925,000 to BLHC which bore interest at 12.5% and was subordinated to all claims of BLHC's tax-exempt bondholders and general creditors. In connection with this subordinated loan, the Company borrowed $880,000 from Berks and Lehigh pursuant to a note payable agreement which bore interest at 12.5% and provided that the $880,000 would be repaid only to the extent that the $925,000 subordinated note receivable from BLHC was collected. In connection with the Reorganization, the Berks and Lehigh shareholders granted CHG an option to purchase the facilities in the event that the sale to BLHC was not consummated. The Berks and Lehigh shareholders also indemnified CHG against any and all losses relating to the development and sale of the two facilities. The sale of the facilities to BLHC was not consummated and CHG exercised its option to purchase the facilities. On March 24, 1995, the Company purchased all of the outstanding common stock of Berks and Lehigh. The purchase price of approximately $15.7 million. including direct acquisition costs, was paid in CHG common stock (147,598 shares of CHG common stock which is restricted) with an estimated fair value of $574,000 (net of a 25% discount due to the restrictions on sale of the stock), cash of $773,000 and the assumption of approximately $14.9 million of liabilities. A special subcommittee of the Board of Directors was appointed to review and analyze the determination of the purchase price which was based on appraisals prepared by independent consultants, discounted cash flow analyses prepared by management and an analysis of comparable transactions by an independent investment banking firm. The Board of Directors voted unanimously to approve the mergers and the consideration paid. The members of the Board of Directors who are Berks and Lehigh shareholders abstained from all deliberations on this matter as well as the vote on the related resolution. Accordingly. the Company wrote-off the $925,000 subordinated note receivable and the related $880,000 note payable. The acquisition has been accounted for using the purchase method. The excess of the purchase price over the net assets acquired has been allocated to property, plant and equipment to record it at its appraised fair Continued - 8 - value. The remainder of the excess of approximately $2,083,000 has been recorded as goodwill which is being amortized over an estimated useful life of twenty years. (b) Acquisition of National Pharmacy Service, Inc. (NPS): ---------------------------------------------------- Effective January 1, 1995, the Company acquired all of the outstanding common stock of NPS, an institutional pharmacy business. The purchase price of approximately $4,081.000, including direct acquisition costs, was paid $3,131,000 in cash and a $950,500 note payable to the sellers who are now officers of the Company at a rate of 7.875 %. The purchase price is subject to downward adjustment to the extent that NPS's earnings before interest, taxes, depreciation and amortization (EBITDA) for the year ended December 31, 1995 is less than its EBITDA for the twelve months ended September 30, 1994. The note payable to the sellers is payable 40% on April 1, 1996 and 60% on January 1, 1998. However, the payments on these notes payable would be reduced by 5.5 times any EBITDA shortfall. Since ultimate payment of the $950,500 portion of the purchase price is uncertain until NPS's 1995 EBITDA is known, this portion of the purchase price will not be recorded until payment is assured beyond a reasonable doubt. As a result, the acquisition has been recorded at a purchase price of $3,130,500 and has been accounted for using the purchase method. The excess of the purchase price over the fair value of the net assets acquired of approximately $2,556,000 is being amortized over a 20-year estimated useful life using the straight-line method. If the EBITDA target is met, additional goodwill will be recorded for the $950,500. (c) Acquisition of National Healthcare Services, Inc. (NHS): ------------------------------------------------------- Effective January 1, 1995, the Company acquired the business and certain of the assets of NHS, a nursing facility management company. The consideration for the acquisition was paid through the issuance of 199,605 shares of unregistered CHG common stock. The purchase price is subject to downward adjustment to the extent that NHS does not generate $2.7 million in revenues for the three year period ending January 1, 1998. One-half of the shares issued have been placed in escrow. As a result, the purchase price of approximately $438,000, including direct acquisition costs, has been recorded for one-half of the shares issued since issuance of the remaining shares to the seller is not assured beyond a reasonable doubt. Also, the value assigned to the shares issued has been discounted by 25% from the quoted market price since the shares are restricted. The acquisition has been accounted for using the purchase method and the excess of the purchase price over the fair value of the net assets acquired of approximately $316,000 is being amortized over the 15- year estimated useful life using the straight-line method. The purchase price could be adjusted to record additional goodwill of up to $412,000 if the revenue target is achieved. (d) Acquisition of Hillcrest Nursing Center Associates (Hillcrest): -------------------------------------------------------------- On January 31, 1995, the Company completed the acquisition of all of the operating assets of Hillcrest which operates