<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CHAMPION HEALTHCARE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
CHAMPION HEALTHCARE CORPORATION
14340 Torrey Chase, Suite 320
Houston, Texas 77014
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held February 12, 1996
To the Stockholders of
Champion Healthcare Corporation:
You are cordially invited to a special meeting of stockholders of
Champion Healthcare Corporation (the "Company") to be held at the offices of
the Company, 14340 Torrey Chase, Suite 320, Houston, Texas 77014 at 10:00 a.m.,
Texas time, on February 12, 1996 for the following purpose:
o To consider and vote upon the adoption of amendments to and a
restatement of the Certificate of Incorporation.
The Board of Directors has fixed the close of business on January 4, 1996
as the record date for determination of stockholders entitled to notice of and
to vote at such meeting.
Regardless of whether you expect to attend the meeting in person, you are
requested to fill in, date and sign the enclosed proxy card and promptly return
it in the enclosed postage paid envelope.
By the order of the Board of Directors,
James G. VanDevender,
Secretary
Houston, Texas
Date: January 22, 1996
<PAGE> 3
CHAMPION HEALTHCARE CORPORATION
14340 Torrey Chase, Suite 320
Houston, Texas 77014
- --------------------------------------------------------------------------------
PROXY STATEMENT
- --------------------------------------------------------------------------------
This proxy statement and the accompanying proxy card are solicited by the
Board of Directors of Champion Healthcare Corporation (the "Company") for use
in connection with a Special Meeting of Stockholders of the Company to be held
at the offices of the Company, 14340 Torrey Chase, Suite 320, Houston, Texas,
on February 12, 1996 at 10:00 a.m., and any adjournment or postponement
thereof. Although proxies will be solicited primarily by mail, regular
employees of the Company may personally aid in such solicitation. The Company
will make arrangements with brokerage houses for forwarding proxy materials to
the beneficial owners of shares of Common Stock registered in brokers' names.
All solicitation costs will be borne by the Company. All properly signed
proxies will be voted, and where a choice has been specified by the stockholder
as provided on the proxy, it will be voted in accordance with the specification
so made. If any proxies do not contain voting instructions, the shares of
Common Stock or voting Preferred Stock, as the case may be, represented by such
proxies will be voted FOR the adoption of the amendments to and restatement of
the Certificate of Incorporation. Any stockholder giving a proxy may revoke it
at any time before it is used at the meeting by giving written notice of
revocation or by signing and delivering to the secretary of the Company a proxy
bearing a later date. Proxy materials are expected to be mailed or delivered
to stockholders on or about January 22, 1996.
VOTING AT THE MEETING
The record date for the determination of stockholders entitled to notice
of and to vote at the meeting was the close of business on January 4, 1996, at
which time there were outstanding 11,849,491 shares of Common Stock, $.01 par
value ("Common Stock"), 448,811 shares of Series C Cumulative Convertible
Preferred Stock, $.01 par value ("Series C"), and 2,156,903 shares of Series D
Cumulative Convertible Preferred Stock, $.01 par value ("Series D")
(collectively the "Preferred Stock"). At the meeting, shares of Common Stock
and Preferred Stock are entitled to vote as follows: Common Stock - 1 vote per
share, Series C and Series D - 2 votes per share. The presence in person or by
proxy of the holders of shares of stock having a majority of the votes which
could be cast by the holders of all outstanding shares of stock entitled to
vote at the meeting will be necessary to constitute a quorum for the
transaction of business at the meeting. Once a quorum has been established,
the affirmative vote of (i) 90% of the Series C outstanding, (ii) 90% of the
Series D outstanding, and (iii) a majority of the outstanding Common Stock,
Series C and Series D voting as a class, present in person or by proxy will be
necessary to approve the adoption of the amendments to the Certificate of
Incorporation.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
<PAGE> 4
The following table sets forth, as of January 2, 1996, certain
information regarding beneficial ownership of Common Stock by (a) each person
known by the Company to own beneficially more than 5% of each class of voting
securities, (b) each director of the Company, (c) the chief executive officer
and the four most highly compensated executive officers of the Company, and (d)
all directors and officers as a group. Each party listed below has sole voting
and investment power except as noted.
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE PREFERRED STOCK FULLY
FOOTNOTE (f) (e) DILUTED
SHAREHOLDER REFERENCES OWNERSHIP SERIES C SERIES D OWNERSHIP
- ---------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
--------------------------MANAGEMENT-----------------------
<S> <C> <C> <C> <C> <C>
Charles R. Miller (1),(2),(22) 734,400 734,400
6.08% 3.41%
James G (1),(2),(23) 407,334 407,334
VanDevender 3.33% 1.89%
Nolan Lehmann (2),(5),(8), 1,603,323 4,901 83,333 1,603,323
(28),(37) 13.27% 1.09% 3.86% 7.44%
Paul B. Queally (2),(4),(7),(30) 2,786,340 33,616 279,985 2,786,340
(g),(h) 21.92% 7.49% 12.97% 12.92%
James A. Conroy (2),(3),(6),(31) 2,077,292 103,773 83,334 2,077,292
(g),(h) 16.69% 23.12% 3.86% 9.64%
David S. Spencer (2),(9),(41) 39,400 39,400
(*) (*)
Manuel M. Ferris (2),(10),(25) 30,000 30,000
(*) (*)
William G. White (2),(24),(38) 225,195 225,195
1.89% 1.04%
Richard D. Sage (2),(36),(59) 115,235 115,235
(*) (*)
Ronald R. Patterson (1),(57) 231,531 1,847 231,531
1.92% (*) 1.07%
Warren W. Wilkey (1),(58) 8,667 8,667
(*) (*)
Arthur M. Doloresco (1), (26) 38,226 38,226
(*) (*)
All officers and (1),(27) 8,577,640 142,290 472,965 8,577,640
directors as a group 58.12% 31.70% 21.90% 39.79%
(21 persons)
------------------------NON-MANAGEMENT---------------------
Bahrain International (17),(20) 445,443 111,111 445,443
Bank, E.C. 3.64% 5.15% 2.07%
Baker Fentress (21),(32) 535,443 111,111 535,443
& Company 4.35% 5.15% 2.48%
William Blair (16),(35) 793,644 30,675 83,334 793,644
Venture Partners III (g),(h) 6.52% 6.83% 3.86% 3.68%
Limited Partnership
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE PREFERRED STOCK FULLY
FOOTNOTE (f) (e) DILUTED
SHAREHOLDER REFERENCES OWNERSHIP SERIES C SERIES D OWNERSHIP
------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
<S> <C> <C> <C> <C> <C>
+ William Blair (16),(35) 793,644 30,675 83,334 793,644
Venture Mgmt (g),(h) 6.52% 6.83% 3.86% 3.68%
Company
+ Samuel B. Guren (16),(35) 793,644 30,675 83,334 793,644
(g),(h) 6.52% 6.83% 3.86% 3.68%
+ William Blair (16),(35) 793,644 30,675 83,334 793,644
& Company (g),(h) 6.52% 6.83% 3.86% 3.68%
First Interstate Bank (30),(60) 2,681,971 37,476 28,069 2,681,971
of California, as (j) 21.25% 8.35% 1.30% 12.44%
Trustee
+ DLJ Venture Capital (7),(30),(j) 37,606 680 37,606
Fund II, L.P. (*) (*) (*)
++ DLJ Fund (7),(30) 37,606 680 37,606
Associates II (*) (*) (*)
+ Sprout Growth, L.P (7),(30),(j) 773,909 13,456 773,909
6.50% (*) 3.59%
++ DLJ Growth (7),(30) 773,909 13,456 773,909
Associates 6.50% (*) 3.59%
+ Sprout Capital (7),(30) 1,170,111 19,480 27,389 1,170,111
VI, L.P. 9.75% 4.34% 1.27% 5.43%
+ Sprout Growth II, 7),(30) 635,652 198,699 635,652
L.P. 5.15% 9.20% 2.95%
+ DLJ Capital (7),(30) 2,681,971 20,233 2,681,971
Corporation 21.25% (*) 12.44%
DLJ First ESC 1,969 633 1,969
Corporation (*) (*) (*)
Donaldson, Lufkin (7),(30) 101,512 32,597 101,512
& Jenrette (*) 1.51% (*)
Securities
Corporation
+Donaldson, Lufkin (7),(30) 2,785,452 53,463 2,785,452
& Jenrette, Inc. 21.92% 2.48% 12.92%
+ The Equitable (7),(30) 2,785,452 53,463 2,785,452
Companies 21.92% 2.48% 12.92%
Incorporated
Equity-Linked (19),(10) 604,047 161,552 604,047
Investors, L.P. (g),(h) 4.89% 7.48% 2.80%
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE PREFERRED STOCK FULLY
FOOTNOTE (f) (e) DILUTED
SHAREHOLDER REFERENCES OWNERSHIP SERIES C SERIES D OWNERSHIP
------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
<S> <C> <C> <C> <C> <C>
Equity-Linked II, (19),(11) 434,565 116,226 434,565
L.P. (g),(h) 3.56% 5.38% 2.02%
+ Rohit M. Desai (19),(56) 1,038,612 277,778 1,038,612
(g),(h) 8.17% 12.86% 4.82%
+ Desai Capital (19),(56) 1,038,612 277,778 1,038,612
Mgmt, Inc. (g),(h) 8.17% 12.86% 4.82%
Equus II (8),(37) 1,263,058 3,601 83,333 1,263,058
Incorporated 10.46% 0.80% 3.86% 5.85%
Equus Capital (8),(28) 338,249 1,300 338,249
Partners, L.P. 2.85% 0.29% 1.57%
+ Equus Capital (8),(28),(37) 338,249 1,300 338,249
Corporation (g),(h) 2.85% 0.29% 1.57%
+ Equus Capital (8),(28),(37) 338,249 1,300 338,249
Management (g),(h) 2.85% 0.29% 1.57%
Corporation
+ Equus Corporation (8),(28),(37) 338,249 1,300 338,249
International (g),(h) 2.85% 0.29% 1.57%
+ Douglass Trust (8),(28),(37) 169,124 650 169,124
FBO Brooke (g),(h) 1.43% 0.15% (*)
+ Douglass Trust (8),(28),(37) 169,124 650 169,124
FBO Preston (g),(h) 1.43% 0.15% (*)
Frontenac VI (18),(50) 1,186,466 55,556 388,889 1,186,466
Limited 9.31% 12.38% 18.01% 5.50%
Partnership
Frontenac Diversified (18),(29) 521,582 83,333 521,582
III Limited 4.23% 3.86% 2.42%
Partnership
+ Frontenac (18),(29),(50) 1,708,048 55,556 472,222 1,708,048
Company (g),(h) 12.93% 12.38% 21.87% 7.92%
+ Frontenac VI (18),(29) 521,582 83,333 521,582
Partners, L.P. 4.23% 3.86% 2.42%
Hancock Venture (15),(48) 678,455 20,874 111,111 678,455
Partners III, L.P. 5.56% 4.65% 5.15% 3.15
John Hancock (15),(49) 355,443 111,111 355,443
Venture Capital 2.93% 5.15% 1.65%
Fund Limited
Partnership II
+ Back Bay Partners (47), (48) 1,033,898 20,874 222,222 1,033,898
V L.P. (49),(g),(h) 8.28% 4.65% 10.29% 4.80%
+ Back Bay Partners (47), (48) 1,033,898 20,874 222,222 1,033,898
L.P. II (49),(g),(h) 8.28% 4.65% 10.29% 4.80%
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE PREFERRED STOCK FULLY
FOOTNOTE (f) (e) DILUTED
SHAREHOLDER REFERENCES OWNERSHIP SERIES C SERIES D OWNERSHIP
-------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
<S> <C> <C> <C> <C> <C>
+ Hancock Venture (47), (48), 1,033,898 20,874 222,222 1,033,898
Partners Inc. (49),(g),(h) 8.28% 4.65% 10.29% 4.80%
+ John Hancock (47), (48), 1,033,898 20,874 222,222 1,033,898
Subsidiaries, Inc (49),(g),(h) 8.28% 4.65% 10.29% 4.80%
+ John Hancock (47), (48), 1,033,898 20,874 222,222 1,033,898
Mutual Life (49),(g),(h) 8.28% 4.65% 10.29% 4.80%
Insurance Company
Olympus Private (6),(31) 2,077,292 103,773 83,334 2,077,292
Placement Fund, L.P 16.69% 23.12% 3.86% 9.64%
+ OGP Partners, L.P (6),(31) 2,077,292 103,773 83,334 2,077,292
(g), (h) 16.69% 23.12% 3.86% 9.64%
+ Robert S. Morri (6),(31) 2,077,292 103,773 83,334 2,077,292
(g), (h) 16.69% 23.12% 3.86% 9.64%
RFE Capital (14),(34) 731.973 731,973
Partners, L.P. 5.87% 3.40%
+ Norcon Associates (14),(34) 731,973 731,973
(g),(h) 5.87% 3.40%
RFE Investment (14),(40) 494,191 148,413 494,191
Partners IV, L.P. 4.03% 6.87% 2.29%
RFE Associates (14),(40) 494,191 148,413 494,191
IV, L.P. (g),(h) 4.03% 6.87% 2.29%
RFE Management (14),(34),(40) 731,973 148,431 731,973
Corp. (g),(h) 5.87% 6.87% 3.40%
+ Robert M. Williams (14),(34),(40), 736,356 148,431 736,356
(51),(h),(i) 5.91% 6.87% 3.42%
+ Howard C. Landis (14),(34),(40) 731,973 148,431 731,973
(g),(h) 5.87% 6.87% 3.40%
+ James A. Parsons (14),(34),(40) 731,973 148,431 731,973
(g),(h) 5.87% 6.87% 3.40%
+ Knute C. Albrecht (14),(34),(40), 734,954 148,431 734.954
(53),(h),(i) 5.90% 6.87% 3.41%
+ Michael J. Foster (14),(34),(40), 733,726 148,431 733,726
(52),(h),(i) 5.89% 6.87% 3.40%
+ A. Dean Davis (14),(34),(40) 731,973 148,431 731,973
(g),(h) 5.87% 6.87% 3.40%
WPG Corporate (13),(39) 632,942 20,738 91,666 632,942
Development (g),(h) 5.21% 4.62% 4.25% 2.94%
Associates III, L.P.
+ WPG CDA (13),(42) 632,942 20,738 91,666 632,942
III, L.P. (g),(h) 5.21% 4.62% 4.25% 2.94%
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE PREFERRED STOCK FULLY
FOOTNOTE (f) (e) DILUTED
SHAREHOLDER REFERENCES OWNERSHIP SERIES C SERIES D OWNERSHIP
------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
<S> <C> <C> <C> <C> <C>
WPG Corporate (54), (55) 134,270 4,399 19,445 134,270
Development (g),(h) 1.13% (*) (*) (*)
Associates III
(Overseas), L.P.
+ WPG CDA III (13),(43) 134,270 4,399 6,317 134,270
(Overseas), Ltd. (g),(h) 1.13% (*) (*) (*)
+ Philip Greer (13),(44) 767,212 25,137 97,983 767,212
(g),(h) 6.28% 5.60% 4.54% 3.56%
Wesley W. Lang, Jr. (13),(45) 770,228 25,137 97,983 770,228
(g),(h) 6.31% 5.60% 4.54% 3.57%
+ Steven N. (13),(46) 767,212 25,137 97,983 767,212
Hutchinson (g),(h) 6.28% 5.60% 4.54% 3.56%
Virginia (12),(33) 1,700,040 172,956 1,700,040
Retirement 13.63% 38.54% 7.89%
System
</TABLE>
- -------------------------------------------------------------------------------
*) Less than 1% of the class.
+,++) Not held of record but may be deemed beneficially owned.
a) Total shares of Company Common Stock outstanding as of January 4, 1996
is 11,849,491.
b) 448,811 shares outstanding as of January 4, 1996, convertible into
897,622 shares of Company Common Stock on a 2 for 1 basis.
c) 2,156,903 shares outstanding as of January 4, 1996, convertible into
4,313,806 shares of Company Common Stock on a 2 for 1 basis.
d) On a fully diluted basis as of January 4, 1996, a total of 21,559,495
shares of Common Stock would be outstanding. This amount is composed of
(i) the 11,849,491 shares of Common Stock identified in footnote (a)
above; plus (ii) the following shares of Common Stock issuable upon the
exercise or conversion, as applicable, of the following securities of the
Company: (A) 80,000 shares underlying Champion stock subscriptions; plus
(B) 1,167,320 shares underlying Champion options; plus (C) 3,244,412
shares underlying Champion Warrants; plus (D) 5,211,428 shares underlying
Champion Preferred Stock; plus (E) 6,844 shares underlying certain
warrants remaining outstanding after Champion's acquisition of
Psychiatric Healthcare Corporation.
e) All direct and beneficial holders of each series of Preferred Stock,
Common Stock issuable upon conversion of Preferred Stock, Common Stock
issuable upon exercise of Warrants held by Preferred Stock holders, and
Common Stock issuable upon the exercise of Options are subject to the D
Stockholders Agreement.
f) With the exception of Messrs. White and Sage, all shares of Common Stock
beneficially owned are subject to the D Stockholders Agreement.
6
<PAGE> 9
g) Shared voting power.
h) Shared investment power.
i) Includes shared voting and investment power for 731,973 shares.
j) Voting power only.
(1) Officer. Business address is 14340 Torrey Chase, Suite 320, Houston,
Texas 77014.
(2) Director.
(3) Mr. Conroy is a vice president of Olympus Private Placement Fund, L.P.
and disclaims beneficial ownership of the Company's securities owned by
that fund.
(4) Mr. Queally is a General Partner of Sprout Group, a division of DLJ
Capital Corp. and is a general partner of the general partner of Sprout
Growth, L.P., Sprout Growth II, L.P., Sprout Capital VI, L.P. and DLJ
Venture Capital Fund II, L.P., D.L.J. Securities Corporation, and D.L.J.
Capital Corporation and disclaims beneficial ownership of the Company's
securities beneficially owned by such funds. Mr. Queally owns directly in
his individual capacity 444 shares of Series D Preferred Stock which may
be converted at any time at the holder's option into 888 shares of Common
Stock.
(5) Mr. Lehmann is president of Equus Capital Management Corporation, the
financial advisor and manager of Equus II Incorporated and Equus Capital
Partners, L.P. and disclaims beneficial ownership of the Company's
securities owned by Equus II Incorporated and Equus Capital Partners,
L.P. Mr. Lehmann owns directly 2,016 shares of the Common Stock.
(6) Metro Center, One Station Place, Stamford, CT 06902.
(7) 140 Broadway, 42nd floor, New York, NY 10005.
(8) 2929 Allen Parkway, Suite 2500, Houston, TX 77019.
(9) 5909-G Breckenridge Parkway, Tampa, FL 33610.
(10) Equity-Linked Investors, L.P. is the beneficial owner of 604,047 shares
of Common Stock through its direct ownership of (i) 106,463 shares of
Common Stock, (ii) 161,552 shares of Series D Preferred Stock which may
be converted at any time at the option of the holder into 323,104 shares
of Common Stock, and (iii) 174,480 shares of Common Stock that may be
acquired within 60 days upon the exercise of warrants.
(11) Equity-Linked Investors II, L.P. is the beneficial owner of 434,565
shares of Common Stock through its direct ownership of (i) 76,593 shares
of Common Stock, (ii) 116,226 shares of Series D Preferred Stock which
may be converted at any time at the option of the holder into 232,452
shares of Common Stock, and (iii) 125,520 shares of Common Stock that may
be acquired within 60 days upon the exercise of warrants.
(12) 1200 E. Main Street, Richmond, VA 23219.
(13) One New York Plaza, 30th Floor, New York, NY 10004.
(14) 36 Grove Street, New Canaan, CT 06840.
7
<PAGE> 10
(15) One Financial Center, 44th Floor, Boston, MA 02111.
(16) 222 West Adams Street, Chicago, IL 60606.
(17) Bahrain International Bank, E.C. is the beneficial owner of 445,443
shares of Common Stock through its direct ownership of (i) 73,221 shares
of Common Stock, (ii) 150,000 shares of Common Stock that may be acquired
within 60 days upon the exercise of Series D Warrants, and (iii) 111,111
shares of Series D Preferred Stock, which may be converted at any time
at the option of the holder into 222,222 shares of Common Stock.
(18) 135 S. LaSalle St., 38th Floor, Chicago, IL 60604.
(19) c/o Desai Capital Management, Inc., 540 Madison Avenue. - 36th Floor, New
York, NY 10022.
(20) c/o Dilmun Investments, Inc., Metro Center, One Station Place, Stamford,
CT 06902.
(21) 200 W. Madison Street, Chicago, IL 60606.
(22) Includes 220,374 shares that may be acquired by Mr. Miller within 60 days
upon the exercise of stock options and warrants.
(23) Includes 387,334 shares that may be acquired by Mr. VanDevender within
60 days upon the exercise of stock options and subscriptions.
(24) Includes 90,729 shares that may be acquired by Mr. White within 60 days
upon the exercise of stock options; does not include 1,753 shares owned
by Mr. White's spouse, as to which shares he disclaims beneficial
ownership.
(25) Includes 30,000 shares that may be acquired by Mr. Ferris within 60 days
upon the exercise of stock options.
(26) Includes 38,226 shares that may be acquired by Mr. Doloresco within 60
days upon the exercise of stock options.
(27) Includes 1,324,017 shares that may be acquired by all directors and
officers as a group within 60 days upon the exercise of stock options,
warrants, or subscriptions.
(28) Equus Capital Partners, L.P. is the beneficial owner of 338,249 shares of
Common Stock through its direct ownership of (i) 333,755 shares of Common
Stock, (ii) 1,894 shares of Common Stock that may be acquired within 60
days upon the exercise of warrants, (iii) 1,300 shares of Series C
Preferred Stock which may be converted at any time at the option of the
holder into 2,600 shares of Common Stock. Equus Capital Corporation,
Equus Capital Management Corporation, Equus Corporation International,
Douglass Trust FBO Brooke and Douglass Trust FBO Preston may be deemed to
beneficially own the shares of Common Stock beneficially owned by Equus
Capital Partners, L.P. By reason of his status as President of Equus
Capital Corporation, which is the managing general partner of Equus
Capital Partners, L.P., Mr. Lehmann may be deemed to be the beneficial
owner of the 338,249 shares held by Equus Capital Partners, L.P. In
addition, Mr. Lehmann holds 2,016 shares which he beneficially owns in
his own capacity. Accordingly, Mr. Lehmann may be deemed to be the
beneficial owner of 340,265 shares in the aggregate. Mr. Lehmann
disclaims beneficial ownership of the 338,249 shares beneficially owned
(except for Equus II Incorporated), except to the extent of his indirect
beneficial interest as President of Equus Capital Corporation.
(29) Frontenac Diversified III Limited Partnership is the beneficial owner of
521,582 shares of Common Stock through its direct ownership of (i)
297,576 shares of Common Stock, (ii) 300,000 shares of Common Stock that
may be acquired within 60 days upon the exercise of Warrants, and (iii)
83,333 shares of Series D Preferred
8
<PAGE> 11
Stock which may be converted at any time at the option of the holder into
166,666 shares of Common Stock. Frontenac Company and Frontenac VI
Partners, L.P. may be deemed to beneficially own the shares of Common
Stock beneficially owned by Frontenac Diversified III Limited Partnership.
(30) DLJ Venture Capital Fund II, L.P. ("DLJ II") may be deemed to be the
beneficial owner of the following securities held by First Interstate
Bank of California as trustee: 34,606 shares, 1,360 common shares
issuable upon conversion or exercise of the 680 shares of Series C
Preferred Stock and warrants to purchase 1,640 shares. Accordingly, DLJ
II may be deemed to beneficially own an aggregate of 37,606 shares (the
"DLJ II Shares").
DLJ Fund Associates II ("Associates II"), as the general partner of
DLJ II, may be deemed to beneficially own indirectly the DLJ II Shares.
Sprout Growth, L.P. ("Growth") may be deemed to be the beneficial owner
of the following securities held by First Interstate Bank of California,
trustee: 714,631 shares, the 26,912 shares issuable upon conversion or
exercise of the 13,456 shares of Series C Preferred Stock and warrants to
purchase 32,366 shares. Accordingly, Growth may be deemed to
beneficially own an aggregate of 773,909 shares (the "Growth Shares").
DLJ Growth Associates ("Associates"), as a general partner of Growth, may
be deemed to beneficially own indirectly the Growth shares.
Sprout Capital VI, L.P. ("Sprout VI") may be deemed to be the beneficial
owner of the following securities held by First Interstate Bank of
California, trustee: 1,014,727 shares, the 93,738 shares issuable upon
the conversion or exercise of the 19,480 shares of Series C Preferred
Stock, 27,389 shares of Series D Preferred Stock and warrants to purchase
61,646 shares. Accordingly, Sprout VI may be deemed to beneficially own
an aggregate of 1,170,111 shares (the "Sprout VI Shares").
Sprout Growth II, L.P. ("Growth II") may be deemed to be the beneficial
owner of the following securities held by First Interstate Bank of
California, trustee: 130,944 shares, the 397,398 shares issuable upon
the conversion or exercise of the 198,699 shares of Series D Preferred
Stock and warrants to purchase 107,310 shares directly owned by it.
Accordingly, Growth II may be deemed to beneficially own an aggregate of
635,652 shares (the "Growth II Shares").
DLJ Capital Corporation ("DLJCC") may be deemed to be the beneficial
owner of the following securities held by First Interstate Bank of
California, trustee: 13,327 shares, the 40,446 shares issuable upon the
conversion or exercise of the 20,233 shares of Series D Preferred Stock
and warrants to purchase 10,920 shares. DLJCC, because of its
relationships with DLJ II and Associates II, and Growth and Associates,
and as the managing general partner of each Sprout VI and Growth II, also
may be deemed to beneficially own indirectly the DLJ II Shares, the
Growth Shares, the Sprout VI Shares and the Growth II Shares, for an
aggregate of 2,681,971 shares (the "DLJCC Shares").
DLJ First ESC L.L.C. ("ESC") may be deemed to be the beneficial owner of
1,969 Common Shares through it's direct ownership of (i) 364 shares, (ii)
the 1,605 shares (the "ESC Shares") issuable upon the conversion or
exercise of the 633 shares of Series D Preferred Stock, and warrants to
purchase 339 shares.
DLJ LBO Plans Management Corporation ("LBO"), as the manager of ESC, may
be deemed to beneficially own indirectly the ESC shares.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") may be
deemed to be the beneficial owner of 101,512 common shares through it's
direct ownership of (i) 18,747 shares, (ii) the 82,765 shares (the "DLJSC
Shares") issuable upon the conversion or exercise of the 32,597 shares of
Series D Preferred Stock, and warrants to purchase 17,571 shares.
9
<PAGE> 12
As the sole stockholder of DLJCC and DLJSC, Donaldson, Lufkin & Jenrette,
Inc. ("DLJ") may be deemed to beneficially own indirectly the DLJCC
Shares and the DLJSC Shares. In addition, as the sole stockholder of
LBO, DLJ may be deemed to beneficially own indirectly the shares that are
beneficially owned indirectly by LBO. Because of The Equitable Companies
Incorporated ("Equitable")'s ownership of DLJ, Equitable may be deemed to
beneficially own indirectly the DLJCC Shares, the DLJSC Shares and the
shares attributed to LBO that may be deemed to be beneficially owned by
DLJ.
(31) Olympus Private Placement Fund, L.P. is the beneficial owner of 2,077,292
shares of Common Stock through its direct ownership of (i) 1,481,294
shares, (ii) 221,784 shares of Common Stock that may be acquired within
60 days upon the exercise of Warrants, (iii) 103,773 shares of Series C
Preferred Stock, which may be converted at any time at the option of the
holder into 207,546 shares of Common Stock, and (iv) 83,334 shares of
Series D Preferred Stock, which may be converted at any time at the
option of the holder into 166,668 shares of Common Stock. OGP Partners,
L.P., James A. Conroy, and Robert S. Morris may be deemed to beneficially
own the shares of Common Stock beneficially owned by Olympus Private
Placement Fund, L.P.
(32) Baker Fentress & Company is the beneficial owner of 535,443 shares of
common stock through its direct ownership of (i) 73,221 shares, (ii)
240,000 shares that may be acquired within 60 days upon the exercise of
stock warrants, and (iii) 111,111 shares of Series D Preferred Stock,
which may be converted into 222,222 shares of common stock.
(33) Virginia Retirement System is the beneficial owner of 1,700,040 shares of
Common Stock through its direct ownership of 1,077,128 shares, (ii)
172,956 shares of Series C Preferred Stock, which may be converted at any
time at the option of the holder into 345,912 shares of Common Stock, and
(iii) 277,000 shares of Common Stock that may be acquired within 60 days
upon the exercise of warrants.
(34) RFE Capital Partners, L.P. is the beneficial owner of 237,782 shares of
Common Stock through its direct ownership of (i) 40,150 shares, and (ii)
197,632 shares of Common Stock that may be acquired within 60 days upon
the exercise of Warrants. Norcon Associates, RFE Investment Partners IV,
L.P., RFE Associates IV, L.P., RFE Management Corp., Robert M. Williams,
Howard C. Landis, James A. Parsons, Knute C. Albrecht, A. Dean Davis and
Michael J. Foster may be deemed to beneficially own the shares of Common
Stock beneficially owned by RFE Capital Partners, L.P.
(35) William Blair Venture Partners III Limited Partnership beneficially owns
793,644 shares of Common Stock
(36) Does not include 12,675 shares owned by Mr. Sage's wife, as to which
shares he disclaims beneficial ownership.
(37) Equus II Incorporated is the beneficial owner of 1,263,058 shares of
Common Stock through its direct ownership of (i) 1,038,944 shares of
Common Stock, (ii) 50,246 shares of Common Stock that may be acquired
within 60 days upon the exercise of warrants, (vi) 3,601 shares of Series
C Preferred Stock which may be converted at any time at the option of the
holder into 7,202 shares of Common Stock, and (vii) 83,333 shares of
Series D Preferred Stock which may be converted at any time at the option
of the holder into 166,666 shares of Common Stock.
(38) 1670 Tyler Green Trail, Smyrna, GA 30080.
(39) WPG Corporate Development Associates III, L.P. is the beneficial owner of
632,942 shares of Common Stock through its direct ownership of (i) 331,132
shares, (ii) 77,002 shares of Common Stock that may be acquired within 60
days upon the exercise of Warrants, (iii) 20,738 shares of Series C
Preferred Stock, which may be converted at any time at the option of the
holder into 41,476 shares of Common Stock, and (iv) 91,666 shares of
Series D Preferred Stock, which may be converted at any time at the option
of the holder into 183,332 shares of Common Stock.
10
<PAGE> 13
(40) RFE Investment Partners IV, L.P. is the beneficial owner of 494,191
shares of Common Stock through its direct ownership of (i) 77,275 shares,
(ii) 120,090 shares of Common Stock that may be acquired within 60 days
upon the exercise of Warrants, and (iii) 148,413 shares of Series D
Preferred Stock, which may be converted at any time at the option of the
holder into 296,826 shares of Common Stock. RFE Capital Partners, L.P.,
Norcon Associates, RFE Associates IV, L.P. RFE Management Corp., Robert M.
Williams, Howard C. Landis, James A. Parsons, Knute C. Albrecht, Michael
J. Foster, and A. Dean Davis may be deemed to beneficially own the shares
of Common Stock beneficially owned by RFE Investment Partners IV, L.P.
(41) Includes 30,000 shares that may be acquired by Mr. Spencer within 60
days upon the exercise of stock options.
(42) WPG CDA III, L.P., as the sole general partner of WPG Corporate
Development Associates III, L.P., may be deemed to own beneficially the
632,942 Shares held by WPG Corporate Development Associates III, L.P.
(43) WPG CDA III (Overseas), Ltd. as the sole investment advisor of WPG
Corporate Development Associates III (Overseas), Ltd., may be deemed to
own beneficially the 134,270 Shares owned by WPG Corporate Development
Associates III (Overseas), Ltd. WPG CDA III (Overseas), Ltd. disclaims
beneficial ownership of all such Shares.
(44) By reason of his status as a managing general partner of WPG CDA III,
L.P., which is the sole general partner of WPG Corporate Development
Associates III, L.P., Mr. Greer may be deemed to be the beneficial owners
of the 632,942 Shares held by WPG Corporate Development Associates III,
L.P. By reason of his status as a managing general partner of WPG CDA III
(Overseas), L.P., Mr. Greer may also be deemed to be the beneficial owner
of the 134,270 Shares held by WPG Corporate Development Associates III
(Overseas), L.P. Accordingly, Mr. Greer may be deemed to be the
beneficial owner of 767,212 shares. Mr. Greer disclaims beneficial
ownership of all Shares beneficially owned by WPG Corporate Development
Associates III, L.P. and WPG Corporate Development Associates III
(Overseas), L.P., except to the extent of his indirect beneficial interest
as a managing general partner of WPG CDA III, L.P. in Shares held by WPG
Corporate Development Associates III, L.P.
(45) By reason of his status as a managing partner of WPG CDA III, L.P.,
which is the sole general partner of WPG Corporate Development Associates
III, L.P., Mr. Lang may be deemed to be the beneficial owner of the
632,942 Shares held by WPG Corporate Development Associates, L.P. By
reason of his status as a managing general partner of WPG CDA III
(Overseas), L.P., Mr. Greer may also be deemed to be the beneficial owner
of the 134,270 Shares held by WPG Corporate Development Associates III
(Overseas), L.P. In addition, Mr. Lang is the beneficial owner in his
individual capacity of 3,016 shares through his direct ownership of (i)
2,506 shares, and (ii) 147 shares of Series C Preferred Stock, which may
be converted at any time at the option of the holder into 294 shares of
Common Stock and has the sole power to vote or direct the vote of and the
sole power to dispose or direct the disposition of the 3,016 shares.
Accordingly, Mr. Lang may be deemed to be the beneficial owner of 770,228
shares in the aggregate. Mr. Lang disclaims beneficial ownership of all
Shares beneficially owned by WPG Corporate Development Associates III,
L.P. and WPG Corporate Development Associates III (Overseas), L.P., except
to the extent of his indirect beneficial interest as a managing general
partner of WPG CDA III, L.P. in Shares held by WPG Corporate Development
Associates III, L.P.
(46) By reason of his status as a managing partner of WPG CDA III, L.P.,
which is the sole general partner of WPG Corporate Development Associates
III, L.P., Mr. Hutchinson may be deemed to be the beneficial owners of the
632,942 Shares held by WPG Corporate Development Associates III, L.P. By
reason of his status as a managing general partner of WPG CDA III
(Overseas), L.P., Mr. Hutchinson may also be deemed to be the beneficial
owner of the 134,270 Shares held by WPG Corporate Development Associates
III (Overseas), L.P. Accordingly, Mr. Hutchinson may be deemed to be the
beneficial owner of 767,212 shares. Mr. Hutchinson disclaims beneficial
ownership of all Shares beneficially owned by WPG Corporate Development
Associates III, L.P. and WPG Corporate Development Associates III
(Overseas), L.P., except to the extent of his indirect beneficial interest
as a managing general partner of WPG CDA III, L.P. in Shares held by WPG
Corporate Development Associates III, L.P.
11
<PAGE> 14
(47) John Hancock Place, Boston, Massachusetts 02117.
(48) Hancock Venture Partners III, L.P. is the beneficial owner of 678,455
shares of Common Stock through its direct ownership of (i) 328,637
shares, (ii) 85,848 shares of Common Stock that may be acquired within 60
days upon the exercise of Warrants, (iii) 20,874 shares of Series C
Preferred Stock, which may be converted at any time at the option of the
holder into 41,748 shares of Common Stock, and (iv) 111,111 shares of
Series D Preferred Stock, which may be converted at any time at the option
of the holder into 222,222 shares of Common Stock of the outstanding
shares of Common Stock. Back Bay Partners V, L.P., Back Bay Partners,
Hancock Venture Partners Inc., John Hancock Subsidiaries, Inc., and John
Hancock Mutual Life Insurance Company may be deemed to beneficially own
the shares of Common Stock beneficially held by Hancock Venture Partners
III, L.P.
(49) John Hancock Venture Capital Fund Limited Partnership II is the
beneficial owner of 355,443 shares of Common Stock through its direct
ownership of (i) 73,221 shares, (ii) 60,000 shares of Common Stock that
may be acquired within 60 days upon the exercise of Warrants and (iii)
111,111 shares of Series D Preferred Stock, which may be converted at any
time at the option of the holder into 222,222 shares of Common Stock. Back
Bay Partners V, L.P., Back Bay Partners L.P. II, Hancock Venture Partners
Inc., John Hancock Subsidiaries, Inc., and John Hancock Mutual Life
Insurance Company may be deemed to beneficially own the shares of Common
Stock beneficially held by John Hancock Venture Capital Fund Limited
Partnership II.
(50) Frontenac VI Limited Partnership is the beneficial owner of 1,186,466
shares of Common Stock through its direct ownership of (i) 297,576 shares,
(ii) 55,556 shares of Series C Preferred Stock, which may be converted at
any time at the option of the holder into 111,112 shares of Common Stock
and (iii) 388,889 shares of Series D Preferred Stock, which may be
converted at any time at the option of the holder into 777,778 shares of
Common Stock. Frontenac Company may be deemed to beneficially own the
shares of Common Stock beneficially owned by Frontenac VI Limited
Partnership.
(51) Mr. Williams is the beneficial owner of 736,356 shares of Common Stock
through his direct ownership of 4,383 shares of Common Stock.
(52) Mr. Foster is the beneficial owner of 733,726 shares of Common Stock
through his direct ownership of 1,753 shares of Common Stock.
(53) Mr. Albrecht is the beneficial owner of 734,954 shares of Common
Stock through his direct ownership of 2,980 shares of Common Stock.
(54) c/o Walker & Company, Caledonian House, Grand Cayman, Cayman Islands,
British West Indies.
(55) WPG Corporate Development Associates III (Overseas), Ltd., is the
beneficial owner of 134,270 shares of Common Stock through its direct
ownership of (i) 70,240 shares, (ii)16,342 shares of Common Stock that may
be acquired within 60 days upon the exercise of Warrants, (iii) 4,399
shares of Series C Preferred Stock, which may be converted at any time at
the option of the holder into 8,798 shares of Common Stock, and (iv)
19,445 shares of Series D Preferred Stock, which may be converted any
time at the option of the holder into 38,890 shares of Common Stock.