a 121-bed skilled nursing and rehabilitation facility. The purchase price of approximately $5,126,000, including direct acquisition costs, was paid $2,003,000 in cash. the assumption of $2,558,000 of long-term debt and a consulting agreement of $565,000 which requires payments over the next five years. The acquisition has been accounted for using the purchase method and the excess of the purchase price over the net assets acquired has been allocated to Hillcrest's fixed assets to record them at their appraised fair values. (e) Acquisition of American Therapy Corporation(ATC): ------------------------------------------------ On February 3, 1995, the Company acquired the business and certain of the assets of ATC, a company which provides physical, speech and occupational therapy services. The total consideration of $2,310,000, including direct acquisition costs, was paid in cash. The acquisition has been accounted for using the purchase method and the excess of the purchase price over the fair value of the net assets acquired of approximately $2,315,000 is being amortized over an estimated useful life of 20 years using the straight-line method. Continued - 9 - (f) Pro Forma Financial Information (unaudited): ------------------------------------------- The following unaudited pro forma financial information shows the results of the Company's operations as though the acquisitions discussed above had been completed as of the beginning of the respective periods (dollars in thousands): Year Ended Year Ended June 30, 1995 June 30, 1994 ------------- ------------- Total Operating Revenue $ 47,605 $ 35,713 Net Income $ 934 $ 1,350 Earnings Per Share $ 0.18 $ 0.18 The estimated pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions been made at the beginning of the respective periods. (g) Acquisition Related Cash Flow Information: ----------------------------------------- Acquisition related non-cash investing activities for the year ended June 30, 1995 were as follows (dollars in thousands): Fair value of assets acquired $ 27,714 Liabilities assumed (18,515) Fair value of stock issued (986) Cash paid for acquisitions, net of $79 cash acquired $ 8,213 ------- 3. Concentration of Credit Risks: ----------------------------- Approximately 21% and 30% of the Company's accounts receivable are from Medicaid programs and 22% and 20% are from Medicare programs at June 30, 1995 and 1994, respectively. Should the related government agencies suspend or significantly reduce contributions to these programs. the Company's ability to collect on its receivables would be adversely affected. Management believes that the remaining receivable balances from various payors do not represent any concentration of credit risk to the Company. Management continually monitors and adjusts its allowance for doubtful accounts and contractual allowances associated with these receivables. Federal law limits the degree to which states are permitted to alter Medicaid programs. 4. Restricted Investments: ---------------------- At June 30. 1995, restricted investments represent debt service reserve accounts maintained with several of the Company's lenders as well as certain escrow accounts related to a HUD mortgage which are invested in certificates of deposit and other cash equivalents. At June 30, 1994. this investment represented a $593,000 face value U.S. Treasury Bill which matured in February, 1995 and was pledged as collateral for a $2,000,000 standby letter of credit from a bank in connection with the construction financing of Berks and Lehigh which expired on March 15, 1995. Continued - 10 - 5. Property, Plant and Equipment: ----------------------------- Property, plant and equipment are comprised of the following (dollars in thousands): June 30, ------------ 1995 1994 ---- ---- Land and land improvements $4,040 $ 2,297 Buildings and improvements 29,218 14,531 Fixed and moveable equipment 9,112 5,636 Assets leased to others 2,945 2,935 Vehicles 243 66 Construction in progress 992 - --- ----- 46,550 25,465 Less: Accumulated depreciation 5,498 3,717 ----- ----- $ 41,052 $ 21,748 ====== ====== Accumulated depreciation includes approximately $506,000 and $396,000 relating to assets leased to others at June 30, 1995 and 1994. respectively. Depreciation expense related to property, plant and equipment for the years ended June 30, 1995, 1994 and 1993 was approximately $1,539,000, $1,199,000 and $934,000, respectively. Total interest cost incurred during the years ended June 30, 1995, 1994 and 1993 was $2,226,000, $2.392,000 and $2,018,000 of which $0, $29,000 and $72,000 was capitalized, respectively. The Company is the lessor of an 80-unit assisted living facility under an operating lease which expires in July 2000 The lessee pays all utilities, property taxes and other costs relating to the facility. Minimum future rentals to be received on this noncancellable lease are $360,000 annually. Operating expenses related to assets leased to others were approximately $351,000, $414,000 and $451,000 (including depreciation expense of $111,000, $103,000 and $103,000) for the years ended June 30, 1995, 1994 and 1993, respectively. 