(56) Each of Desai Capital Management, Inc. and Rohit M. Desai may be deemed
to be the beneficial owner of the entire 1,038,612 shares of Common Stock
held by Equity-Linked Investors, L.P. and Equity-Linked Investors II, L.P.
(57) Includes 220,460 shares that may be acquired by Mr. Patterson within 60
days upon the exercise of stock options and warrants.
(58) Includes 6,667 shares that may be acquired by Mr. Wilkey within 60 days
upon the exercise of stock options.
12
<PAGE> 15
(59) 610 S.W. 128th Street, Miami, FL 33156.
(60) 707 Wilshire Boulevard, W-11-2, Los Angeles, CA 90017. Trustee under
a ten year voting trust agreement dated August 31, 1995, granting it sole
voting power of the Company securities it holds on behalf of Sprout
Growth, L.P., Sprout Capital VI, L.P., DLJ Venture Capital Fund II, L.P.,
Sprout Growth II, L.P., and DLJ Capital Corporation.
13
<PAGE> 16
PROPOSAL TO AMEND AND RESTATE CERTIFICATE OF INCORPORATION
GENERAL. Effective December 31,1995 the Company, pursuant to the 1995
Recapitalization Agreement ("Recapitalization Agreement") entered into several
transactions for the principal purpose of enhancing the value of Common Stock
through reducing the complexity of its capital structure and eliminating the
accrual of future dividends on its outstanding preferred stock. As a part of
these transactions (i) three series of the Company's outstanding preferred
stock, pursuant to their terms, converted into Common Stock, (ii) all accrued
dividends on all five classes of the Company's outstanding preferred stock were
paid by issuing Common Stock, and (iii) the holders of the remaining two series
of outstanding preferred stock agreed to waive the future accrual of
preferential dividends. As a further part of these transactions the Company
issued additional shares of Common Stock to all holders of its then outstanding
preferred stock as consideration for the actions taken and agreed to reduce
the exercise price of certain warrants for the period beginning December
31,1995 and ending 90 days after the adoption of the amendment to the
Certificate of Incorporation being considered at this special stockholders
meeting. The above transactions are herein collectively referred to as the
"Recapitalization".
AGREEMENT TO VOTE FOR PROPOSAL. The shareholder participants to the above
transactions, as a condition of the Recapitalization Agreement, agreed to vote
in favor of the proposed amendments to and restatement of the Certificate of
Incorporation. As a result of this commitment, approximately 73% of all the
votes entitled to be cast at the meeting, as well as the required percentages
of class votes by holders of Preferred Stock, have agreed to vote for the
adoption of the proposed amendments to and restatement of the Certificate of
Incorporation, which is enough to pass the proposal.
REASONS FOR RECAPITALIZATION. Prior to the Company's merger with
AmeriHealth, Inc. on December 6, 1994 its Common Stock was privately held.
From formation in 1990 through June, 1995, the Company raised capital necessary
for acquiring and operating its hospitals through issuances of private debt,
five series of preferred stock, several series of warrants to purchase Common
Stock, bank debt and REIT debt. Upon becoming a publicly held company, it
determined that its capital structure was overly complex and not easily
understood by the investing public with the result that the market price of its
Common Stock and its ability to access the public equity market is impaired.
The purpose of the Recapitalization was to reduce the complexity of the
Company's capital structure, eliminate the impact on earnings per share of the
accrual of preferred stock dividends, and thereby
14
<PAGE> 17
provide the opportunity for greater interest from the investing public both now
and should it decide to raise equity or subordinated debt capital in the
future.
FAIRNESS OPINION. On November 30, 1995 the Board of Directors approved the
Recapitalization subject to receipt of a fairness opinion from a recognized
investment banking firm. Thereafter, the Company retained Jefferies & Company,
Inc. ("Jefferies") to render its opinion with respect to the Recapitalization.
On December 26, 1995 the Board of Directors appointed two members, David S.
Spencer and William G. White, who are not affiliated with any particular holder
of preferred stock, as a special committee to "evaluate the Recapitalization and
upon its receipt and evaluation of the Fairness Opinion determine if the
Recapitalization is overall fair from a financial perspective to the Company's
Common Stockholders, in satisfaction of such condition to the Recapitalization
under the Recapitalization Agreement." On December 29, 1995, Jefferies
delivered its written opinion to the special committee that, as of such date,
the Recapitalization was fair from a financial point of view to the current
holders of the Company's Common Stock. Based upon its analysis and opinion, the
special committee made a similar determination. The resolution of the Board of
Directors creating the special committee provides that, in making its
determination concerning the fairness of the Recapitalization from a financial
point of view to the current holders of the Company's Common Stock, the
committee was "to consider only the Recapitalization as set forth in the
Recapitalization Agreement and is neither to consider any alternatives to such
Recapitalization as set forth therein nor to attempt to negotiate any different
terms or provisions to such Recapitalization as set forth therein;" therefore,
in making this determination, the special committee did not consider any
possible alternatives to the Recapitalization previously approved by the Board
of Directors, nor did the special committee attempt to negotiate or renegotiate
any of the provisions of the Recapitalization with the Preferred Shareholders or
anyone else. No limitations were imposed by the Company or its Board of
Directors upon Jefferies with respect to any investigations they made or the
procedures they followed in reaching their opinions.
In rendering its opinion, Jefferies reviewed, among other things, (i) a
draft copy of the Recapitalization Agreement in substantially final form and
other transaction documents and related exhibits thereto (each dated December
21, 1995) (ii) publicly available financial and other information of the
Company, including the Company's Annual Report to Shareholders and Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 and its
Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and
September 30, 1995 and (iii) certain financial and operating information with
respect to the business, operations and prospects of the Company furnished to
Jefferies by the Company. In addition, Jefferies held discussions with
management of the Company concerning its business, properties and prospects and
undertook such other reviews, analyses and inquiries relating to the Company as
Jefferies deemed relevant to its opinion.
In rendering its opinion, Jefferies relied upon and did not independently
verify the accuracy, completeness and fair presentation of all financial and
other information (including financial projections and estimates) that were
provided to Jefferies by or on behalf of the Company, or which were publicly
available. Jefferies' opinion is conditioned upon such information (whether
written or oral) being complete, accurate and fair in all material respects.
With respect to the financial forecasts provided to and discussed with
Jefferies by management of the Company, Jefferies assumed, with the Company's
15
<PAGE> 18
approval and without independent verification that (i) such information was
reasonably prepared on bases reasonably reflecting management's best currently
available estimates and good faith judgments as to the future performance of
the Company and (ii) that the Company will perform in accordance with all such
projections for all periods specified in the forecasts. Jefferies did not make
an independent evaluation or appraisal or conduct a physical inspection of any
of the Company's assets, nor was Jefferies furnished with any such appraisals.
Jefferies' opinion was based on economic, monetary, political, market and other
conditions as they existed and could be evaluated on the date of the opinion;
however such conditions are subject to rapid and unpredictable change.
THE FULL TEXT OF JEFFERIES' WRITTEN OPINION, DATED DECEMBER 29 1995,
WHICH SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, APPEARS AS ATTACHMENT
I TO THIS PROXY STATEMENT. STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS
ENTIRETY. JEFFERIES' OPINION WAS DIRECTED ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE RECAPITALIZATION TO THE CURRENT HOLDERS OF THE
COMPANY'S COMMON STOCK. JEFFERIES' OPINION WAS DELIVERED FOR THE INFORMATION
PURPOSES OF THE SPECIAL COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS AND DOES
NOT CONSTITUTE A RECOMMENDATION AS TO HOW ANY STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING OR ANY OTHER MEETING OF THE COMPANY'S STOCKHOLDERS TO CONSIDER
THE RECAPITALIZATION. THIS SUMMARY OF JEFFERIES' OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In conducting its analysis and arriving at its opinion, Jefferies
considered such financial and other factors as it deemed appropriate under the
circumstances, including: (i) the terms and business and financial aspects of
the Recapitalization; (ii) the Company's current capital structure and its need
for growth capital; (iii) the historical and current markets for the Company's
Common Stock (including float, liquidity and sell-side analytical research
coverage) and for other securities of other public companies believed by
Jefferies to be comparable to the Company; (iv) the financial impact of the
Recapitalization on the holders of the Company's Common Stock; (v) certain of
the Company's operating and financial information, including the financial
forecasts provided by management relating to the Company's business and
prospects; (vi) publicly available financial data and stock market performance
data of other public companies believed by Jefferies to be comparable to the
Company; (vii) the mandatory redemption requirements in June 2000 with respect
to the Series C and Series D Preferred Stock; and (viii) the potential effect
of such Preferred Stock redemption requirements on the Company's ability to
obtain public or private debt financing.
The factors set forth above do not purport to represent all of the
factors considered by Jefferies in rendering its opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances, and therefore, such preparation is not readily
susceptible to summary description. Furthermore, in arriving at its fairness
opinion, Jefferies did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Jefferies
believes its analyses must be considered as a whole and that considering any
portions of such analyses and of the factors considered, without considering
all analyses and factors, could create a misleading
16
<PAGE> 19
or incomplete view of the process underlying the opinion. In its analyses,
Jefferies made numerous assumptions with respect to the hospital industry's
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Company. Any estimates contained in
those analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than as set forth in such
analyses. No public company utilized as a comparison is identical to the
Company. An analysis of the results of such a comparison is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and
other factors, including capital structure, that could affect the public
trading value of the companies to which the Company is being compared.
INFORMATION CONCERNING JEFFERIES. Jefferies is a recognized investment
banking firm and, as a customary part of its investment banking activities, is
regularly engaged in the evaluation of capital structures and the rendering of
advice in financial restructurings and recapitalizations. In addition,
Jefferies performs the valuations of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, financial restructurings and other financial services.
Pursuant to a letter agreement dated December 7, 1995 (the "Engagement
Letter"), the Company engaged Jefferies to render its opinion to the Company in
connection with the Recapitalization. The Company paid Jefferies a fee of
$35,000 upon the execution of the Engagement Letter and an additional fee of
$40,000 upon the delivery of its opinion. Due to its partly contingent nature,
this compensation arrangement could be viewed as creating a conflict of
interest for Jefferies. Pursuant to the Engagement Letter, the Company has
agreed to reimburse Jefferies for reasonable expenses incurred by Jefferies,
subject to certain limitations, including fees and disbursements of counsel,
and to indemnify Jefferies against certain liabilities in connection with its
engagement. Other than as described above, no fees were paid by the Company to
Jefferies during the past two years.
DESCRIPTION OF RECAPITALIZATION. Pursuant to the terms of the Recapitalization
Agreement several transactions occurred as of December 31,1995. A general
description of these transactions is given below.
Payment of Accrued Dividends in Common Stock. The Company and the
holders of Series A Convertible Preferred Stock, par value $.01 ("Series A"),
Series A-1 Convertible Preferred Stock, par value $.01 ("Series A-1"), Series
BB Cumulative Convertible Preferred Stock, par value $.01 ("Series BB"),
Series C and Series D agreed to the payment effective December 31, 1995 of all
dividends accrued on such preferred stock through the issuance of Common Stock
at the agreed price of $7.00 per share. On December 29, 1995 the closing price
per share of the Common Stock on the American Stock Exchange was $5.3125. The
amount of accrued dividends and number shares of Common Stock issued is
summarized in the "Recapitalization Summary Table" below.
The five series of preferred stock accrued dividends until December 31,
1995 in the following annual amounts:
17
<PAGE> 20
<TABLE>
<CAPTION>
Annual Per No. Shares Annual Dividend Total Accrued
Series Share Dividend Outstanding Accrual Dividends
- ------ -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Series A $0.08 3,500,000 $ 280,000 $ 876,496
Series A-1 $0.08 2,769,109 221,529 670,173
Series BB $0.94 1,577,546 1,482,893 4,797,788
Series C $1.44 448,811 646,288 1,345,695
Series D $1.44 2,156,903 3,105,940 4,923,601
------------ -------------
TOTAL $ 5,736,650 $ 12,613,753
</TABLE>
Conversion of Preferred Stock into Common Stock. The holders of Series A,
Series A-1 and Series BB agreed to convert all of such shares into Common Stock
according to the existing terms of each such series. The number shares of
Series A, Series A-1 and Series BB that was converted and the number of shares
of Common Stock issued is summarized in the "Recapitalization Summary Table"
below.
Waiver of Future Preferential Dividend on Preferred Stock. The holders
of the Series A, Series A-1 and Series BB, by virtue of converting such shares
into Common Stock, and the holders of the Series C and Series D preferred stock
by the terms of the Recapitalization Agreement, agreed to waive the accrual of
all future preferential dividends on each respective series of preferred stock.
In consideration for such actions, the Company issued an amount of Common
Stock valued at $8.00 per share to the holders of the Series A, Series A-1 and
Series BB that approximated nine months of future dividend accruals, and to the
Series C and Series D an amount of Common Stock also valued at $8.00 per share
that approximated twenty-one months of future dividend accruals. The number of
shares of Common Stock issued in consideration for waiving future accruals of
preferential dividends is summarized in the "Recapitalization Summary Table"
below.
RECAPITALIZATION SUMMARY TABLE
The following information is given as of December 31, 1995 and reflects
by series the shares issued on conversion, in payment of accrued dividends, and
in consideration of converting at the present time and waiving all future
dividend accruals. Share issuances are of Common Stock and are adjusted for
fractional shares.
<TABLE>
<CAPTION>
Preferred Shares For Shares For Shares For Waiver Total Shares
Shares Conversion Dividends of Future Dividends Issued
- -------- ---------- ---------- ------------------- ------------
<S> <C> <C> <C> <C>
Series A 949,794 125,210 26,247 1,101,251
Series A-1 692,275 95,736 20,765 808,776
Series BB 3,155,092 685,391 139,013 3,979,496
Series C 192,231 141,369 333,600
Series D 703,332 679,389 1,382,721
- -----------------------------------------------------------------------------------------------------
Total 4,797,161 1,801,900 1,006,783 7,605,844
</TABLE>
Reduction of Warrant Exercise Price. As a further part of the
Recapitalization the Company and the holders of certain warrants to purchase
Common Stock agreed that
18
<PAGE> 21
beginning December 31,1995 and ending ninety (90) days after shareholder
approval of the Amendment to the Certificate of Incorporation being voted on at
this special stockholders meeting, the exercise prices of such warrants would be
reduced. Warrants to purchase of total of 680,104 shares of Common Stock, issued
pursuant to the Note and Stock Purchase Agreement, dated May 27, 1992, as
amended, had their exercise price reduced from $5.90 to $5.25 per share.
Warrants to purchase of total of 1,922,670 shares of Common Stock, issued
pursuant to the Series D Note and Stock Purchase Agreement, dated December 31,
1993, as amended, had their exercise price reduced from $9.00 to $7.00 per share
and warrants to purchase of total of 525,000 shares of Common Stock issued
pursuant to the Series E Note Purchase Agreement, dated May 1, 1995, as amended,
had their exercise price reduced from $9.00 to $7.00 per share.
DESCRIPTION OF CHANGES TO CERTIFICATE OF INCORPORATION.
Under the terms of the Recapitalization Agreement the Company and the
other parties thereto agreed to submit to the Company's shareholders for
approval the amendments to and restatement of the Certificate of Incorporation
attached hereto as Attachment II (the "Amendment") which both amends and
restates the existing Certificate of Incorporation. The Company's Board of
Directors in connection with authorization of the Recapitalization and
conditioned upon the closing of the transactions called for in the
Recapitalization Agreement on December 31,1995 adopted the Amendment and
recommended it be submitted to the stockholders for approval. Discussed below
are changes the Amendment will make to the current Certificate of
Incorporation. Reference is made to Annex II for a description of the
Certificate of Incorporation as it will read upon adoption.
Shares and Classes Authorized. Currently. The Company is authorized to issue
40,400,000 shares which are divided as follows: 25,000,000 shares of Common
Stock, 15,400,000 shares of preferred stock divided into six series as follows
(i) 3,500,000 shares of Series A, (ii) 6,500,000 shares of Series A-1, (iii)
400,000 shares of Series B $2.125 Increasing Rate Cumulative Convertible
Preferred Stock, (iv) 2,300,000 shares of Series BB, (v) 500,000 shares of
Series C, and (vi) 2,200,000 shares of Series D. All shares of Series B $2.125
Increasing Rate Cumulative Convertible Preferred Stock were redeemed or
converted at the time of the merger with AmeriHealth in December 1994, and all
references thereto in the Amendment have been omitted, therefore a
description of such shares is not included.
After Amendment. The Company will be authorized to issue 27,700,000
shares which will be divided as follows: 25,000,000 shares of Common Stock,
2,700,000 shares of preferred stock divided into two series as follows (i)
500,000 shares of Series C, and (ii) 2,200,000 shares of Series D.
Series A, Series A-1 and Series BB. Effective December 31,1995 all
outstanding shares of Series A, Series A-1 and Series BB were converted
according to their terms into shares of Common Stock. WHILE A DESCRIPTION OF
THE TERMS OF SUCH SERIES IS GIVEN BELOW, STOCKHOLDERS SHOULD BE AWARE THAT THE
PROPOSED AMENDMENT HAS ELIMINATED ALL PROVISIONS FOR SUCH SERIES.
Series A.
19
<PAGE> 22
1) Dividend Rights. The dividend rates are $0.08 per share per annum
cumulative and accruing from the date of issuance. Dividends are payable (i) in
shares of Common Stock at any time before or after a Change in Control Event
(as defined in the Certificate of Incorporation) and the completion of a public
offering of Common Stock with net proceeds of at least $15,000,000 ("Successful
Secondary Public Offering"), and (ii) in cash upon a Change in Control Event
but subject to and the approval of two-thirds (2/3rds) of all outstanding
Series BB, Series C, and Series D Preferred Stock and any restrictions in the
Company's existing agreements with senior secured lenders. Dividends are also
payable upon redemption in Common Stock or in cash subject to the approvals and
agreements referred to above.
2) Terms of Conversion. The "Conversion Price" is $3.685 per share. The
"Conversion Price" is adjustable up or down, but never to exceed the Conversion
Price immediately preceding the event in question, upon the sale or issuance of
additional Common Stock, including stock rights, options, and convertible
securities, for consideration less than the Conversion Price in effect
immediately prior to sale or issuance in question. The Series A stockholder has
an option to convert at any time into Common Stock all or any Series A, based
on the applicable Conversion Price and the applicable conversion rate. The
Company has the option and right to require conversion of the outstanding
Series A, with 30 days minimum prior notice, upon the happening of one of two
events: (1) a public offering of Common Stock with a gross offering price of
$15,000,000 or more at $7.50 or more per share (subject to an antidilution
adjustment); or (2) a merger, consolidation or other similar transaction that
results in the Company's acquisition of $15,000,000 or more in cash or other
assets and results in the Common Stock being publicly traded at a price
reasonably anticipated to be $7.50 per share. The conversion rate for all
conversions of Series A is one share of Common Stock for each 3.685 shares of
Series A issued and outstanding.