6. Intangible Assets: ----------------- Intangible assets, net consist of the following (dollars in thousands): June 30, 1995 1994 ---- ---- Goodwill $ 7,401 $ - Financing fees 725 245 Organization costs 52 32 -- -- 8,178 277 less accumulated amortization 238 87 --- -- $ 7,940 $ 190 ===== === Amortization expense related to intangible assets for the years ended June 30, 1995, 1994 and 1993 was approximately $209,000, $129,000 and $145,000, respectively, and included amortization of deferred financing costs of approximately $45,000, $111,000 and $129,000. respectively which was recorded as interest expense. The increase in other assets in 1995 relates primarily to deferred costs for the development of assisted living facilities, Continued - 11 - 7. Subordinated Notes Receivable: ------------------------------ Subordinated notes receivable consist of the following (dollars in thousands): June 30, --------------- 1995 1994 ---- ---- Alpha Housing and Healthcare. Inc. $ 426 $ 458 Berks/Lehigh Healthcare Corporation (see Note 2(a)) -- 925 -- ----- 426 1,383 Less current portion (78) (321) ---- ------ $ 348 $1,062 === ===== In August 1992, Concord earned fees for assigning its rights to purchase two nursing facilities and arranging the tax-exempt financing for Alpha Housing and Healthcare, Inc. (Alpha Housing). an unrelated nonprofit organization, which purchased the facilities. Concord manages these two facilities for Alpha Housing. in August 1992, Concord loaned Alpha Housing $638,000 pursuant to the financing arrangements for Alpha Housing's purchase of the facilities, which is collateralized by a second mortgage on the two facilities and bears interest at 9%. If the unpaid balance of principal plus accrued interest reaches $800,000. interest ceases to accrue on the note until a payment has been received from Alpha Housing. The note receivable is subordinated. Management estimates that only nominal payments will be received on the note for approximately seven years. After that time, management expects that the available cash flows of the two facilities will be sufficient to make annual payments to Concord which would allow for the payment of interest on the note receivable at 9% such that the balance would not exceed $800,000. For financial reporting purposes, the Company discounted the note receivable to provide for the accrual of interest at an effective rate of 9% on the net carrying value of the note over the estimated period until Alpha Housing is expected to begin making payments on the note. The discount of approximately $247,000 was recorded as a reduction of the fee revenues which Concord earned in connection with the purchase and financing of the facilities by Alpha Housing and is being amortized using the interest method. The amount of the unamortized discount at June 30, 1995 and 1994 was $139,000 and $180,000, respectively. 8. Short-Term Borrowings: --------------------- In December 1994, CHG obtained a $1,000,000 working capital line of credit from a bank which is due on demand and bears interest at the bank's national commercial rate (8.0% at June 30, 1995) plus 0.75% which is payable monthly. This line of credit is collateralized by the accounts receivable and certain other assets of CHG and two of its subsidiaries as well as the collateral for the $13.9 million credit facility described in Note 9. As of June 30, 1995, the borrowing limit was $983,000 which was unused. This borrowing agreement prohibits the payment of dividends. At June 30, 1994, short-term borrowings were at rates ranging from 8.25% to 8.75% and were collateralized by certain real and personal property of certain subsidiaries. Interest expense on short-term borrowings for the years ended June 30, 1995, 1994 and 1993 was $49,000, $74.000 and $34.000, respectively. Continued - 12 - 9. Long-Term Debt: -------------- Long-term debt consisted of the following (dollars in thousands): June 30, ----------------- 1995 1994 ---- ---- Mortgages Payable to Banks $ 39,882 $ 24,480 Notes Payable to Banks 236 788 Other 531 24 ------ ------ 40,649 25,292 Less: Current portion 1,089 798 ------ ------ $39,560 $ 24,494 ====== ====== Mortgages Payable to Banks: --------------------------- In February, 1995, the Company obtained credit facilities aggregating $20,530,000 from a bank. The outstanding balance at June 30, 1995 was $20,446,000. The proceeds were used to refinance an existing mortgage loan and the construction loans for two nursing facilities, to fund a $517,000 debt service reserve fund with the lender, to fund financing costs and for working capital. This mortgage loan bears interest at LIBOR plus 2.75% (8.75% at June 30, 1995) and requires the Company to make monthly payments aggregating $172,000 for interest and principal and a final payment of approximately $19,262,000 in February, 2000. The mortgage loan is collateralized by the real and personal property of three of the Company's nursing facilities which had a carrying value of approximately $21.4 million at June 30, 1995, as well as a guarantee of CHG. The loan agreement requires the Company to maintain certain minimum debt service coverage ratios. In January, 1995, the Company obtained a $13.9 million credit facility. Borrowings on this credit facility were $13,772,000 at June 30, 1995 with interest at the bank's federal funds rate plus 3.50% (9.56% at June 30, 1995) and were collateralized by all real and personal property of three of the Company's nursing facilities and an independent living facility. The total carrying amount of assets pledged on the credit facilities and line of credit (see Note 8) was approximately $17.2 million at June 30, 1995. The loan agreements require the Company to maintain certain financial ratios. The Company was not in compliance with the net worth and tangible net worth ratio covenants at June 30, 1995 primarily as a result of the intangible assets and additional liabilities recorded in connection with the nursing