3) Redemption. Series A stockholders may require redemption of their
stock within 90 days of receipt of written notice from the Company of a "Change
in Control" or of a "Default Event" (both of which terms are defined in the
Company's Certificate of Incorporation). The redemption price will be $1.00 per
share plus accrued but unpaid dividends to date of redemption. No redemption of
Series A shall occur prior to the redemption of the Series BB, Series C and
Series D.
4) Liquidation Right. Subject to the prior liquidation rights of the
Series BB, Series C and Series D stockholders, the Series A stockholders shall
receive liquidation payments of $1.00 per share plus all accrued but unpaid
dividends or ratable payments among all Series A and Series A-1 stockholders
if less that $1.00 plus all accrued but unpaid dividends is available.
Series A-1. Except for the Conversion Price of $4.00 per share and the
conversion rate of one (1) share of Common Stock for each four (4) shares of
the Series A-1, the dividend rights, conversion terms, redemption provisions,
voting rights, liquidation rights, preemption rights, liability to further
calls or assessments, and all other powers, designations, preferences, and
relative participating, optional or other special rights and qualifications,
limitations or restrictions which apply to the Series A apply to the Series
A-1.
20
<PAGE> 23
Series BB.
1) Dividend Rights. The dividend rate is 8% of $11.80, the Stated Value,
per share per annum cumulative, accruing from the date of issuance, and
preferential to the Series A and Series A-1 stockholders and proportionate with
the Series C stockholders. Payment of dividends shall be made in cash upon the
occurrence of (a) a Successful Secondary Public Offering, (b) conversion of the
Series BB or Series C preferred stock, (c) a Change in Control Event, or (d)
redemption of Series BB or Series C, subject to the Company's existing
agreements with senior secured lenders and the approval of two-thirds (2/3rds)
of all outstanding Series D.
2) Terms of Conversion. The "Conversion Price" is $5.90 per share. The
"Conversion Price" is adjustable upon the same terms and conditions as the
Series A and Series A-1. Each Series BB stockholder has the option to convert
all or any Series BB at any time into Common Stock, based on the applicable
Conversion Price and the applicable conversion rate. The Company has the option
and right to require conversion of all the outstanding Series BB upon: (a)
prior written notice at least 30 days preceding; (b) a Successful Secondary
Public Offering; (c) at a per share offering price of at least 175% of the
Conversion Price then in effect with the minimum public offering price
increased by 10% per year from May 1, 1994 and each May 1 of each year
thereafter; and (d) if all outstanding Series A and Series A-1 is or has been
converted. The conversion rate for all conversions of Series BB is two shares
of Common Stock for one share of Series BB. No fractional common shares will
be issued and all fractional common shares shall be paid "Market Price" as
defined in the Certificate of Incorporation. All accrued dividends shall be
paid upon conversion of the Series BB, Series C and Series D Preferred Stock.
3) Redemption Provisions. Series BB stockholders may require redemption
of their stock within 90 days of receipt of written notice from the Company of
a Change in Control or of a Default Event. The redemption price will be $11.80
per share plus accrued but unpaid dividends to date of redemption. No
redemption of Series BB shall occur prior to the redemption of the Series C and
Series D. If all the Series C and Series D has been redeemed in full, the
Company shall redeem the Series BB no later than June 30, 2000.
4) Liquidation Rights. Subject to the prior liquidation rights of the
Series C and Series D stockholders, the Series BB stockholders shall receive
liquidation payments of $11.80 per share plus all accrued but unpaid dividends
or ratable payments among all Series BB stockholders if less that $11.80 plus
all accrued but unpaid dividends is available.
Series C.
1) Dividend Rights.
CURRENTLY. The dividend rate is 8% of $18.00, the Stated Value,
per share per annum cumulative, accruing from the date of issuance, and
preferential to the Series A and Series A-1 stockholders and proportionate with
the Series BB stockholders. Payment of dividends shall be on the same terms as
the Series BB.
AFTER AMENDMENT. The dividend rate of 8% is eliminated and the Series
C will participate in any dividends declared on Common Stock on an as converted
basis.
2) Terms of Conversion.
21
<PAGE> 24
CURRENTLY. The "Conversion Price" is $9.00 per share. The
"Conversion Price" is adjustable upon the same terms and conditions as the
Series A and Series A-1. Each Series C stockholder has the option to convert
all or any Series C at any time into Common Stock, based on the applicable
Conversion Price and the applicable conversion rate. The Company has the
option and right to require conversion of all the outstanding Series C upon:
(a) prior written notice at least 30 days preceding; (b) a Successful Secondary
Public Offering; (c) at a per share offering price of at least 133% of the
Conversion Price then in effect with the minimum public offing price increased
by 10% per year on May 1, 1994 and each May 1 of each year thereafter; and (d)
if all outstanding Series A and Series A-1 and Series BB is or has been
converted. The conversion rate for all conversions of Series C is two shares of
Common Stock for one share of Series C. No fractional common shares will be
issued and all fractional common shares shall be paid "Market Price" as defined
in the Certificate of Incorporation. All accrued dividends shall be paid upon
conversion of the Series BB, Series C and Series D.
AFTER AMENDMENT. The Conversion Price remains $9.00. The Conversion
Price will be proportionately adjusted upon stock splits. The Company has the
option and right to require conversion of all the outstanding Series C in the
manner set forth above upon the anticipated completion of a public offering of
Common Stock for "net proceeds" of not less than $25,000,000 at a per share
offering price of at least $10.00.
3) Redemption Provisions.
CURRENTLY. Series C stockholders may require redemption of their
stock within 90 days of receipt of written notice from the Company of a Change
in Control or of a Default Event. The redemption price will be $18.00 per share
plus accrued but unpaid dividends to date of redemption. If all the outstanding
Series C and Series D cannot be redeemed at the same time, then no Series C
shall be redeemed prior to the redemption of 80% of the Series D, after which
80% of the Series C shall be redeemed, after which the remaining 20% of the
outstanding Series D shall be redeemed, after which the remaining 20% of the
Series C shall be redeemed. The Series C and Series D shall be redeemed no later
than June 1, 2000.
AFTER AMENDMENT. Redemption will occur only on the redemption date of
June 1, 2000 at the redemption price of $18.00 per share. If all the
outstanding Series C and Series D cannot be redeemed at the same time, the
existing proration terms continue to apply.
4) Liquidation Rights.
CURRENTLY. The Series C and Series D stockholders shall receive
liquidation payments of $18.00 per share (the "Stated Value") plus all accrued
but unpaid dividends. If the Company is unable to pay fully the Series C and
Series D stockholders, then the first payment shall be distributed first to the
holders of Series D in an amount equal to 80% of the outstanding Series D
Stated Value plus accrued and unpaid dividends, thereafter next to the holders
of Series C in an amount equal to 80% of the outstanding Series C Stated Value
plus accrued and unpaid dividends, thereafter next to the holders of the Series
D in an amount equal to the remaining amount of Series D Stated Value plus
accrued and unpaid dividends, and thereafter next to the holders of Series C in
an amount equal to the remaining amount of Series C Stated Value plus accrued
and unpaid dividends; in each instance among such holders pro rata.
AFTER AMENDMENT. Substantially unchanged, except references to accrued
dividends have been omitted.
22
<PAGE> 25
Series D
1) Dividend Rights
CURRENTLY. The dividend rate is 8% of $18.00, the Stated Value,
per share per annum cumulative, accruing from the date of issuance, and
preferential to the Series A and Series A-1, Series BB and Series C
stockholders. Payment of dividends shall be made in cash upon the occurrence of
(a) a Successful Secondary Public Offering, (b) conversion of the Series D, (c)
a Change in Control Event, or (d) redemption of Series D, subject to the
Company's existing agreements with senior secured lenders.
AFTER AMENDMENT. The dividend rate of 8% is eliminated and the Series
D will participate in any dividends declared on Common Stock on an as converted
basis.
2) Terms of Conversion.
CURRENTLY. The "Conversion Price" will be $9.00 per share. The
"Conversion Price" is adjustable upon the same terms and conditions as the
Series A and Series A-1. Each Series D stockholder has an option to convert all
or any Series D at any time into Common Stock, based on the applicable
Conversion Price and the applicable conversion rate. The Company has the option
and right to require conversion of all the outstanding Series D upon: (a) prior
written notice at least 30 days preceding; (b) the anticipated completion of a
public offering of the Common Stock for "net proceeds" of not less than
$25,000,000; (c) at a per share offering price of at least 175% of the
Conversion Price then in effect with the minimum public offering price
increased by 10% per year on December 1, 1994 and each December 1 of each year
thereafter; and (d) if all outstanding Series A, Series A-1, Series BB and
Series C is or has been converted. The conversion rate for all conversions of
Series D Preferred Stock is two shares of Common Stock for one share of Series
D. No fractional common shares will be issued and all fractional common shares
shall be paid "Market Price" as defined in the Certificate of Incorporation.
All accrued dividends shall be paid upon conversion of the Series BB, Series C
and Series D..
AFTER AMENDMENT. The Conversion Price remains $9.00. The Conversion
Price will be proportionately adjusted upon stock splits. The Company has the
option and right to require conversion of all the outstanding Series C in the
manner set forth above upon the anticipated completion of a public offering of
Common Stock for "net proceeds" of not less than $25,000,000 at a per share
offering price of at least $10.00.
3) Redemption Provisions.
CURRENTLY. Series D stockholders may require redemption of their
stock within 90 days of receipt of written notice from the Company of a Change
in Control or of a Default Event. The redemption price will be $18.00 per share
plus accrued but unpaid dividends to date of redemption. If all the outstanding
Series C and Series D cannot be redeemed at the same time, then no Series C
shall be redeemed prior to the redemption of 80% of the Series D, after which
80% of the Series C shall be redeemed, after which the remaining 20% of the
outstanding Series D shall be redeemed, after which the remaining 20% of the
Series C shall be redeemed. The Series C and D shall be redeemed no later than
June 1, 2000.
AFTER AMENDMENT. Redemption will occur only on the redemption date of
June 1, 2000 at the redemption price of $18.00 per share. If all the
outstanding Series C and Series D cannot be redeemed at the same time, the
existing proration terms continue to apply.
4) Liquidation Rights.
23
<PAGE> 26
CURRENTLY. The Series C and Series D stockholders shall receive
liquidation payments of $18.00 per share (the "Stated Value") plus all accrued
but unpaid dividends. If the Corporation is unable to pay fully the Series C
and Series D stockholders, then the first payment shall be distributed first to
the holders of Series D in an amount equal to 80% of the outstanding Series D
Stated Value plus accrued and unpaid dividends, thereafter next to the holders
of Series C in an amount equal to 80% of the outstanding Series C Stated Value
plus accrued and unpaid dividends, thereafter next to the holders of the Series
D in an amount equal to the remaining amount of Series D Stated Value plus
accrued and unpaid dividends, and thereafter next to the holders of Series C in
an amount equal to the remaining amount of Series C Stated Value plus accrued
and unpaid dividends; in each instance among such holders pro rata.
AFTER AMENDMENT. Substantially unchanged, except references to accrued
dividends have been omitted.
Voting Rights for Series A, Series A-1, Series BB, Series C, and Series D.
CURRENTLY. All series of preferred stock other than the Series B
$2.125 Increasing Rate Cumulative Convertible Preferred Stock have voting
rights on all matters according to the number of common shares into which the
preferred stock is convertible at the time of any shareholders' vote. The
issuance of a new class of stock or the increase of shares within an existing
class of stock that either ranks on parity with or is superior to a given
series of Company preferred stock as to dividends, redemption, and liquidation
requires the following approvals by then outstanding class or classes: (1)
66.66% of Series A and Series A-1 voting as a class; (2) 75% of Series BB and
Series C, voting together as a class; and (3) 75% of Series D, voting as a
class. No amendment of voting powers, designations, preferences, or relative,
participating, optional or other special rights and no amendments of the
Certificate of Incorporation or bylaws that materially adversely affect the
rights of Series A, Series A-1, Series BB, Series C, and Series D shall occur
without the following approvals by then outstanding class or classes: (1) 90%
vote of Series A and Series A-1, voting as a class; (2) 90% of Series BB and
Series C, voting together as a class; and (3) 90% of the Series D, voting as a
class. Upon the occurrence of a Default Event, the preferred stock will have
the right to enlarge the Board of Directors and elect a controlling number of
directors.
AFTER AMENDMENT. The Series C and Series D will continue to have
substantially the same voting rights. References to Series A, Series A-1 and
Series BB have been removed.
Director Election Rights on Default Event.
CURRENTLY. Holders of the Company's Series A, Series A-1, Series
BB, Series C and Series D have the right to elect a majority of the Board of
Directors upon the occurrence of a "Default Event" as defined in the
Certificate of Incorporation. They retain that right throughout the "Default
Period" as defined in the Certificate of Incorporation.
AFTER AMENDMENT. Upon and during the continuance of a Default Event
the holders of Series C and Series D as a class have the right to elect six new
members to the Board of Directors if the existing number of Directors is eleven
or less, and one additional Director for each Director that exceeds eleven at
the time of the Default Event. As of December 31,1995 there were ten members
on the Board of Directors.
Change in Definition of Default Event.
24
<PAGE> 27
CURRENTLY. One of the Default Events set forth in the
Certificate of Incorporation is a "Change in Control Event" as defined in the
Certificate of Incorporation. A Change in Control Event occurs when (1) Charles
R. Miller owns less than 80% of the stock he beneficially owned on December 28,
1993 at any time prior to the first anniversary of a Successful Secondary
Public Offering; (2) Charles R. Miller has less than 40% of the stock he
beneficially owned on December 28, 1993 at any time prior to the second
anniversary of a Successful Secondary Public Offering; (3) the acquisition by
one person or group of 50% or more of the combined voting power of the then
outstanding voting securities; (4) the sale or disposition of all or
substantially all of the Company's assets; (5) the merger of the Company with
or into another person; (6) any attempts by the Company to reduce substantially
or eliminate a public market for the Company stock, to require a filing under
Section 13(e) of the Securities Exchange Act of 1934, as amended, or to cause
the delisting of the Common Stock from a national securities exchange; and (7)
the material or complete liquidation of the Company. No Change in Control Event
regarding Charles R. Miller will occur after his termination subject to certain
specified conditions, his permanent disability that prevents continued
employment, or his death.
AFTER AMENDMENT. Substantially unchanged, except that part of the
definition relating to the change in share ownership of Charles R. Miller has
been eliminated.
Preemptive Rights of Series A, Series A-1, Series BB, Series C, and Series D.
There are no statutory preemptive rights contained in the Certificate of
Incorporation and none will be contained after the Amendment.
Liability to Further Calls or to Assessments for Series A, Series A-1, Series
BB, Series C, and Series D. There is no liability for further calls or
assessments under the existing Certificate of Incorporation and there will be
no such liability after the Amendment.
Common Stock. The rights of holders of Common Stock are governed by the
Company's Certificate of Incorporation, bylaws and the Delaware General
Corporation Law. The Amendment does not affect any of the rights of holders of
Common Stock, except as may indirectly result from the changes to the Series A,
Series A-1, Series BB, Series C and Series D described above.
This summary of the comparative rights of the stockholders should not be
substituted for a careful reading of the documents referred to herein. The
Board of Directors recommends voting FOR the adoption of the Amendments.
FINANCIAL INFORMATION
Financial information concerning the Company is attached.
By the order of the Board of Directors,
CHARLES R. MILLER
25
<PAGE> 28
President
Date: January 22,1996
THE COMPANY WILL FURNISH WITHOUT CHARGE TO ANY PERSON WHOSE PROXY IS SOLICITED,
ON WRITTEN REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND
EXCHANGE COMMISSION ON FORM 10-K FOR 1994, AS AMENDED. REQUESTS SHOULD BE SENT
TO CHAMPION HEALTHCARE CORPORATION, 14340 TORREY CHASE, SUITE 320, HOUSTON,
TEXAS 77014, ATTENTION: JAMES G. VANDEVENDER.
26
<PAGE> 29
FINANCIAL STATEMENTS
FOR CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES
DATED DECEMBER 22, 1995
<PAGE> 30
CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
CHAMPION HEALTHCARE CORPORATION - FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995:
Condensed Consolidated Balance Sheet - September 30, 1995 and
December 31, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 4
Condensed Consolidated Statement of Operations - For the three and nine months ended September 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 5
Condensed Consolidated Statement of Cash Flows - For the nine months ended September 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 6
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . F- 7
Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . F-12
CHAMPION HEALTHCARE CORPORATION - FOR THE YEAR ENDED DECEMBER 31, 1994:
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-19
Consolidated Balance Sheet - December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . F-20
Consolidated Statement of Operations - For the years ended December 31, 1994, 1993 and 1992 . . . . . . F-21
Consolidated Statement of Stockholders' Equity - For the years ended December 31, 1994, 1993
and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . F-44
DAKOTA HEARTLAND HEALTH SYSTEM - FOR THE YEAR ENDED DECEMBER 31, 1994:
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-52
Balance Sheet - December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-53
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-54
The following are consolidated financial statement schedules of Champion Healthcare Corporation
and subsidiaries:
Report of Coopers & Lybrand, L.L.P., Independent Accountants on Financial Statement Schedules . . . . . F-57
Schedule I -- Condensed Financial Information of the Registrant . . . . . . . . . . . . . . . . . . . . F-58
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . F-62
JORDAN VALLEY HOSPITAL - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995:
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-65
Balance Sheet - September 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-66
Statement of Income - For the nine months ended September 30, 1995. . . . . . . . . . . . . . . . . . . F-67
Statement of Cash Flows - For the nine months ended September 30, 1995. . . . . . . . . . . . . . . . . F-68
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-69
PRO FORMA FINANCIAL INFORMATION:
Champion - Jordan Valley and Recapitalization:
Pro Forma Combining Income Statement - For the nine months ended September 30, 1995 . . . . . F-77
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-78
Pro Forma Combining Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . . F-79
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-80
Champion Pro Forma Combined Group and Jordan Valley Hospital (Champion - Jordan Valley):
Pro Forma Combining Income Statement - For the nine months ended September 30, 1995 . . . . . F-82
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-83
Pro Forma Combining Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . . F-84
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-85
</TABLE>
F-1
<PAGE> 31
<TABLE>
<S> <C>
Champion Combined Group and Salt Lake Regional Medical Center (Champion Pro Forma Combined Group):
Pro Forma Combining Income Statement - For the nine months ended September 30, 1995 . . . . . F-88
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-89
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-90
Champion Combined Company and Dakota Hospital (Champion Combined Group):
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-92
Notes to Pro Forma Combining Income Statement . . . . . . . . . . . . . . . . . . . . . . . . F-93
Champion Combined Company (Champion Healthcare Corporation, AmeriHealth, Inc.