facility acquisitions in March 1995 which had not been expected to occur at the time when this loan was negotiated. However, the Company obtained waivers of the ratio covenants from the lender through June 30, 1996. The remaining mortgage loans outstanding at June 30, 1995 represent three loans aggregating $5,664,000 at interest rates ranging from 8.06% to 9.5% with aggregate monthly payments of approximately $51,000 for principal and interest with balloon payments of $227,000 in September 1995 and $2,706,000 in March 1998. These mortgage loans are collateralized by the assets of the Company's assisted living facility. a skilled nursing facility and certain land with an aggregate carrying value of approximately $8.2 million. Mortgages payable at June 30, 1994, represent seven mortgages aggregating $24,480,000 with interest rates ranging from 6.25% to 9.5% which were collateralized by substantially all of the Company's real and personal property as well as guarantees from certain shareholders. As of June 30. 1995, all but two of these mortgage loans had been paid-off or refinanced except two with an aggregate balance of $3,155,000. Notes Payable to Banks: ---------------------- At June 30, 1995, the outstanding note payable of $236,000 bears interest at 8% with monthly principal and interest payments of $6,100. At June 30, 1994, the $788,000 of notes payable bore interest at rates ranging from 8.0% to 8.5%. In connection with the Reorganization, $500,000 of these notes were repaid. Continued - 13 - Other: ----- Other long-term debt includes $515,000 payable over five years pursuant to a consulting agreement (see Note 2(d)) related to the Hillcrest acquisition with quarterly payments ranging from $25,000 to $32,500. At June 30, 1995, the aggregate maturities of long-term debt for the next five fiscal years ending June 30 are as follows (dollars in thousands): 1996 $ 1,089 1997 $ 905 1998 $ 3,569 1999 $ 922 2000 $19,771 Interest paid, net of amounts capitalized, for the years ended June 30, 1995, 1994 and 1993 amounted to approximately $2,258,000, $2,445,000 and $2,012,000, respectively. 10. Basic Services and Specialty Medical Services Revenues: ------------------------------------------------------ The distribution of basic services and specialty medical services revenues by class of payor was as follows (dollars in thousands): For the Years Ended June 30 -------------------------------- 1995 1994 1993 ---- ---- ---- Class of Payor: Private pay and other $17,873 $10,729 $ 7,446 Medicaid 10,604 6,670 4,784 Medicare 7,627 4,777 2,523 ----- ----- ----- $36,104 $22,176 $14,753 ====== ====== ====== 11. Income Taxes: ------------ The provision for income taxes, including the tax benefit of the extraordinary loss, consists of the following for the year ended June 30, 1995 (dollars in thousands): Federal: Current $ 566 Deferred 249 State: Current 202 Deferred 89 ----- $1,106 ===== The differences between the U.S. statutory tax rate and the Company's effective rate for the year ended June 30. 1995 are as follows: U.S. federal statutory tax rate 34.0% State income taxes (net of federal benefit) 5.9 Benefit of federal loss carryforwards (5.5) Benefit of extraordinary loss (2.3) Amortization of assets not deductible 1.4 Change in valuation allowance for state taxes 2.3 Other (1.7) ----- 34.1% ==== Continued - 14 - Tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities at June 30, 1995 are as follows (dollars in thousands): Assets: Provision for bad debts $ 152 Amortization of intangibles 176 --- 328 Liabilities: Property, plant and equipment, net (1,420) (1,092) ------- Valuation allowance (75) Net deferred tax liability $(1,167) ======= The change in the valuation allowance was $75,000 and relates to future deductible amounts for the excess of the tax basis for certain fixed assets. As of August 16, 1994, KBLHAC had net operating loss carryforwards (NOL's) for federal income tax purposes of approximately 525,000. The Company utilized the benefits of these NOL's during the current fiscal year. Cash paid for taxes was $861,000 for the year ended June 30, 1995 and no income taxes were paid during the year ended June 30, 1994. Pro Forma Income Tax Information (unaudited): -------------------------------------------- The pro forma tax data is based on the assumption that, prior to the Reorganization, the Company was taxable as a C-Corporation and could utilize net operating loss benefits to reduce subsequently incurred federal income taxes. Immediately subsequent to the Reorganization, there are no such benefits available to the Company related to these net operating losses. The pro forma income tax provision results from state income taxes. 12. Extraordinary Items and Nonoperating Income: ------------------------------------------- In August 1994, the Company recognized extraordinary losses on the early extinguishment of certain mortgage loans payable and on the renegotiation of certain mortgage loans payable due to substantial modifications to the loan terms. The extraordinary loss of $215,000 before the tax benefit of $74,000 represents the charge-off of unamortized deferred financing fees of $152,000 and a prepayment penalty of $63,000. On April 1, 1994, Concord renegotiated and revised the interest rate on two mortgage loans from approximately 10.68% to LIBOR plus 2.0% (6.25% at June 30, 1994) and extended the maturity of these loans by approximately two years. Due to the substantial modifications to the terms of these loans, the original debt was considered extinguished for accounting purposes. As a result, Concord recognized an extraordinary loss for the fees paid of $537,000 and the write-off of the unamortized deferred financing fees of $146, 000 related to the original debt. The Company recognized a gain of approximately $324,000 from the sale of the right to develop 60 long-term care beds in the year ended June 30, 1993 which is included in nonoperating income. 