and Psychiatric Healthcare Corporation):
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-96
Notes to Pro Forma Combining Income Statement . . . . . . . . . . . . . . . . . . . . . . . . F-97
</TABLE>
F-2
<PAGE> 32
CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
CHAMPION HEALTHCARE CORPORATION - FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995:
Condensed Consolidated Balance Sheet - September 30, 1995 and
December 31, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 4
Condensed Consolidated Statement of Operations - For the three and nine months ended September 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 5
Condensed Consolidated Statement of Cash Flows - For the nine months ended September 30, 1995
and 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 6
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . F- 7
Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . F-12
</TABLE>
F-3
<PAGE> 33
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,848 $ 48,424
Restricted cash -- 5,000
Accounts receivable, less allowance for doubtful
accounts of $7,097 and $4,959 at September 30, 1995 and
December 31, 1994, respectively 28,477 17,115
Supplies inventory 3,715 1,942
Prepaid expenses and other current assets 7,646 4,899
----------- ------------
Total current assets 47,686 77,380
Property and equipment, less allowances for depreciation and
amortization of $9,515 and $5,340 at September 30, 1995 and
December 31, 1994, respectively 155,608 81,913
Investment in DHHS 46,324 40,088
Other assets 24,442 17,172
----------- ------------
Total assets $ 274,060 $ 216,553
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations $ 2,243 $ 4,781
Accounts payable 9,250 10,637
Due to third parties 9,940 2,241
Other current liabilities 14,977 8,446
----------- ------------
Total current liabilities 36,410 26,105
Long-term debt and capital lease obligations 152,415 105,284
Other long-term liabilities 8,935 11,037
Redeemable preferred stock 81,491 76,294
Common stock, $.01 par value:
Authorized - 25,000,000 shares, 4,262,386 and 4,223,975
shares issued and outstanding at September 30, 1995
and December 31, 1994, respectively 43 42
Common stock subscribed, 80,000 and 100,000 shares at
September 30, 1995 and December 31, 1994, respectively 40 50
Common stock subscription receivable (40) (50)
Paid in capital 12,294 15,998
Accumulated deficit (17,528) (18,207)
----------- ------------
Total liabilities and stockholders' equity $ 274,060 $ 216,553
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE> 34
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------------------------- --------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net patient service revenue $ 44,877 $ 22,074 $ 114,438 $ 67,742
Other revenue 912 1,257 3,397 3,555
-------- -------- --------- --------
Net revenue 45,789 23,331 117,835 71,297
Operating expenses:
Salaries and benefits 19,638 8,961 50,898 26,853
Other operating and administrative 18,269 9,629 46,493 28,916
Provision for bad debts 3,232 1,159 8,985 4,702
Interest 3,489 1,569 9,406 4,801
Depreciation and amortization 2,357 900 5,971 2,519
Equity in earnings of DHHS (2,500) -- (6,245) --
-------- -------- --------- --------
Total expenses 44,485 22,218 115,508 67,791
-------- -------- --------- --------
Operating income 1,304 1,113 2,327 3,506
Minority interest (15) -- 77 --
-------- -------- --------- --------
Income before income taxes and extraordinary item 1,319 1,113 2,250 3,506
Provision for income taxes 528 85 833 248
-------- -------- --------- --------
Income before extraordinary item 791 1,028 1,417 3,258
Extraordinary item-loss on early
extinguishment of debt, net of tax benefit of
$380 -- -- (738) --
-------- -------- --------- --------
Net income $ 791 $ 1,028 $ 679 $ 3,258
======== ======== ========= ========
Loss applicable to common stock $ (712) $ (150) $ (3,804) $ (214)
======== ======== ========= ========
Loss per common share:
Loss before extraordinary item $ (.17) $ (.12) $ (.73) $ (.18)
Extraordinary item -- -- (.17) --
-------- -------- --------- --------
Loss per common share $ (.17) $ (.12) $ (.90) $ (.18)
======== ======== ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE> 35
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
-----------------------------
(Dollars in thousands)
<S> <C> <C>
Operating activities:
Net income $ 679 $ 3,258
Extraordinary item, net of a tax benefit of $380 738 --
Equity in earnings of DHHS (6,245) --
Minority interests 77 --
Depreciation and amortization 5,971 2,519
Provision for bad debts 8,985 4,702
Changes in assets and liabilities, net of effects from acquisitions
Increase in assets (5,548) (6,957)
Increase (decrease) in liabilities 6,127 (2,723)
--------- --------
Net cash provided by operating activities 10,784 799
--------- --------
Investing activities:
Additions to property and equipment (31,337) (7,540)
Purchase of hospital and healthcare related entities (58,768) --
Investment in Dakota Partnership (2,000) --
Proceeds from sale of property and equipment 1,470 --
Investment in note receivable (2,023) (175)
Other 363 (1,224)
--------- --------
Net cash used in investing activities (92,295) (8,939)
--------- --------
Financing activities:
Payments on long-term debt and capital lease obligations (93,977) (1,796)
Proceeds from long-term debt obligations 133,046 72
Payments related to issuance of long-term debt obligations (3,927) --
Release of restricted funds 5,000 --
Other 793 --
--------- --------
Net cash provided by (used in) financing activities 40,935 (1,724)
--------- --------
Decrease in cash and cash equivalents (40,576) (9,864)
Cash and cash equivalents at beginning of period 48,424 66,686
--------- --------
Cash and cash equivalents at end of period $ 7,848 $ 56,822
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
F-6
<PAGE> 36
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements
do not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for the
periods presented have been reflected. Such financial statements include the
accounts of the Company and all wholly-owned and majority-owned subsidiaries
and partnerships. All significant intercompany transactions and accounts have
been eliminated in consolidation.
The year-end condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1994,
included in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1994.
Results for the nine months ended September 30, 1994, as previously reported in
the Company's Form 8-K dated December 21, 1994, as amended, have been restated
to reflect additional contractual allowances at one of the Company's hospitals.
The Company's business is seasonal in nature and subject to general economic
conditions and other factors. Accordingly, operating results for the three and
nine month periods ended September 30, 1995, are not necessarily indicative of
the results that may be expected for the year ended December 31, 1995.
NOTE 2 -- SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATE
The Company, through a wholly-owned subsidiary, owns 50% of a partnership
operated as Dakota Heartland Health System ("DHHS"). DHHS owns and operates
two general acute care hospitals with a total of 341 beds in Fargo, North
Dakota, and the Company manages the combined operations of the two facilities
pursuant to an operating agreement with DHHS. Under the terms of the
partnership agreement, the Company is entitled to 55% of DHHS's net income and
distributable cash flow ("DCF") until such time as it has recovered on a
cumulative basis an additional $10,000,000 of DCF. The Company is also
obligated to advance funds to DHHS to cover any and all operating deficits.
DHHS began operations on December 31, 1994.
F-7
<PAGE> 37
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATE -- CONTINUED
The Company accounts for its investment in DHHS under the equity method. The
following table summarizes certain financial information of DHHS as of and for
the quarter and nine months ended September 30, 1995 (dollars in thousands).
Earnings before interest, taxes, depreciation and amortization ("EBITDA") has
been included because it is a widely used measure of internally generated cash
flow and is frequently used in estimating a company's value. EBITDA is not an
acceptable measure of liquidity, cash flow or operating income under generally
accepted accounting principles.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1995 September 30, 1995
------------------ ------------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenue $ 26,520 $ 80,185
EBITDA 5,524 14,243
Net income 4,545 11,355
Company's equity in the earnings of DHHS 2,500 6,245
<CAPTION>
September 30, 1995 December 31,1994
------------------ ----------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets $ 36,114 $ 28,220
Non-current assets 44,139 44,298
Current liabilities 8,678 12,212
Non-current liabilities 43 129
Partners' capital 71,532 60,177
</TABLE>
NOTE 3 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
September 30, 1995 and December 31, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Revolving Loan $ 37,200 $ --
Term Loan -- 18,500
11% Senior Subordinated Notes (face amount of $98,767, net of a
discount of $654 at September 30, 1995) 98,113 62,703
Wilmington Savings Fund Society -- 9,766
Health Care REIT, Inc. 11,320 12,770
Other notes payable & capital lease obligations 8,025 6,326
---------- ---------
Total debt and capital lease obligations 154,658 110,065
Less current portion (2,243) (4,781)
---------- ---------
Total long-term debt and capital lease obligations $ 152,415 $ 105,284
========== =========
</TABLE>
On May 31, 1995, the Company refinanced and prepaid its term and revolving
credit loans ("old credit facility") obtained in November 1993 with a
$100,000,000 revolving credit facility (the "Revolving Loan") with Banque
Paribas, as agent, AmSouth Bank of Alabama, Bank One of Texas, N.A., CoreStates
Bank, N.A., and NationsBank of Texas, N.A. Amounts available under the
Revolving Loan are subject to certain limitations, and the total
F-8
<PAGE> 38
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- CONTINUED
amount available under the Revolving Loan declines to $80,000,000 on the third
anniversary date. The Revolving Loan also provides for short term letters of
credit of up to $5,000,000. The Revolving Loan matures no later than March 31,
1999 and bears interest at a lender defined incremental rate plus, at the
Company's option, the LIBOR or Prime rate. The incremental rate to be applied
is based upon the Company meeting certain operational performance targets, as
defined, and ranges from 2.5% to 3.0% with respect to the LIBOR rate option and
from 1.0% to 1.5% with respect to the Prime rate option. At September 30, 1995
and December 31, 1994, the interest rates on the Revolving Loan and old credit
facility were 8.96% and 9.12%, respectively. The Company currently has
$649,000 outstanding under letters of credit. Proceeds from the refinancing
were used to prepay approximately $48,000,000 principal amount outstanding
under the Company's old credit facility and approximately $9,533,000 principal
amount of debt held by Wilmington Savings Fund Society ("WSFS"). The interest
rate on the WSFS Loan was 11.5% and 10.5% at May 31, 1995 (the date of
prepayment) and December 31, 1994, respectively. With the exception of certain
assets collateralizing debt assumed in the Company's 1994 acquisition of
Psychiatric Healthcare Corporation, the Revolving Loan is collateralized by
substantially all of the Company's assets. The terms of the Revolving Loan
eliminated the requirement under the Company's previous bank credit facility to
maintain a cash collateral account with the lender in the amount of $5,000,000.
The Company's future acquisitions and divestitures may require, in certain
circumstances, consent by lenders under this agreement.
In connection with the Company's refinancing and prepayment of its old credit
facility and the WSFS debt, the Company wrote off unamortized deferred
financing costs of $738,000 (net of an income tax benefit of $380,000). Such
amounts were recorded as an extraordinary loss in the accompanying condensed
consolidated statement of operations.
On June 12, 1995, the Company issued $35,000,000 face amount (less a discount
of approximately $668,000) of Senior Subordinated Notes (the "Notes"). The
Notes mature on December 31, 2003 and require quarterly interest payments at an
annual effective rate of 11.35% (11% stated rate). The Notes include
detachable warrants for the purchase of 525,000 shares of common stock. The
warrants are exercisable for common stock at the holder's option at an exercise
price of $9.00 per share until December 31, 2003. The Notes are subject to
redemption on or after December 31, 1995, at the Company's option, at prices
declining from 112.5% of the principal amount at December 31, 1995 to par on
December 31, 2002. Additionally, the Note holders may require the Company to
repurchase all outstanding Notes in the event of a change in control of the
Company based on a declining redemption premium ranging from 112.5% to 103% of
principal. Proceeds from the issuance of Notes were used to paydown
approximately $31,500,000 principal amount outstanding under the Revolving Loan
with the remainder retained for general corporate purposes. The Notes are
uncollateralized obligations and are subordinated in right of payment to
certain senior indebtedness of the Company. Approximately $668,000 of the
proceeds from the issuance of the Notes were allocated to the warrants.
The Company is subject to various loans, notes and mortgages that contain
restrictive covenants which include, among others, restrictions on additional
indebtedness, the payment of dividends and other distributions, the repurchase
of common stock and related securities under certain circumstances, and the
requirement to maintain certain financial ratios. The Company was in
compliance with or has obtained permanent waivers for all loan covenants to
which it was subject at September 30, 1995.
NOTE 4 -- ACQUISITIONS
On April 13, 1995, the Company acquired Salt Lake Regional Medical Center
("SLRMC") from HealthTrust, Inc.-The Hospital Company ("HTI"). SLRMC is
located in Salt Lake City, Utah, and is comprised of a 200 bed tertiary care
hospital and five clinics. During the third quarter of 1995, the Company and
the successor to HTI, Columbia/HCA, finalized total consideration paid for
SLRMC at approximately $58,015,000, which consisted of $56,248,000 in cash and
additional consideration due of approximately $1,767,000, which the Company has
recorded in other current liabilities. Cash consideration included
approximately $11,521,000 for certain working capital components and
reimbursement of certain capital expenditures made previously by the seller.
The
F-9
<PAGE> 39
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4 -- ACQUISITIONS -- CONTINUED
Company funded the asset purchase from available cash and approximately
$30,000,000 in borrowings under its old credit facility. SLRMC was formerly a
not-for-profit hospital acquired by HTI in August 1994 and was sold pursuant to
a consent decree and settlement agreement between HTI and the Federal Trade
Commission. Consummation of the sale had been subject to approval by the
Federal Trade Commission, which was received on April 7, 1995. The acquisition
was accounted for as a purchase transaction with the purchase price allocated
preliminarily to the fair value of acquired net working capital and property
and equipment. Adjustments, if any, are not expected to be material to the
overall purchase accounting.
The following selected unaudited pro forma financial information for the nine
months ended September 30, 1995 and 1994 assumes that the acquisition of SLRMC
occurred on January 1, 1995 and 1994, respectively, and that the acquisition of
AmeriHealth, Psychiatric Healthcare Corporation, and the formation of the DHHS
partnership occurred on January 1, 1994. The pro forma financial information
does not purport to be indicative of the results that actually would have been
obtained had the operations been combined during the periods presented, and is
not intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1995 1994
---- ----
(Dollars in thousands, except
per share data)
<S> <C> <C>
Net revenue $ 139,855 $ 150,752
============== ============
Income before extraordinary item $ 1,901 $ 2,301
============== ============
Net income $ 1,163 $ 2,301
============== ============
Loss per common share before extraordinary item $ (0.61) $ (0.35)
============== ============
Loss per common share $ (0.78) $ (0.35)
============== ============
Weighted average number of common shares
outstanding 4,243 4,260
============== ============
</TABLE>
On October 21, 1994, the Company acquired Psychiatric Healthcare Corporation
("PHC") for a net purchase price of approximately $24,600,000. The Company has
completed its analysis of the assets acquired and liabilities assumed and has
allocated approximately $8,800,000 in excess purchase price to goodwill, which
is currently being amortized over a 20 year period. Additionally, the net
purchase price included contingent consideration of up to $2,000,000 in
additional preferred stock, notes and detachable warrants, including
approximately $1,300,000 due upon the disposition of a facility that was closed
and held for sale at the date of acquisition. The facility was sold in March
1995. To date, the Company has issued approximately $1,440,000 in additional
preferred stock, notes and detachable warrants as required under the PHC
purchase agreement, and expects to issue the remaining contingent consideration
of approximately $560,000 in the fourth quarter of 1995.
F-10
<PAGE> 40
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 5 -- LOSS PER SHARE
Primary loss per share is calculated by dividing loss attributable to common
stockholders (net income less preferred stock dividend requirements) by the
weighted average number of common and common equivalent shares outstanding
during each period, assuming the exercise of all stock options and warrants,
when dilutive, with an exercise price less than the average market price of the
common stock using the treasury stock method. Fully diluted income per share is
not presented for the quarter and nine months ended September 30, 1995 and 1994
as the results are anti-dilutive.
The weighted average number of shares used in computing loss per share are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Primary 4,257,526 1,209,294 4,243,267 1,209,294
========= ========= ========= =========
Fully Diluted N/A N/A N/A N/A
</TABLE>
NOTE 6 -- CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
At September 30, 1995, the Company had outstanding 10,440,385 shares of Series
A, A-1, BB, C and - D Cumulative Convertible Redeemable Preferred Stock
(collectively, "Preferred Stock") which were convertible into 9,984,625 shares
of common stock. The Company is subject to certain credit agreements which
restrict its right to pay cash dividends on its common stock and Preferred
Stock. At September 30, 1995, the dividend arrearage on the Company's
Preferred Stock was $11,185,000 and will increase as dividends accumulate.
NOTE 7 -- INCOME TAXES
The income tax provision recorded for the quarter and nine months ended
September 30, 1995 and 1994, respectively, differs from the expected income tax
provision due to permanent differences, the provision for state income taxes
and the realization of net deferred tax assets.
NOTE 8 -- CONTINGENCIES
Litigation. The Company is subject to claims and legal actions arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
Professional Liability. The Company is self-insured up to $1,000,000 per
occurrence for the payment of claims arising from professional liability risks.
The Company has accrued liabilities for potential professional liability risks
based on estimates for losses limited to $1,000,000 per occurrence and
$4,000,000 in the aggregate. The Company is further insured by a commercial
insurer for claims in excess of these limits up to an additional $10,000,000
over its self- insured retention. In the opinion of management, any unaccrued
damages awarded will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
NOTE 9 -- SUBSEQUENT EVENT
On November 9, 1995, the Company entered into a definitive agreement with
Columbia/HCA to acquire Jordan Valley Hospital ("Jordan"), a 50 bed acute care
hospital in West Jordan, Utah, in exchange for Autauga Medical Center, an 85
bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled
nursing facility, both in Prattville, Alabama, plus additional cash
consideration of approximately $7,500,000. The transaction is subject to
various third-party approvals, including that of the Federal Trade Commission.
The Company believes that consummation of this transaction is probable.
F-11
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIGNIFICANT ACQUISITIONS
The Company was formed on February 1, 1990 to acquire and operate general acute
care and specialty hospitals which may be under performing financially but have
or can develop a competitive market position by establishing themselves as the
low cost provider of quality health care services within their respective
markets. To date, the Company has acquired ten operating hospitals and one
skilled nursing facility and has entered into a partnership with an
unaffiliated hospital.
Because of the financial impact of the Company's recent acquisitions and the
formation of the DHHS partnership, it is difficult to make meaningful
comparisons between the Company's financial statements for the fiscal periods
presented. Furthermore, each additional hospital acquisition can have a
significant impact on the Company's overall financial performance. After
acquiring a hospital, the Company attempts to implement various operating
efficiencies and cost cutting strategies, including staffing adjustments. The
Company may also incur significant additional costs to expand the hospital's
services and improve its market position. The Company can give no assurance
that these investments and other activities will result in significant
increases in revenue or reductions in costs at the acquired facility.
Consequently, the financial performance of an acquired hospital may adversely
affect the Company's operating results in the near-term. The Company believes
this effect will be mitigated as additional hospitals are acquired.
EFFECT OF PROPOSED LEGISLATION
Congress continues to consider legislation that could significantly impact
Medicare, Medicaid and other government funding of health care costs.
Initiatives currently before Congress, if enacted, would significantly reduce
payments under various government programs, including, among others, payments
to disproportionate share and teaching hospitals. A reduction in these
payments would adversely affect net revenue and operating margins at certain of
the Company's hospitals. Approximately 54.9% of the Company's net patient
service revenue was attributable to the Medicare and Medicaid programs for the
nine months ended September 30, 1995. The Company is unable to predict what
legislation, if any, will be enacted by Congress in the future or what effect
such legislation might have on the Company's results of operations.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1995 Compared to Quarter Ended September 30, 1994
The Company reported net income of $791,000 for the quarter ended September 30,
1995, compared to net income of $1,028,000 for the third quarter of 1994. On a
per share basis, after deducting non-cash dividend requirements for preferred
stockholders of $1,503,000 and $1,178,000 for the quarters ended September 30,
1995 and 1994, respectively, the Company reported a primary loss per share of
$0.17 for the quarter ended September 30, 1995, compared to a primary loss per
share of $0.12 for the third quarter of 1994. Fully diluted earnings per
share was not presented for the quarters ended September 30, 1995 and 1994 due
to the anti-dilutive effect of such calculation.