13. Shareholder's Equity: -------------------- Preferred Stock: --------------- The Company is authorized to issue 1,000,000 shares of preferred stock with such designation, voting and other rights and preferences as may be determined from time to time by the Board of Directors. Continued - 15 - The Company recognized a gain of approximately $324,000 from the sale of the right to develop 60 long-term care beds in the year ended June 30, 1993 which is included in nonoperating income. 13. Shareholders Equity: ------------------- Preferred Stock: --------------- The Company is authorized to issue 1,000,000 shares of preferred stock with such designation, voting and other rights and preferences as may be determined from time to time by the Board of Directors. Common Stock Warrants: --------------------- As of June 30, 1995, the Company had 6,050,000 redeemable common stock warrants outstanding each entitling the holder to purchase one share of common stock at an exercise price of $5.50 through April 19, 2000. The Warrants will be redeemable at a price of $.01 per Warrant in certain circumstances. The Company previously had 305,479 Unit Purchase Options (UPO's) outstanding. On May 1, 1995, the Company exchanged 315,000 shares of its common stock for all of the outstanding UPO's. This exchange has been accounted for as a purchase of the UPO's into treasury followed by a cancellation of the UPO's with no impact on total shareholders' equity. Outstanding Common Stock: ------------------------ At June 30, 1994, KBLHAC had 3,500,000 shares of common stock outstanding. During the year ended June 30, 1995, 3,500,000 shares were issued in connection with the Reorganization, 347,203 shares were issued for acquisitions and 315,000 shares were issued in exchange for the UPO's. Due from Shareholders: --------------------- The amounts due from shareholders have been reported as a separate deduction from shareholders' equity since it was the intent of the Company to cancel the amounts due from shareholders upon consummation of the Reorganization. Shares Held in Escrow: --------------------- The shares held in escrow represent one-half of the shares (99,802 shares issued in connection with the acquisition of National Healthcare Services, Inc. (NHS) which will not be released to the NHS seller unless certain future revenue levels are attained (see Note 2(c)). The shares held in escrow ar included in the Company's earnings per share calculations. The NHS seller has the voting rights to these shares. Other Escrowed Shares: --------------------- Pursuant to the indemnification provisions of the Reorganization Agreement and the Berks/Lehigh Acquisition Agreement, the former owners of the Concord Entities and of Berks and Lehigh have escrowed 1,022,598 shares which they retain the voting rights to. For financial reporting purposes, these shares are treated as outstanding and are included in the Company's earnings per share calculations. Mandatorily Redeemable Common Stock: ----------------------------------- In January 1994, the shareholders of the Company reached an agreement with a minority shareholder to purchase all of his interests in the Company and to repay his shareholder payables for a total sum of $1,625,000. The Company partially redeemed his interests in the Company and made a payment of $250,000 in January 1994 and granted the shareholder a put option to fully redeem the shareholder's interest not later than October 31, 1994 in exchange for cash and indebtedness aggregating the unpaid balance of the $1,625,000. The minority shareholder's remaining interest in the Company was redeemed August 16, 1994 upon consummation of the Reorganization. Continued - 16 - 14. Stock Option Plan: ----------------- On August 12, 1994, the Company's shareholders approved the 1994 Stock Option Plan which permits the granting of incentive and non-qualified stock options to purchase an aggregate of 1,000,000 shares of CHG'S common stock to officers, directors, employees, consultants and advisors of the Company. Transactions under this plan for the year ended June 30, 1995, are summarized as follows: Shares Under Option Price Range ------------ ----------- Outstanding at July 1, 1994 590,000 $4.50 - $5.25 Granted 410,000 $5.25 - $5.50 Exercised -- -- Cancelled (21,500) $5.25 ------- Outstanding at June 30, 1995 978,500 $4.50 - $5.50 ======= The stock options granted during 1994 vest primarily over two years (178,500 options) and four years (720,000 options). As of June 30, 1995, 334,250 of the options were exercisable. On May 9, 1995, the Board of Directors approved the grant of 107,000 stock options which vest over four years and are exercisable at $4.75 per share, the fair market value of the common stock on the grant date. These options grants are contingent upon the shareholder approval discussed Note 17. 15. Related Party Transactions: -------------------------- The Company had the following related party transactions: - Housekeeping and laundry services provided by companies owned by a relative of a shareholder/officer. - Legal services provided by certain shareholders and a Director. - Office space leased from companies owned by certain shareholders. - Equipment and supplies purchased from companies partially owned by a shareholder/officer. - Insurance premiums paid to purchase insurance policies owned by certain shareholders. - Design services provided by relatives of certain shareholders. - Directors fees paid to shareholders of the Company by certain of its nursing facilities. - General contracting services provided by a construction company owned by two shareholders. - Transportation services provided by a construction company owned by two shareholders. A summary of those transactions follows (dollars in thousands): For the Year Ended June 30, ------------------------------ 1995 1994 1993 ---- ---- ---- Housekeeping and laundry services $2,007 $1,312 $1,263 Legal services 83 61 18 Office space rental 113 54 25 Equipment and supplies purchases 76 91 108 Insurance premiums - 11 46 Fees for design services - 21 89 Directors fees - 30 153 Construction services - 60 2,852 Transportation services 115 - - Continued - 17 - In addition, the Company earned $162,000 of management fees from two nursing facilities which were owned by certain shareholders before the Company purchased them in March, 1995. Accounts payable and accrued expenses at June 30, 1995 and 1994 includes approximately $318,000 and $199,000, respectively, related to these services. Payables to related parties at June 30, 1994 include the $925,000 note payable described in Note 2(a), a $265,000 uncollateralized, non-interest bearing working capital advance to Concord related to the development of the Berks and Lehigh facilities and a $119,000 uncollateralized working capital loan which was due on demand and bore interest at the prime rate plus 1% (8.25% at June 30, 1994). 16. Commitments and Contingencies: ----------------------------- Leases: ------ The Company leases certain office space and equipment under noncancellable operating leases which expire through 1998. At June 30, 1995, long-term operating lease commitments were immaterial. Total rental expense for the years ended June 30, 1995, 1994 and 1993 was approximately $343,000, $160,000 and $146,000, respectively. Other: ----- Alpha Housing has a $900,000 working capital line of credit from a bank which expires on December 31, 1995 and is collateralized by first lien on Alpha Housing's gross revenues, as defined, and a guarantee by the Company. There were no borrowings under this line as of June 30, 1995 and 1994. The Company has entered into a $3.7 million contract for the construction of a 120-bed skilled nursing facility. Self-Insurance: -------------- Since July 1993, the Company has been self-insured for workers' compensation claims through an arrangement with a domestic insurer and an offshore reinsurer. In connection with this arrangement, the Company has a $500,000 letter of credit from a bank as collateral for its potential obligation to the reinsurer for the difference between the maximum loss (capped at $2,020,000 through the reinsurance arrangement) and the amounts funded ($1,520,000) for fiscal 1995. The Company has funded the estimated losses and related expenses for fiscal 1994 based on actuarial estimates. The annual letter of credit fee is 1.25% of the letter of credit amount. Litigation: ---------- The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, that their unfavorable disposition would not have a material effect on the financial position, results of operations or the liquidity of the Company. 17. Subsequent Events: ----------------- On September 12, 1995, the Company borrowed approximately $19 million from the same bank and on essentially the same terms as the $20,530,000 mortgage payable described in Note 9 except that the interest rate is fixed at 8.98%. Certain of the proceeds were used to repay the $13,900,000 mortgage payable described in Note 9 and the remainder will be used to provide funds for the Company's growth. During the quarter ended September 30, 1995, the Company will recognize an extraordinary loss on the early retirement of debt for the $93,000 of unamortized deferred financing fees related to the debt which was extinguished. The Company's Board of Directors has approved an increase in the number of stock options which can be granted under the Plan to 1,600,000. This amendment to the Plan will be submitted for approval of the Company's stockholders at the 1995 Annual Meeting of Stockholders. The Board of Directors also approved the grant of approximately 332,000 stock options which vest immediately and are exercisable at $5.00 per share, the fair market value of the common stock on August 24, 1995, the grant date. These options grants are contingent upon the Continued - 18 - shareholder approval discussed above. On August 25, 1995, the Company completed an exchange offer to exchange one share of its common stock for three of its outstanding warrants. Warrantholders exchanged 5,353,926 warrants for 1,784,642 shares of the Company's common stock and there are 696,074 remaining warrants outstanding. If the exchange offer had been completed as of the beginning of the year ended June 30, 1995, net income per share would have been $.21 per share based on 9,348,015 weighted average common and common share equivalents outstanding. - 19 - CONCORD HEALTH GROUP, INC. BALANCE SHEET December 31, 1995 (Dollars in Thousands) (UNAUDITED) ________ ASSETS Current Assets Cash and cash equivalents $ 2,265 Accounts receivable, net allowance for doubtful accounts of $587 6,383 Other current assets 1,237 ------- Total current assets 9,885 Restricted investments 