Operating income for the quarter ended September 30, 1995, included
approximately $2,500,000 attributable to the Company's equity in the earnings
of DHHS. The Company contributed Heartland Medical Center ("Heartland") to the
DHHS partnership effective December 31, 1994, and accounts for its investment
in DHHS under the equity method. Previously, the Company had consolidated
Heartland for financial reporting purposes. Operating income for the quarter
ended September 30, 1994, included $1,693,000 attributable to Heartland.
The Company had net revenue of $45,789,000 for the three months ended September
30, 1995, compared to $23,331,000 for same period in 1994, an increase of
$22,458,000 or 96.3%. The increase was due primarily to hospital acquisitions
in the fourth quarter of 1994 and April 1995 (collectively, the
"Acquisitions"), and was offset,
F-12
<PAGE> 42
in part, by the contribution of Heartland to the DHHS partnership. Net revenue
for the prior period included approximately $9,563,000 attributable to
Heartland.
Net revenue for the quarter ended September 30, 1994, included approximately
$632,000 in interest income earned on cash balances.
The Company's operations are labor intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and
benefits increased 119.1% to $19,638,000 for the quarter ended September 30,
1995, compared to $8,961,000 for the third quarter of 1994, primarily as a
result of the Company's Acquisitions. As a percent of net revenue, salaries
and benefits were 42.9% and 38.4% for the quarters ended September 30, 1995 and
1994, respectively. This trend is consistent with the Company's strategy of
acquiring hospitals that have attractive market share and profit potential, but
which may be under performing due to a lack of capital or management resources.
In many instances, these hospitals incur labor and other operating costs in
excess of what the Company believes is necessary for the efficient operation of
the facility. The Company attempts to reduce these costs over time by
implementing various operating efficiencies and cost cutting strategies.
However, the Company can give no assurance that its efforts will ultimately
result in significant cost reductions at these facilities.
The major components of other operating and administrative expenses were
professional fees, taxes (other than income), insurance, utilities and other
services. Other operating and administrative expenses increased by 89.7% to
$18,269,000 for the quarter ended September 30, 1995, compared to $9,629,000 in
1994, once again as a result of the Company's Acquisitions. As a percent of
net revenue, other operating and administrative expenses were 39.9% for the
third quarter of 1995 compared to 41.3% in 1994.
Provision for bad debts was $3,232,000 for the quarter ended September 30,
1995, or 7.2% of net patient service revenue, compared to $1,159,000, or 5.3%
in 1994. The increase in provision for bad debts as a percent of net patient
service revenue resulted primarily from an increase in revenues attributable to
uninsured and underinsured patients at certain facilities, which have
historically been the source of the Company's uncollectable accounts.
Interest expense increased to $3,489,000 in the third quarter of 1995 compared
to $1,569,000 for the comparable period in 1994, due principally to (i) the
increase in amounts outstanding under the Company's Revolving Loan and old
credit facility as a result of its acquisition of SLRMC, (ii) the issuance of
$19,133,000 and $35,000,000 of 11% Senior Subordinated Notes on December 30,
1994 and June 12, 1995, respectively, and (iii) debt assumed and/or issued in
connection with the acquisitions of AmeriHealth, Inc. and Psychiatric
Healthcare Corporation in the fourth quarter of 1994. Interest expense also
increased due to an increase in the interest rate under which the Company
calculates interest payments on amounts outstanding under the Revolving Loan
and old credit facility (a weighted average of approximately 8.95% and 8.19%
for the quarters ended September 30, 1995 and 1994, respectively.)
Depreciation and amortization expense was $2,357,000 in 1995 compared to
$900,000 in 1994, an increase of $1,457,000 or 161.9%. This increase is due
primarily to the Company's Acquisitions, as well as the Company's ongoing
capital improvement programs at its existing hospitals.
For the quarters ended September 30, 1995 and 1994, the Company capitalized
approximately $576,000 and $139,000, respectively, in interest costs associated
with the construction of a hospital and other medical related facilities.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1994
The Company reported net income of $679,000 for the nine months ended September
30, 1995, compared to net income of $3,258,000 for the comparable period in
1994. On a per share basis, after deducting non-cash dividend requirements for
preferred stockholders of $4,483,000 and $3,472,000 for the nine months ended
September 30, 1995 and 1994, respectively, the Company reported a primary loss
per share of $0.90 for the nine months ended September 30, 1995, compared to a
primary loss per share of $0.18 for the first nine months of 1994. The net
loss for the nine months ended September 30, 1995, included an extraordinary
loss of approximately $738,000 (net of an
F-13
<PAGE> 43
income tax benefit of $380,000), or $0.17 per share, on the early
extinguishment of debt. Fully diluted earnings per share was not presented for
the nine months ended September 30, 1995 and 1994 due to the anti-dilutive
effect of such calculation.
Operating income for the nine months ended September 30, 1995, included
approximately $6,245,000 attributable to the Company's equity in the earnings
of DHHS. The Company contributed Heartland Medical Center to the DHHS
partnership effective December 31, 1994, and accounts for its investment in
DHHS under the equity method. Previously, the Company had consolidated
Heartland for financial reporting purposes. Operating income for the nine
months ended September 30, 1994, included $4,954,000 attributable to Heartland.
The Company had net revenue of $117,835,000 for the nine months ended September
30, 1995, compared to $71,297,000 for same period in 1994, an increase of
$46,538,000 or 65.3%. The increase was due primarily to hospital acquisitions
in the fourth quarter of 1994 and April 1995, and was offset, in part, by the
contribution of Heartland Medical Center to the DHHS partnership. Net revenue
for the nine months ended September 30, 1994, included approximately
$29,464,000 attributable to Heartland.
Net revenue for the nine months ended September 30, 1995 and 1994, included
approximately $728,000 and $1,633,000, respectively, in interest income earned
on cash balances.
Salaries and benefits increased 89.5% to $50,898,000 for the nine months ended
September 30, 1995, compared to $26,853,000 for the first nine months of 1994,
primarily as a result of the Company's Acquisitions. As a percent of net
revenue, salaries and benefits were 43.2% and 37.7% for the nine months ended
September 30, 1995 and 1994, respectively. This trend is consistent with the
Company's strategy of acquiring hospitals that have attractive market share and
profit potential, but which may be under performing due to a lack of capital or
management resources. In many instances, these hospitals incur labor and other
operating costs in excess of what the Company believes is necessary for the
efficient operation of the facility. The Company attempts to reduce these
costs over time by implementing various operating efficiencies and cost cutting
strategies. However, the Company can give no assurance that its efforts will
ultimately result in significant cost reductions at these facilities.
The major components of other operating and administrative expenses were
professional fees, taxes (other than income), insurance, utilities and other
services. Other operating and administrative expenses increased by 60.8% to
$46,493,000 for the nine months ended September 30, 1995, compared to
$28,916,000 in 1994, once again as a result of the Company's Acquisitions. As
a percent of net revenue, other operating and administrative expenses declined
to 39.5% for the for the first nine months of 1995 compared to 40.6% in 1994.
Provision for bad debts was $8,985,000 for the nine months ended September 30,
1995, or 7.9% of net patient service revenue, compared to $4,702,000, or 6.9%
in 1994. The increase in provision for bad debts as a percent of net patient
service revenue resulted primarily from an increase in revenues attributable to
uninsured and underinsured patients at certain facilities, which have
historically been the source of the Company's uncollectable accounts.
Interest expense increased to $9,406,000 in the first nine months of 1995
compared to $4,801,000 for the comparable period in 1994, due principally to
(i) the increase in amounts outstanding under the Company's Revolving Loan and
old credit facility as a result of its acquisition of SLRMC, (ii) the issuance
of $19,133,000 and $35,000,000 of 11% Senior Subordinated Notes on December 30,
1994 and June 12, 1995, respectively, and (iii) debt assumed and/or issued in
connection with the acquisitions of AmeriHealth, Inc. and Psychiatric
Healthcare Corporation in the fourth quarter of 1994. Interest expense also
increased due to an increase in the interest rate under which the Company
calculates interest payments on amounts outstanding under the Revolving Loan
and old credit facility (a weighted average of approximately 9.21% and 7.40%
for the nine months ended September 30, 1995 and 1994, respectively).
F-14
<PAGE> 44
Depreciation and amortization expense was $5,971,000 in 1995 compared to
$2,519,000 in 1994, an increase of $3,452,000 or 137.0%. This increase is due
primarily to the Company's Acquisitions, as well as the Company's ongoing
capital improvement programs at its existing hospitals.
For the nine months ended September 30, 1995 and 1994, the Company capitalized
approximately $1,297,000 and $139,000, respectively, in interest costs
associated with the construction of a hospital and other medical related
facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $7,848,000 at September 30, 1995.
The Company also had $62,151,000 available under its senior secured bank
facility, subject to certain limitations, which it refinanced and expanded from
$50,000,000 to $100,000,000 effective May 31, 1995.
The Company generated approximately $10,784,000 in cash from operations for the
nine months ended September 30, 1995. Cash flow from operations has not
contributed significantly to the Company's liquidity in the past, due
principally to its strategy of acquiring under performing hospitals. The
Company seeks to improve cash flows at its acquired facilities through the
implementation of improved operating efficiencies over time. However, there
can be no assurance that the Company's efforts will be successful, nor can it
give any assurance that these improvements, if achieved, will result in
increased cash flows from operations.
For the nine months ended September 30, 1995, the Company expended
approximately $31,337,000 for capital expenditures, which included
approximately $22,795,000 in expenditures related to a hospital and medical
building under construction in Midland, Texas and approximately $4,756,000
related to the construction of an ambulatory care center at the Company's
Baytown, Texas facility. The Baytown and Midland facilities began operations
in June and October of 1995, respectively. Also for the nine months ended
September 30, 1995, the Company expended approximately $93,977,000 for
principal payments on long-term debt and capitalized lease obligations, which
included a $850,000 debt reduction concurrent with the sale of a closed PHC
facility, the defeasance of approximately $1,200,000 principal amount of bonds
outstanding at a former AmeriHealth facility, and a $31,500,000 prepayment on
amounts outstanding under the Revolving Loan concurrent with the issuance of
Senior Subordinated Notes on June 12, 1995. In connection with the Company's
refinancing of its old credit facility on May 12, 1995, the Company prepaid
approximately $48,000,000 outstanding under the old credit facility and
approximately $9,533,000 principal amount of debt held by Wilmington Savings
Fund Society.
The Company anticipates that existing capital sources and internally generated
cash flows will be sufficient to fund capital expenditures, debt service and
working capital requirements through the foreseeable future. The Company
intends to acquire additional acute care and specialty facilities, home
healthcare providers and physician practices and is actively pursuing several
of such acquisitions. However, depending upon the individual circumstances, the
Company will likely require additional debt or equity financing as it pursues
its acquisition strategy.
On April 13, 1995, the Company acquired Salt Lake Regional Medical Center from
HealthTrust, Inc.-The Hospital Company. SLRMC is located in Salt Lake City,
Utah, and is comprised of a 200 bed tertiary care hospital and five clinics.
During the third quarter of 1995, the Company and the successor to HTI,
Columbia/HCA, finalized total consideration paid for SLRMC at approximately
$58,015,000, which consisted of $56,248,000 in cash and additional
consideration due of approximately $1,767,000, which the Company has recorded
in other current liabilities. The acquisition was accounted for as a purchase
transaction with the purchase price allocated preliminarily to the fair value
of acquired net working capital and property and equipment. Adjustments, if
any, are not expected to be material to the overall purchase accounting.
On June 12, 1995, a wholly-owned subsidiary of the Company acquired Brookside
Health Group, a home healthcare provider located in Richmond, Virginia. The
Company paid total consideration, including transaction costs, of
F-15
<PAGE> 45
approximately $3,651,000, which consisted of approximately $2,520,000 in cash
and the issuance of $1,131,000 in notes payable to the seller. The Company
funded the acquisition from available funds.
On November 9, 1995, the Company entered into a definitive agreement with
Columbia/HCA to acquire Jordan Valley Hospital ("Jordan"), a 50 bed acute care
hospital in West Jordan, Utah, in exchange for Autauga Medical Center, an 85
bed acute care hospital, and Autauga Health Care Center, a 72 bed skilled
nursing facility, both in Prattville, Alabama, plus additional cash
consideration of approximately $7,500,000. The transaction is subject to
various third-party approvals, including that of the Federal Trade Commission.
The Company believes that consummation of this transaction is probable.
On May 31, 1995, the Company refinanced and prepaid amounts outstanding under
its old credit facility obtained in November 1993 with a $100,000,000 Revolving
Loan. Amounts available under the Revolving Loan are subject to certain
limitations, and the total amount available under the Revolving Loan declines
to $80,000,000 on the third anniversary date. The Company had approximately
$37,200,000 outstanding under its Revolving Loan at September 30, 1995. The
Revolving Loan also provides for short term letters of credit of up to
$5,000,000. The Revolving Loan matures no later than March 31, 1999 and bears
interest at a lender defined incremental rate plus, at the Company's option,
the LIBOR or Prime rate. The incremental rate to be applied is based upon the
Company meeting certain operational performance targets, as defined, and ranges
from 2.5% to 3.0% with respect to the LIBOR rate option and from 1.0% to 1.5%
with respect to the Prime rate option. At September 30, 1995 and December 31,
1994, the interest rates on the Revolving Loan and old credit facility were
8.96% and 9.12%, respectively. The Company currently has $649,000 outstanding
under letters of credit. Proceeds from the refinancing were used to prepay
approximately $48,000,000 principal amount outstanding under the Company's old
credit facility and approximately $9,533,000 principal amount of debt held by
WSFS. In connection with the prepayment of such debt, the Company expensed
approximately $738,000 (net of a tax benefit of $380,000) of deferred loan
costs. With the exception of certain assets collateralizing debt assumed in
the Company's 1994 acquisition of Psychiatric Healthcare Corporation, the
Revolving Loan is collateralized by substantially all of the Company's assets.
The terms of the Revolving Loan eliminated the requirement under the Company's
previous bank credit facility to maintain a cash collateral account with the
lender in the amount of $5,000,000. The Company's future acquisitions and
divestitures may require, in certain circumstances, consent by lenders under
this agreement.
On June 12, 1995, the Company issued $35,000,000 face amount (less a discount
of approximately $668,000) of Senior Subordinated Notes. The Notes mature on
December 31, 2003 and require quarterly interest payments at an annual
effective rate of 11.35% (11% stated rate). The Notes include detachable
warrants for the purchase of 525,000 shares of common stock. The warrants are
exercisable for common stock at the holder's option at an exercise price of
$9.00 per share until December 31, 2003. The Notes are subject to redemption
on or after December 31, 1995, at the Company's option, at prices declining
from 112.5% of the principal amount at December 31, 1995 to par on December 31,
2002. Additionally, the Note holders may require the Company to repurchase all
outstanding Notes in the event of a change in control of the Company based on a
declining redemption premium ranging from 112.5% to 103% of principal.
Proceeds from the issuance of Notes were used to paydown approximately
$31,500,000 principal amount outstanding under the Revolving Loan with the
remainder retained for general corporate purposes. The Notes are
uncollateralized obligations and are subordinated in right of payment to
certain senior indebtedness of the Company. Approximately $668,000 of the
proceeds from the issuance of the Notes were allocated to the warrants.
The Company is subject to various loans, notes and mortgages that contain
restrictive covenants which include, among others, restrictions on additional
indebtedness, the payment of dividends and other distributions, the repurchase
of common stock and related securities under certain circumstances, and the
requirement to maintain certain financial ratios. The Company was in
compliance with or has received permanent waivers for all loan covenants to
which it was subject as of September 30, 1995.
The Company is subject to certain credit agreements that restrict its right to
pay cash dividends on its common stock and Series A, A-1, BB, C and - D
Preferred Stock. Furthermore, the Company can not pay cash dividends on its
common stock until dividends on the Preferred Stock have been paid in full. At
September 30, 1995, the dividend
F-16
<PAGE> 46
arrearage on the Company's Preferred Stock was $11,185,000 and will increase as
dividends accumulate. The Company is presently exploring options to mitigate
the impact of future Preferred Stock dividends which may include modification
of the Company's Preferred Stock agreements.
At September 30, 1995, 10,440,385 shares of Preferred Stock were redeemable and
convertible into 9,984,625 shares of common stock. Additionally, at September
30, 1995, the Company had outstanding 2,848,890 warrants to purchase 3,234,762
shares of Common Stock.
INFLATION
The health care industry is labor intensive. Wages and other expenses are
subject to rapid escalation, especially during periods of inflation and when
shortages occur in the marketplace. In addition, suppliers attempt to pass
along increases in their costs by charging the Company higher prices. In
general, the Company's revenue increases through price increases or changes in
reimbursement levels have not kept up with cost increases. In light of cost
containment measures imposed by government agencies, private insurance
companies and managed-care plans, the Company is likely to experience continued
pressure on operating margins in the future.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS 121, which is effective for fiscal years beginning after December 15,
1995, requires that long-lived assets and certain identifiable intangibles held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company will adopt SFAS 121 at the beginning of 1996. It is
anticipated that the impact of adopting this statement will not have a material
effect on the financial statements.
F-17
<PAGE> 47
CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Champion Healthcare Corporation:
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-19
Consolidated Balance Sheet - December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . F-20
Consolidated Statement of Operations - For the years ended December 31, 1994, 1993 and 1992 . . . . . . . F-21
Consolidated Statement of Stockholders' Equity - For the years ended December 31, 1994, 1993
and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Consolidated Statement of Cash Flows - For the years ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . . F-44
Dakota Heartland Health System:
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-52
Balance Sheet - December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-53
Notes to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-54
The following are the consolidated financial statement schedules of Champion Healthcare Corporation and
subsidiaries:
Report of Coopers & Lybrand, L.L.P., Independent Accountants on Financial Statement Schedules . . . . . . F-57
Schedule I -- Condensed Financial Information of the Registrant . . . . . . . . . . . . . . . . . . . . . F-58
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-62
</TABLE>
F-18
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Champion Healthcare Corporation
We have audited the accompanying consolidated balance sheet of Champion
Healthcare Corporation as of December 31, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Champion Healthcare
Corporation as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 1, the consolidated financial statements presented herein
have been revised from those previously issued.
As discussed in Note 3 the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes to the liability
method.
Coopers & Lybrand L.L.P.
Houston, Texas
March 30, 1995
F-19
<PAGE> 49
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1994 1993
--------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,424 $ 66,686
Restricted cash 5,000 --
Accounts receivable, less allowance for doubtful
accounts of $4,959 and $3,569, respectively 17,115 17,379
Supplies inventory 1,942 1,447
Prepaid expenses and other current assets 4,899 1,287
----------- -----------
Total current assets 77,380 86,799
Property and equipment:
Land 4,510 1,485
Buildings and improvements 48,888 14,454
Equipment 25,016 9,782
Construction in progress 8,839 2,860
----------- -----------
Total property and equipment 87,253 28,581
Less allowances for depreciation and amortization 5,340 2,570
----------- -----------
Total property and equipment, net 81,913 26,011
Investment in DHHS 40,088 --
Intangible assets, net of accumulated amortization of
$1,684 and $896, respectively 11,665 4,533
Other assets 5,507 1,604
----------- -----------
Total assets $ 216,553 $ 118,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,221 $ 1,831
Current portion of capital lease obligations 560 492
Accounts payable 10,637 7,787
Due to third parties 2,241 351
Accrued and other liabilities 8,446 7,200
----------- -----------
Total current liabilities 26,105 17,661
Long-term debt 102,626 59,046
Capital lease obligations 2,658 715
Other long-term liabilities 11,037 821
Commitments and contingencies (Note 14)
Redeemable preferred stock 76,294 56,861
Common stock, $.01 par value:
Authorized - 25,000,000 shares, 4,223,975 and 1,126,250
shares issued and outstanding at December 31, 1994
and 1993, respectively 42 11
Common stock subscribed, 100,000 shares 50 50
Common stock subscription receivable (50) (50)
Paid in capital 15,998 --
Accumulated deficit (18,207) (16,168)
----------- -----------
Total liabilities and stockholders' equity $ 216,553 $ 118,947
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 50
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
--------------------------------------------------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Net patient service revenue $ 99,613 $ 86,728 $ 43,799
Other revenue 4,580 3,104 1,274
----------- ---------- ---------
Net revenue 104,193 89,832 45,073
Expenses:
Salaries, wages and benefits 41,042 36,698 19,642
Supplies 12,744 11,641 6,022
Other operating expenses 29,767 24,033 14,653
Provision for bad debts 7,812 5,669 3,520
Interest 6,375 2,725 1,404
Depreciation and amortization 4,010 3,524 1,361
Asset write-down -- 15,456 --
----------- ---------- ---------
Total expenses 101,750 99,746 46,602
Income (loss) before income taxes and
extraordinary loss 2,443 (9,914) (1,529)
Provision for income taxes 200 1,009 63
----------- ---------- ---------
Income (loss) before extraordinary item 2,243 (10,923) (1,592)
Extraordinary item:
Loss on early extinguishment of debt,
net of tax tax benefit of $634 -- (1,230) --
----------- ---------- ---------
Net income (loss) $ 2,243 $ (12,153) $ (1,592)
=========== ========== =========
Loss applicable to common stock $ (2,467) $ (13,805) $ (2,451)
=========== ========== =========
Loss per common share:
Primary:
Loss before extraordinary item $ (1.69) $ (11.21) $ (2.23)
Extraordinary item -- (1.10) --
----------- ---------- ---------
Loss per common share $ (1.69) $ (12.31) $ (2.23)
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE> 51
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Common Stock Paid-In Accumulated
Shares Amount Subscribed Receivable Capital Deficit
------ ------ ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1992 1,100,000 $ 137 $ 50 $ (50) $ 156
Common stock restatement, retroactively
applied (126) 126
Series A preferred stock dividend (194)
Preferred stock dividends accrued, including
accretion of issuance costs (88) $ (771)
Net loss (1,592)
--------- ----------- ----------- ------------ --------- ---------
BALANCES AT DECEMBER 31, 1992 1,100,000 11 50 (50) (2,363)
Preferred stock dividends accrued,
including accretion of issuance costs (1,652)
Exercise of bridge loan warrants 26,250
Net loss (12,153)
--------- ----------- ----------- ------------ --------- ---------
BALANCES AT DECEMBER 31, 1993 1,126,250 11 50 (50) (16,168)
Exercise of bridge loan warrants 83,044 1
Shares issued in AmeriHealth acquisition 3,014,681 30 16,426
Preferred stock dividends accrued, including
accretion of issuance costs (428) (4,282)
Net income 2,243
--------- ----------- ----------- ------------ --------- ---------
BALANCES AT DECEMBER 31, 1994 4,223,975 $ 42 $ 50 $ (50) $ 15,998 $ (18,207)
========= =========== =========== ============ ========= =========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 52
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 2,243 $(12,153) $ (1,592)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 4,010 3,524 1,361
Deferred income taxes 1,600 (1,171) (88)
Provision for bad debts 7,812 5,669 3,520
Asset write-down 15,456
Changes in operating assets and liabilities,
excluding acquisitions:
Accounts receivable (9,088) (6,842) (7,328)
Supplies inventory (264) (446) (180)
Prepaid expenses and other current assets (4,154) (169) (32)
Other assets (908) (424)
Accounts payable, income taxes payable and
other accrued liabilities (1,968) 1,935 3,969
-------- -------- --------
Net cash (used in) provided by
operating activities (717) 5,379 (370)
-------- -------- --------
Investing activities:
Purchase of facilities (5,813) (25,643)
Net payment for investment in partnership (20,000)
Cash acquired in acquisitions 4,341
Additions to property and equipment (12,561) (4,726) (1,637)
Proceeds from sales of property and equipment 1,100
Investment in note receivable (757)
Other investing activities (56)
-------- -------- --------
Net cash used in investing activities (28,977) (10,539) (26,236)
-------- -------- --------
Financing activities:
Proceeds from issuance of long-term obligations 19,133 63,091 16,238
Payments related to issuance of long-term debt
obligations and other financing costs (2,396) (533)
Payments on long-term obligations (2,300) (28,516) (782)
Payments on long-term obligations assumed
through acquisitions (9,911)
Proceeds from issuance of redeemable
preferred stock and stock warrants 11,223 34,345 17,500
Payments related to preferred stock issuance (882) (532)
Payment of dividends in connection
with AmeriHealth merger (1,000)
Cash restricted under collateral agreement (5,000)
Other (713)
-------- -------- --------
Net cash provided by financing
activities 11,432 65,642 31,891
-------- -------- --------
(Decrease) increase in cash
and cash equivalents (18,262) 60,482 5,285
Cash and cash equivalents at beginning of year 66,686 6,204 919
-------- -------- --------
Cash and cash equivalents at end of year $ 48,424 $ 66,686 $ 6,204
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE> 53
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. RESTATEMENT OF FINANCIAL STATEMENTS
The Company and the staff of the Securities and Exchange Commission ("SEC")
have had discussions with respect to the accounting method used to account for
the Company's investment in Dakota Heartland Health Systems ("DHHS"), a 50%
owned partnership, which began operations on December 31, 1994. As a result of
those discussions, the Company has accounted for its investment in DHHS using
the equity method of accounting. Previously, the Company included the separate
financial statements of DHHS in its consolidated financial statements.
Accordingly, the Company's consolidated financial statements for the year ended
December 31, 1994, have been restated to reflect the Company's accounting for
its investment in DHHS using the equity method.
NOTE 2. ORGANIZATIONAL BACKGROUND
Champion Healthcare Corporation, a Delaware corporation (the "Company") is
engaged in the ownership and management of general acute care and specialty
hospitals and related health care facilities. Including hospital partnerships,
the Company owns and/or operates six acute care hospitals, two psychiatric
hospitals and a skilled nursing facility.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, all
wholly-owned and majority-owned subsidiaries and majority-owned partnerships.
The Company uses the equity method of accounting when it has a 20% to 50%
interest in other companies and partnerships. Under the equity method, the
Company records its original investment at cost and adjusts its investment for
its undistributed share of the earnings or losses of the equity investee. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Net Patient Service Revenue
The Company's facilities have entered into agreements with third-party payors,
including U.S. government programs and managed care health plans, under which
the Company is paid based upon established charges, cost of providing services,
predetermined rates by diagnosis, fixed per diem rates or discounts from
established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third party payors.
Payments for services rendered to patients covered by the Medicare and Medicaid
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the programs' principles of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final
settlements under these programs are subject to administrative review and
audit, and provision is currently made for adjustments which may result during
the period in which such adjustments become known. Allowance for contractual
adjustments under these programs are netted in accounts receivable in the
accompanying Consolidated Balance Sheet. Management is of the opinion that
adequate allowance has been provided for possible adjustments that might result
from such final settlements.
F-24
<PAGE> 54
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Revenue
Other revenue includes income from non-patient hospital activities such as fees
from home infusion and other related services, cafeteria sales and interest
income.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments, primarily
U.S. government backed securities and certificates of deposit, purchased with
an original maturity of three months or less. The Company maintains its cash
in bank deposits which, at times, may exceed federally insured limits.
Accounts Receivable
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients. Current earnings are
charged with an allowance for doubtful accounts based on experience and other
circumstances that may affect the ability of patients to meet their
obligations. Accounts deemed uncollectible are charged against that allowance.
Supplies Inventory
Inventory consists of pharmaceuticals and supplies and is stated at the lower
of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for new facilities
and equipment and those that substantially increase the useful life of existing
property and equipment are capitalized. Ordinary maintenance and repairs are
charged to expense when incurred. Upon disposition, the assets and related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is included in the statement of operations.
Depreciation is computed using the straight-line method at rates calculated to
amortize the cost of the assets over estimated useful lives ranging from 3 to
30 years.
The Company capitalized interest costs of approximately $294,000 in 1994.
Intangible Assets
Intangible assets consist of goodwill, the costs of obtaining long-term
financing, non-compete agreements and various other intangible assets.
Long-term financing costs are amortized on a straight-line basis over the term
of the applicable debt. Goodwill represents costs in excess of net assets
acquired and is amortized on a straight line basis over a period of 20 years.
Costs related to non-compete agreements and other intangibles are amortized on
a straight- line basis over three to five years.
Amortization expense for 1994, 1993 and 1992 was approximately $1,000,000,
$1,209,000 and $443,000, of which approximately $395,000, $139,000 and $332,000
relate to deferred financing costs.
F-25
<PAGE> 55
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cumulative Convertible Redeemable Preferred Stock
The Company reflects accumulated unpaid and undeclared dividends on the
cumulative redeemable preferred stock as an increase in the related issue with
corresponding charges to additional paid-in capital, to the extent available,
and accumulated deficit.
Income Taxes
Effective January 1, 1993, the Company adopted the liability method of
accounting for income taxes pursuant to Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"). Under this method, deferred income taxes
are recorded to reflect the tax consequence on future years of temporary
differences between the tax basis of the assets and liabilities and their
financial amounts at year-end. Prior to January 1, 1993, the Company used the
deferral method previously prescribed. There was no cumulative effect on prior
year operations as a result of this change in accounting for income taxes.
Earnings Per Share
Earnings per common and common equivalent share amounts are calculated by
dividing net earnings applicable to common stock by the weighted average number
of common shares outstanding during each period, as restated for the
two-for-one stock split on July 7, 1993, assuming exercise of all stock options
and warrants having an exercise price less than the average stock market price
of the common stock using the treasury stock method. Fully diluted loss per
common share has not been presented as the results are antidilutive in all
years. Weighted average shares outstanding used to determine earnings per
common and common equivalent share were 1,457,000, 1,122,000 and 1,100,000 in
1994, 1993 and 1992, respectively.
NOTE 4. ACQUISITIONS AND OTHER INVESTMENTS
Gulf Coast Hospital
On September 1, 1992, the Company acquired HCA-Gulf Coast Hospital ("GCH"), a
competing hospital then located in Baytown, Texas, for approximately
$17,265,000 in cash and a note payable of $500,000. The Company subsequently
consolidated the operations of GCH with Baytown Medical Center and renamed the
combined facilities BayCoast Medical Center (See "Note 5. Asset Write-Down").
St. John and St. Ansgar Hospitals
On September 1, 1992, the Company purchased St. John and St. Ansgar hospitals
in Moorhead, Minnesota and Fargo, North Dakota, respectively, from a Catholic
order for approximately $8,400,000 in cash and a note payable of approximately
$2,000,000. The Company consolidated the operations of the two facilities into
the 142 licensed bed Fargo facility in order to eliminate duplicative staffing,
support services and other operating expenses and to reduce excess or
underutilized capacity. The Fargo facility was renamed Heartland Medical
Center ("HMC"). The Moorhead, Minnesota facility was sold in 1993 for
$1,100,000 to a non-health care user. The Company's net purchase price for
HMC, excluding working capital and including the proceeds from the sale of the
Moorhead facility, was approximately $7,500,000.
Physicians & Surgeons Hospital
The Company acquired P&S in Midland, Texas on May 1, 1993 for approximately
$5,800,000 in cash and the assumption of $1,200,000 in debt.
F-26
<PAGE> 56
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
Psychiatric Healthcare Corporation
On October 21, 1994, the Company acquired Psychiatric Hospital Corporation
("PHC"), a privately held corporation headquartered in Birmingham, Alabama, by
the merger of PHC with and into a wholly-owned subsidiary of the Company. PHC
owned and operated two free-standing psychiatric hospitals with a combined
total of 219 beds located in Springfield, Missouri and Alexandria, Louisiana
and owned a third free-standing psychiatric hospital located in Sherman, Texas
that was closed and held for lease or sale at the date of acquisition. The net
purchase price, including a "contingent" consideration feature of $1,300,000
(up to $2,000,000 in aggregate) and the assumption of long-term debt, was
approximately $23,000,000. Consideration paid by the Company consisted of the
assumption of approximately $14,880,000 in long-term debt and the issuance of
securities to PHC shareholders consisting of: (i) 212,661 shares of Series D
preferred stock, (ii) $5,737,000 of 11% Senior Subordinated Notes with 172,110
detachable warrants to acquire common stock and (iii) options expiring January
3, 1995, which were subsequently exercised, to acquire an additional 7,561
shares of Series D Preferred Stock, $202,000 of 11% Senior Subordinated Notes
with 6,060 of detachable warrants. Other than for fractional share amounts,
the Company paid no cash to PHC shareholders. The Company also agreed to issue
additional Series D Preferred Stock and 11% Senior Subordinated Notes with
detachable warrants as contingent consideration of $2,000,000, if within the
next two years PHC receives up to $2,000,000 in payments from some combination
of the sale of the Sherman, Texas facility, the resolution of a Medicaid
lawsuit against the State of Missouri or the receipt by the Louisiana facility
of more than $500,000 in specified Medicaid and indigent payments. In March
1995, the Company sold the closed facility for approximately $1,300,000 to an
unrelated third party; accordingly, the Company expects to issue additional
preferred stock, notes and detachable warrants as required under the PHC
purchase agreement. Based on a preliminary allocation of the purchase price,
approximately $5,900,000 in excess purchase price has been assigned to
goodwill, which the Company will amortize over a period of 20 years.
AmeriHealth, Inc.
On December 6, 1994, the Company merged with AmeriHealth, Inc.("AHH"), a
Delaware corporation, with AHH being the surviving corporation resulting from
the merger (the "Combined Company"). The merger was accounted for as a
recapitalization of the Company with the Company as the acquiror (a reverse
acquisition). Concurrent with the merger, the name of the Combined Company was
changed to Champion Healthcare Corporation, and the Combined Company adopted
the Company's certificate of incorporation provisions.
Pursuant to the merger, the Combined Company: (a) paid a cash distribution of
$0.085 cents per share to all common stockholders of AHH, (b) issued one share
of its Combined Company common stock for each 5.70358 shares of the
approximately 17.2 million outstanding shares of AHH's Common Stock (plus cash
in lieu of fractional shares); (c) one share of Combined Company common stock
for each of the approximately 1.2 million then outstanding shares of the
Company common stock; and (d) one share of newly authorized Combined Company
preferred stock for each of the then outstanding shares of the Company's
preferred stock. The terms of the new voting shares of Combined Company
preferred stock are identical to those of the Company's preferred stock
outstanding prior to the merger. In addition, holders of the outstanding
shares of AHH's $2.125 Increasing Rate Cumulative Convertible Preferred Stock
were canceled in exchange for cash equal to the redemption price of such shares
plus all unpaid dividends which totaled approximately $47,000. The net
purchase price, including the assumption of approximately $17,700,000 in debt,
was approximately $38,300,000. Pending receipt and analysis of appraisals, the
Company has presently assigned the cost of the AHH acquisition to net working
capital and property and equipment. AHH owned and managed two acute care
hospitals with a combined total of 265 licensed beds in Richmond, Virginia and
Prattville, Alabama, and a 72-bed skilled nursing facility also located in
Prattville, Alabama.
F-27
<PAGE> 57
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
Partnership with Dakota Hospital
On December 21, 1994, a wholly owned subsidiary of the Company that owned
Heartland Medical Center, a 142 bed general acute care facility in Fargo, North
Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199 bed general acute care hospital
also in Fargo, North Dakota. The partnership is operated as Dakota Heartland
Health System ("DHHS"). Also on December 21, 1994, the Company entered into an
operating agreement with the partnership and Dakota to manage the combined
operations of the two hospitals. Under the terms of the partnership agreement,
the Company is obligated to advance funds to the partnership to cover any and
all operating deficits of the partnership. DHHS began operations on December
31, 1994.
The Company and Dakota contributed their respective hospitals debt and lien
free (except for capitalized lease obligations), including certain working
capital components, and the Company contributed an additional $20,000,000 in
cash, each in exchange for 50% ownership in the partnership. A $20,000,000
special distribution was made to Dakota after capitalization of the partnership
in accordance with the terms of the partnership agreement. The Company will
receive 55% of the net income and distributable cash flow ("DCF") of the
partnership until such time as it has recovered on a cumulative basis an
additional $10,000,000 of DCF in the form of an "excess" distribution.
The partnership is administered by a Governing Board comprised of six members
appointed by Dakota, three members appointed by the Company and three members
appointed by mutual consent of the Dakota members and the Company members.
Certain Governing Board actions require the majority approval of each of the
Company members and Dakota members. Because the partners through the
partnership agreement have delegated management of the partnership to the
Company through the operating agreement, the authority of the Governing Board
is limited.
From the 19th month after the commencement of the partnership, Dakota has the
right to require the Company to purchase its partnership interest free of debt
or liens for a cash purchase price equal to 5.5 times earnings before
depreciation, interest, income taxes and amortization less Dakota's pro-rata
share of the partnership's long-term debt. On a pro forma basis, the
partnership had earnings before depreciation, interest, income taxes and
amortization of approximately $13,600,000 for the year ended December 31, 1994.
From the 37th month after the commencement of the partnership, the purchase
price for Dakota's partnership interest shall not be less than $50,000,000.
After receipt of written notice of Dakota's intent to sell its partnership
interest, the Company would have 12 months to complete the purchase. Should
the Company not complete the purchase during this period, Dakota would have the
right to, among others, (i) terminate the operating agreement and engage an
outside party to manage the hospital, (ii) replace the Company's designees to
the Governing Board and (iii) enter into a fair market value transaction to
sell substantially all of the partnership's assets.
The Company accounts for its investment in DHHS under the equity method. The
following table summarizes the financial position of DHHS at December 31, 1994
(dollars in thousands).
<TABLE>
<S> <C>
Current assets $28,220
Noncurrent assets 44,298
Current liabilities 12,212
Noncurrent liabilities 129
Partners' capital 60,177
</TABLE>
F-28
<PAGE> 58
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
The following selected unaudited pro forma financial information for the years
ended December 31, 1994 and 1993 assumes that the acquisition of AHH, PHC, P&S
and the formation of the DHHS partnership had occurred as of January 1, 1993.