1,166 Property, plant and equipment 41,997 Intangible assets, net 8,841 Other assets 1,770 ------- Total assets $63,659 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt 1,185 Accounts payable and accrued expenses 4,065 ------ Total current liabilities 5,250 Long-term debt 44,909 Deferred income taxes 1,307 ------- Total liabilities 51,466 ------- Commitments and Contingencies Stockholders' Equity: Preferred stock, 1,000,000 authorized; none issued Common stock, $.001 par value - 20,000,000 shares authorized; 9,446,845 outstanding 9 Additional paid-in capital 10,904 Retained earnings 1,692 ------- 12,605 Common stock held in escrow (412) ------- Total stockholders' equity 12,193 ------- Total liabilities and stockholders' equity $63,659 ======= See accompanying notes to financial statements. CONCORD HEALTH GROUP, INC. STATEMENTS OF INCOME (Dollars and Share Amounts in Thousands) (UNAUDITED) ______ Six Months Ended Three Months Ended December 31, December 31, 1995 1994 1995 1994 ---- ---- ---- ---- Revenue: Basic services $13,688 $ 8,296 $ 6,771 $ 4,179 Special medical services 13,574 5,246 7,340 2,733 Management services 849 442 419 231 Rental and other income 457 405 255 127 ------- ------- ------- ------- Total operating revenues 28,568 14,389 14,785 7,270 ------- ------- ------- ------- Operating expenses: Salaries, wages and benefits 11,569 6,344 6,019 2,897 Supplies and other operating expenses 6,688 3,125 3,512 1,824 Purchased services 2,896 995 1,361 499 General corporate expense 1,930 1,054 1,056 610 Interest expense 2,041 746 l,068 294 Depreciation and amortization 1,213 630 609 318 ------ ------ ------ ----- Total operating expenses 26,337 12,894 13,625 6,442 ------ ------ ------ ----- Income before income taxes and extraordinary item 2,231 1,495 1,160 828 Provision for income taxes (764) (654) (402) (301) ------- ------- ------- ------ Income before extraordinary item 1,467 841 758 527 Extraordinary loss on early extinguishment of debt, net of income tax benefit of $37 and $74 (56) (141) - - ------- ------- ------ ----- Net income $1,411 $ 700 $ 758 $ 527 ====== ====== ====== ====== Primary earnings per share data: Earnings before extraordinary item $.61 $.11 $.08 $.06 ==== ==== ==== ==== Net income $.15 $.10 $.08 $.06 ==== ==== ==== ==== Weighted average common and common share equivalents outstanding 9,447 12,417 9,447 13,311 ======= ====== ===== ====== See accompanying notes to financial statements CONCORD HEALTH GROUP, INC. STATEMENTS OF CASH FLOWS Dollars in Thousands (UNAUDITED) For the Six Months Ended -------------------------- December 31, December 31, 1995 1994 -------- --------- Net cash provided (used) by operating activities: $ (160) $1,045 ------- ----- Cash flows from investing activities: Purchase of property, plant and equipment (1,956) (515) Increase in intangible assets (1,284) - (Increase) decrease in restricted investments (464) 1 Increase in indebtedness of related parties - (702) Change in other assets 54 43 ------- ------- Net cash used by investing activities (3,650) (1,173) ------- ------- Cash flows from financing activities: Increase in line of credit borrowings - (410) Proceeds from issuance of long-term debt 6,324 - Payment on long-term debt (878) (10,053) Payable to related parties - (189) Distributions to Shareholders - (634) Payments to repurchase common stock - (1,375) Costs associated with warrant exchange (905) Net proceeds from merger after transaction costs - 11,939 ------- ------- Net cash provided (used) by financing activities 4,541 (722) -------- -------- Increase (decrease) in cash and cash equivalents 731 (850) Cash and cash equivalents at beginning of period 1,534 1,237 -------- -------- Cash and cash equivalents at end of period $ 2,265 $ 387 ======== ======== See accompanying notes to financial statements. CONCORD HEALTH GROUP, INC. Notes To Financial Statements 1. Company Background Concord Health Group, Inc. (CHG) and its wholly-owned subsidiaries (the Company) are engaged primarily in the development, ownership and management of facilities which provide subacute, skilled, rehabilitative and intermediate nursing care, residential care and personalized services to the elderly in independent living and assisted living units. The Company also provides management, institutional pharmacy and therapy services for its own facilities and to unaffiliated facilities. In August 1994, KBL Healthcare Acquisition Corp. (KBLHAC) merged with Concord Service Corporation and Affiliates (Concord), consisting of a group of commonly controlled S-Corporations and a partnership (the Reorganization). Upon consummation of the Reorganization, KBLHAC changed its name to Concord Health Group, Inc. (CHG), which became the parent company of the Concord entities which are now C-Corporations. Upon consummation of the Reorganization, KBLHAC issued 3,500,000 shares of its common stock and paid cash of $1,375,000 to a minority shareholder of Concord to acquire all of the outstanding common stock and partnership interests of the Concord entities. CHG changed its year end to June 30 immediately after the Reorganization which was treated as a capital stock transaction for accounting purposes. Under this method of accounting, the transaction was considered to be equivalent to the issuance of stock by Concord in exchange for the net assets of KBLHAC as of the closing date, accompanied by a recapitalization of Concord. 2. Summary of Significant Accounting Policies: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods presented. Results for the interim periods presented are not necessarily indicative of the results which might be expected for the entire year. The unaudited financial statements should be read in conjunction with the financial statements for the year ended June 30, 1995. (a) Principles of Consolidation. The financial statements as of and for the three and six month periods ended December 31, 1995 and 1994 are consolidated and include the accounts of CHG and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. (b) Primary and Fully Diluted Earnings Per Share For the three and six month periods ended December 31, 1995, the weighted average common and common share equivalents outstanding have been determined in accordance with the modified treasury stock method which limits the repurchase of common shares to 20% of the Company's outstanding shares as of the end of the period at the average market price during the period. The warrants converted in the warrant exchange on August 25, 1995 have been treated as "if converted" which assumes the conversion of the warrants for shares of common stock occurred as of the beginning of the period (July 1, 1995) since the application of the "if converted" method is dilutive. For the three and six month periods ended December 31, 1994, the weighted average common and common share equivalents outstanding have been determined in accordance with Fully diluted earnings per share is not presented as the dilution is less than 3%. (c) Pro Forma (Supplementary) Earnings Per Share Data For the three and six month periods ended December 31, 1995, pro forma earnings per share were $.08 and $.16 on income before extraordinary item and $.08 and $.15 on net income based on 9,446,845 weighted average shares outstanding. For the three and six month periods ended December 31, 1994, pro forma earnings per share was $.06 and $.10 on income before extraordinary item and $.06 and $.08 on net income based on 9,396,000 and 9,447,000 weighted average common and common share equivalents outstanding. Pro forma earnings per share for the three and six month periods ended December 31, 1995 and 1994 have been calculated assuming that the Warrant Exchange was consummated as of July 1, 1994 (the beginning of the periods presented), the Reorganization was consummated as of July 1, 1994 and the Company was taxable as a C-Corporation commending July 1, 1994. (d) Recently Issued Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 123 on Accounting for Stock-Based Compensation will apply to the Company beginning in the fiscal year ending June 30, 1997. As permitted by SFAS No. 123, the Company will continue to account for employee stock options or similar equity instruments using the intrinsic value method. 3. Extraordinary Item: In September 1995, the Company recognized an extraordinary loss on certain mortgage loans payable which were extinguished early and refinanced with another lender. The extraordinary loss of $93,000 before tax benefit represents the charge-off of unamortized deferred financing fees. 4. Short-Term Borrowings: During December 1995, the Company replaced its existing line of credit with a $3 million line of credit with the same bank. The new line of credit is due on demand and bears interest at the bank's national commercial rate (8.50% at December 31, 1995) plus 0.25%. Borrowings on this line are limited to the lesser of 75% of accounts receivable of certain of the Company's subsidiaries (three nursing facilities, its two pharmacy subsidiaries and its therapy subsidiary) aged less than 90 days or $3,000,000. Borrowings on this line of credit are collateralized by the accounts receivable of those subsidiaries. The agreement requires the company to maintain a current ratio of at least 1.1 to 1 at each quarter end and a minimum debt service coverage ratio of 1.15 times at each year end. At December 31, 1995, there were no borrowings outstanding under this line and available borrowings were approximately $2,335,000. 5. Stockholders' Equity: (a) Warrant Exchange On August 25, 1995, the Company completed an exchange offer to exchange one share of its common stock for three of its outstanding warrants. Warrantholders exchanged 5,353,926 warrants for 1,784,642 shares of the Company's common stock and there are 696,074 remaining warrants outstanding. The company incurred total expenses of approximately $905,000 to complete this transaction which have been charged directly to additional paid-in capital. (b) Authorized Shares On November 21, 1995, the shareholders approved a decrease in the number of authorized shares of common stock from 30,000,000 to 20,000,000 shares. 6. Subsequent Events: On January 15, 1996, the Company, the Multicare Companies, Inc. (Multicare) and CHG Acquisition Corp., a wholly-owned subsidiary of Multicare (CHG Acquisition) entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of all of the issued and outstanding shares of the Company's common stock at a net cash price of $7.35 per share and all outstanding warrants to purchase the Company's common stock at a net cash price of $1.85 per warrant (the difference between $7.35 and $5.50, the per share exercise price of the warrants). On January 22, 1996, CHG Acquisition commenced a cash tender offer (the "Tender Offer") for all outstanding shares at $7.35 per share and all outstanding warrants at $1.85 per warrant. The Tender Offer is conditioned upon, among other things, a majority of the total number of shares outstanding, on a fully-diluted basis, being validly tendered and not withdrawn. -----END PRIVACY-ENHANCED MESSAGE-----