The selected pro forma financial information presented for the year ended
December 31, 1992 assumes that the acquisition of GCH, HMC and P&S had occurred
on January 1, 1992. The selected pro forma financial information presented for
the year ended December 31, 1991 assumes the acquisition of GCH and HMC had
occurred on January 1, 1991. The pro forma financial information below does
not purport to be indicative of the results that actually would have been
obtained had the operations been combined during the periods presented, and is
not intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
1994 1993 1992 1991
---- ---- ---- ----
(unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenue $ 119,078 $ 121,614 $ 97,883 $ 80,444
========== ========== ========= ==========
Equity in earnings of DHHS $ 5,443 $ 3,159
========== ==========
Loss before extraordinary item $ (3,609) $ (19,697) $ (16,862) $ (5,517)
========== ========== ========= ==========
Net loss $ (3,609) $ (20,927) $ (16,862) $ (5,517)
========== ========== ========= ==========
Loss per common share before extraordinary item $ (2.04) $ (5.25) $ (16.11) $ (5.53)
========== ========== ========= ==========
Loss per common share $ (2.04) $ (5.55) $ (16.11) $ (5.35)
========== ========== ========= ==========
Weighted average number of common shares
outstanding 4,224 4,136 1,100 1,100
========== ========== ========= ==========
</TABLE>
NOTE 5. ASSET WRITE-DOWN
In 1992, the Company entered into an agreement to purchase twelve hospitals
from Humana, Inc. The acquisition was to be financed in part with
approximately $140,000,000 in publicly traded senior subordinated notes;
however, due to conditions in the financial markets at that time, the Company
was unable to complete the transaction. In connection to the transaction, the
Company expensed approximately $1,300,000 in underwriter and professional fees
in 1992.
In December 1993, the Company ceased providing medical services at GCH, one of
its two hospitals in Baytown, Texas, which it had acquired from HCA Health
Services of Texas, Inc. on September 1, 1992. The Company intended to use GCH
for limited administrative purposes only until it could arrange a sale. As a
result, the Company wrote down the GCH assets by $15,456,000, which reflected
the estimated fair value of the facility under limited use less ongoing
operating costs and various rental concessions previously granted tenants. The
book value of GCH prior to the write-down was $16,681,000. The remaining net
historical cost of $1,225,000 represented the equipment moved to the other
Baytown campus. In June 1994, the Company sold the former HCA facility to a
physician group for nominal consideration. The Company believes that assets
associated with its other campus in Baytown have not been impaired as the
result of this change in operations.
F-29
<PAGE> 59
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following at December 31, 1994
and 1993 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Accrued salaries and wages $ 1,303 $ 1,134
Accrued property and other taxes 767 1,507
Accrued vacation 1,148 1,023
Accrued professional liability claims 359 1,047
Accrued group health claims 846 706
Income taxes payable 200 1,122
Other 3,823 661
---------- ---------
Total accrued and other liabilities $ 8,446 $ 7,200
========== =========
</TABLE>
NOTE 7. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1994 and 1993
(dollars in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Term Loan $ 18,500 $ 20,000
11% Senior Subordinated Notes 62,703 37,833
Wilmington Savings Fund Society 9,766 --
Health Care REIT, Inc. 12,770 --
Other notes payable 3,108 3,044
---------- --------
Total debt 106,847 60,877
Less current portion (4,221) (1,831)
---------- --------
Total long-term debt $ 102,626 $ 59,046
========== ========
</TABLE>
On November 5, 1993, the Company refinanced its subsidiary term and revolving
credit loans obtained in August 1991 with a $50 million credit facility
comprised of a $20,000,000 term loan (the "Term Loan") and a $30 million
revolving credit facility (the "Revolving Loan") with Banque Paribas, First
Union National Bank of North Carolina and NationsBank of Tennessee, N.A.
Effective May 1994, BankOne, N.A. became a participant in this credit facility.
Any working capital or acquisition related borrowings under the Revolving Loan
are due November 5, 2000; and any construction related borrowings under the
Revolving Loan begin amortizing 2.5% quarterly from November 3, 1997 through
November 5, 2000. The loans bear interest, at the Company's option, at the
LIBOR rate plus 3% or the defined lender's base rate plus 1.5%. At December
31, 1994 and 1993, the interest rates on the Term Loan were 9.12% and 6.56%,
respectively. As of December 31, 1994, the Company has not drawn any funds
available under the Revolving Loan. The Company is required to pay a
commitment fee of 1/2 of 1% on the unused portion of the Revolving Loan. With
the exception of certain assets collateralizing debt assumed in the PHC and AHH
acquisitions, the agreement is collateralized by substantially all of the
Company's assets. Additionally, the Company is required to maintain a cash
collateral account with the lender in the amount of $5,000,000. The Company's
future acquisitions and divestitures may require, in certain circumstances,
consent by lenders under this agreement.
In connection with the Company's refinancing of its subsidiary term and
revolving credit loans in 1993, a prepayment premium and unamortized deferred
financing costs of $1,230,000, net of an income tax benefit of $634,000, were
written off and recorded as an extraordinary loss.
F-30
<PAGE> 60
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. LONG-TERM DEBT (CONTINUED)
On December 31, 1993, the Company issued $37,833,000 of Senior Subordinated
Notes (the "Notes") bearing interest at an annual fixed rate of 11% and
maturing on December 31, 2003. Such Notes included detachable warrants for the
purchase of 1,134,990 shares of common stock. On December 30, 1994, pursuant
to commitments obtained from the original purchasers of the Notes, the Company
issued an additional $19,133,000 of Notes with detachable warrants for the
purchase of 573,990 shares of common stock. Interest is payable quarterly.
The Notes are subject to redemption on or after December 31, 1995 at the
Company's option at prices declining from 112.5% of the principal amount at
December 31, 1995 to par on December 31, 2002. Additionally, there is a
requirement to repurchase all outstanding Notes in the event of a change of
control of the Company, at the holder's option, based on the declining
redemption premium ranging from 112.5% to 103% of principal. The Notes are
uncollateralized obligations and are subordinated in right of payment to all
existing and future senior indebtedness of the Company. The warrants are
exercisable for common stock at the holder's option at an exercise price of
$9.00 per share until December 31, 2003. No value was allocated to the
warrants at the time of issuance because the exercise price was greater than
the estimated fair value of the common stock, and the interest rate on the note
was considered a market rate.
In connection with the Company's acquisition of PHC, the Company assumed
approximately $12,970,000 of mortgage financing on the PHC facilities, $257,000
in capitalized leases, and $159,000 of notes payable. A working capital credit
facility with a balance of approximately $1,494,000 was repaid from available
cash of the Company and PHC. The mortgage notes are payable to Health Care
REIT, Inc. and at December 31, 1994, included $2,645,000 principal amount
collateralized by a closed facility in Sherman, Texas. The mortgage bears
interest at an annual rate of 13.05% at December 31, 1994, which increases
annually to an interest rate of 15.4% at November 1, 2001; after which the
mortgage bears interest at an annual rate equal to the rate of seven year US
Treasuries plus 500 basis points. Approximately $10,125,000 principal balance
of the mortgage matures on December 1, 2008, with principal payments commencing
on February 1, 1995, based on 25 year amortization. The remaining balance of
the mortgage requires quarterly principal payments of $200,000 through 1997.
On March 22, 1995, the Company sold the Sherman, Texas facility for
approximately $1,300,000. In connection with the sale, the Company made a
required principal payment of $850,000 on the mortgage collateralized by this
facility and obtained a release of collateral from the lender. The remaining
principal balance of $1,595,000 is now collateralized by the Company's hospital
in Alexandria, Louisiana.
In connection with the Company's merger with AHH, the Company assumed and
extended approximately $10,000,000 principal amount of debt held by Wilmington
Savings Fund Society (the "WSFS Loan") and paid approximately $7,665,000 in
cash to retire $8,049,000 principal amount of AHH debt held by the Resolution
Trust Corporation. The WSFS loan matures April 15, 1996 and requires the
monthly payment of interest at an annual rate of 2% plus prime and quarterly
principal payments of $233,250 on the first day of each calendar quarter. The
WSFS loan is collateralized by certain assets of Metropolitan Hospital and
guaranteed by the Company.
Other notes payable bear interest at rates ranging from 7% to 9.5% and are
generally collateralized by the underlying assets to which they relate.
The Loans, Notes and Mortgages referenced above contain restrictive covenants
which include, among others, restrictions on additional indebtedness, the
payment of dividends and other distributions, the repurchase of common stock
and related securities under certain circumstances, and the requirement to
maintain certain financial ratios. The Company was in compliance with or has
obtained permanent waivers for all loan covenants to which it was subject as
December 31, 1994 and 1993.
F-31
<PAGE> 61
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. LONG-TERM DEBT (CONTINUED)
Maturities of debt as of December 31, 1994, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1995 $ 4,221
1996 12,515
1997 5,873
1998 4,338
1999 4,101
Thereafter 75,799
-----------
$ 106,847
===========
</TABLE>
NOTE 8. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consisted of the following at December 31, 1994 and
1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Dollars in thousands)
<S> <C> <C>
Series D - Cumulative convertible redeemable preferred
stock, $.01 par, 2,200,000 shares authorized; 2,105,258 and
1,269,144 shares issued and outstanding at
December 31, 1994 and 1993, respectively
($39,787,000 and $22,845,000 liquidation value in 1994
and 1993, respectively) $ 38,754 $ 22,008
Series C - Cumulative convertible redeemable preferred
stock, $.01 par, 500,000 shares authorized;
448,811 shares issued and outstanding at December 31, 1994
and 1993 ($8,778,000 and $8,132,000 liquidation value in
1994 and 1993, respectively) 8,740 8,089
Series BB - Cumulative convertible redeemable preferred
stock, $.01 par, 2,300,000 shares
authorized; 1,577,547 shares issued and
outstanding at December 31, 1994 and 1993 ($21,924,000
and $20,434,000 liquidation value in 1994 and 1993, 21,551 19,995
respectively)
Series A-1 - Cumulative convertible redeemable preferred stock,
$.01 par, 6,500,000 shares authorized; 2,769,109
shares issued and outstanding at December 31, 1994 and 1993
($3,206,000 and $3,004,000 liquidation value in 1994
and 1993, respectively) 3,206 3,004
Series A - Cumulative convertible redeemable preferred stock,
$.01 par, 3,500,000 shares authorized; 3,500,000
shares issued and outstanding at December 31, 1994 and 1993
($4,069,000 and $3,809,000 liquidation value in 1994
and 1993, respectively) 4,043 3,765
--------- --------
$ 76,294 $ 56,861
========= ========
</TABLE>
On December 6, 1994, the Company acquired AmeriHealth, Inc. through a merger
accounted for as a reverse acquisition, and thereby became a Delaware
corporation. Delaware law requires that there be no distinctions within a
class or series of Stock. Prior to the merger, Series A had two distinct
groups of stockholders with two different conversion prices. To comply with
Delaware law, Series A was divided into Series A (initial conversion price of
$3.685 per share) and Series A-1 (initial conversion price of $4.00 per share).
The Series A and A-1
F-32
<PAGE> 62
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. REDEEMABLE PREFERRED STOCK (CONTINUED)
preferred stock are identical in all other respects. The Series B was renamed
Series BB preferred stock to distinguish it from AmeriHealth Series B preferred
stock. The powers, privileges and rights of the Series A, A-1, BB, C and D
preferred stockholders are substantially identical to those in existence prior
to the merger.
SERIES D
The Series D cumulative convertible redeemable preferred stock ("Series D") is
convertible, at the holder's option, into the common stock at a price of $9.00
per share until redemption date. The conversion price is subject to adjustment
upon the sale or issuance of additional common stock, including stock rights,
options and convertible securities, for consideration less than the conversion
price in effect immediately prior to the sale or issuance in question. The
Series D shares are mandatorily redeemable on June 1, 2000 at $18.00 per share
plus any accrued and unpaid dividends. Series D stockholders may require
redemption of their stock within 90 days of receipt of written notice from the
Company of a change of control or default event (as defined); however, no
redemption of Series D shares shall occur unless all the outstanding Series C
and Series D shares can be redeemed. Dividends on the Series D shares accrue
at a rate of 8% of the stated value of $18.00 per share and are payable in cash
under certain events, including, among others, a change in control or a
successful secondary public offering of the Company's common stock. All
accrued dividends shall be paid upon conversion of Series BB through D
preferred stock. Series D preferred stock has preference to the Series A-1
through Series C preferred stock and common stock as to dividends and
redemption and has preference to Series C in liquidation.
The Company has the right to convert all or any shares of Series D into common
stock under a successful secondary public offering of the Company's common
stock or upon the conversion of all outstanding Series A through Series C
preferred stock.
On December 30, 1994, the Company issued 623,453 shares of Series D preferred
stock pursuant to existing commitments for the original purchasers of Series D.
Cash proceeds from the issuance were $11,222,000.
On October 21, 1994, the Company issued 212,661 shares of Series D preferred
stock in connection with its acquisition of PHC.
SERIES C
The Series C cumulative convertible redeemable preferred stock ("Series C") is
convertible, at the holder's option, into common stock at a price of $9.00 per
share until the redemption date. The conversion price is adjustable upon the
same terms and conditions as Series D preferred stock. The Series C shares are
mandatorily redeemable on June 1, 2000 at $18.00 per share plus any accrued and
unpaid dividends; however, no redemption of Series C shall occur unless all the
outstanding Series C and Series D shares can be redeemed. Dividends on the
Series C shares accrue at a rate of 8% of the stated value of $18.00 per share
and are payable in cash under certain events, including, among others, a change
in control or a successful secondary public offering of the Company's common
stock. The Series C has preference to the Series A, A-1 and common stock and
is generally equal to the Series BB and Series D as to dividends and
redemption.
The Company has the right to convert all or any shares of Series C into common
stock under a successful secondary public offering of the Company's common
stock or upon the conversion of all outstanding Series A, A-1, and BB preferred
stock.
SERIES BB
The Series BB cumulative convertible redeemable preferred stock ("Series BB")
is convertible, at the holder's option, into common stock at a price of $5.90
per share until redemption date. The conversion price is adjustable
F-33
<PAGE> 63
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. REDEEMABLE PREFERRED STOCK (CONTINUED)
upon the same terms and conditions as Series D preferred stock. The Series BB
shares are mandatorily redeemable on June 30, 2000 at $11.80 per share plus any
accrued and unpaid dividends; however, no redemption of Series BB shall occur
prior to the redemption of Series C and Series D preferred stock. Dividends on
the Series BB shares accrue at a rate of 8% of the stated value of $11.80 per
share and are payable in cash under certain events, including, among others, a
change in control or a successful secondary public offering of the Company's
common stock. The Series BB has preference to the Series A and A-1 convertible
redeemable preferred stock and common stock as to redemption, liquidation and
dividends.
The Company has the right to convert all or any shares of Series BB into common
stock under a successful secondary public offering of the Company's common
stock or upon the conversion of all outstanding Series A and A-1 preferred
stock.
On December 2, 1993, 289,950 warrants associated with the extinguishment of the
10% Senior Subordinated Notes were exercised for 289,950 shares of Series BB
preferred stock. Cash proceeds from the exercise were $3,422,000.
SERIES B
The Company has the authority to issue 400,000 shares of Series B $2.125
Increasing Rate Cumulative Convertible Preferred Stock ("Series B"), $.01 par
value. There are currently no shares of Series B preferred stock outstanding.
SERIES A-1
Series A-1 cumulative convertible redeemable preferred stock ("Series A-1") is
convertible, at the holder's option, into common stock at a conversion rate of
1 share of common stock for each four shares of Series A-1 preferred stock.
The conversion price is adjustable upon the same terms and conditions as Series
D preferred stock. Series A-1 shares are mandatorily redeemable, at the
holder's option, at $1.00 per share within 90 days of receipt of written
notice of a change of control or a default event (as defined); however, no
redemption of Series A-1 shall occur prior to the redemption of Series BB
through Series D preferred stock. Dividends on Series A-1 accrue at a rate of
$.08 per share per annum cumulative and accruing from December 28, 1993. Prior
to December 28, 1993, cumulative dividends accrued from the date of issuance at
a dividend rate of $0.0467 per share per annum. Dividends are payable in
common stock and/or cash in the event of a change of control, as defined,
subject to the Company's existing agreement with senior secured lenders and the
approval of two-thirds of all outstanding Series BB, C and D preferred stock.
Subject to the prior liquidation rights of the Series BB through D preferred
stockholders, the Series A-1 preferred stockholders shall receive liquidation
payments of $1.00 per share plus all accrued but unpaid dividends or ratable
payments among all Series A and A-1 preferred stockholders if less than $1.00
plus all accrued but unpaid dividends are available.
The Company has the right to convert the shares of Series A-1 into common stock
under a successful secondary public offering, as defined, or upon a qualified
merger, consolidation or other similar transaction, as defined.
SERIES A
Series A cumulative convertible redeemable preferred stock ("Series A") is
convertible, at the holder's option, into common stock at a conversion rate of
1 share of common stock for each 3.685 shares of Series A Preferred Stock.
All other rights and preferences that apply to Series A-1 preferred stock apply
to Series A preferred stock.
Voting Rights for Series A, A-1, BB, C, and D Preferred Stock. All series of
preferred stock have voting rights on all matters according to the number of
common shares into which the preferred stock is convertible at the time of any
shareholders' vote. The issuance of a new class of stock or the increase of
shares within an existing class of stock that either ranks on parity with or is
superior to a given series of preferred stock as to dividends, redemption
F-34
<PAGE> 64
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. REDEEMABLE PREFERRED STOCK (CONTINUED)
and liquidation requires the following approvals by the then outstanding class
or classes: (1) 66.66% of Series A and A- 1 voting together as a class; (2) 75%
of Series BB and C, voting together as a class; and (3) 75% of Series D, voting
as a class. No amendment of voting powers, designations, preferences or rights
and no amendments of Articles or Bylaws that materially adversely affect the
rights of Series A, BB, C, and D preferred stock shall occur without the
following approvals by then outstanding class or classes: (1) 90% vote of
Series A, voting as a class; (2) 90% of Series BB and C, voting together as a
class; and (3) 90% of the Series D, voting as a class. Upon the occurrence of
an event of default, the preferred stock shareholders will have the right to
enlarge the Board of Directors and elect a controlling number of directors.
At December 31, 1994, redeemable preferred stock was convertible into common
stock as follows:
<TABLE>
<CAPTION>
PREFERRED CONVERSION COMMON
STOCK RATIO SHARES
---------- ---------- ---------
<S> <C> <C> <C>
Series D 2,105,258 2:1 4,210,516
Series C 448,811 2:1 897,622
Series BB 1,577,547 2:1 3,155,094
Series A-1 2,769,109 1:4 692,277
Series A 3,500,000 1:3.685 949,797
---------- ---------
Total 10,400,725 9,905,306
========== =========
</TABLE>
F-35
<PAGE> 65
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. REDEEMABLE PREFERRED STOCK (CONTINUED)
The changes in redeemable preferred stock for the years ended December 31,
1994, 1993 and 1992 are as follows (dollars in thousands, except share data):
<TABLE>
<CAPTION>
Series D Series C Series BB Series A-1 Series A
Shares Amounts Shares Amounts Shares Amounts Shares Amounts Shares Amounts
-------- ------- ------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992 269,109 $ 269 3,500,000 $3,457
Series BB preferred stock
issued as dividends to Series
A preferred shareholders 16,411 $ 194
Issuance of preferred stock -
Series A-1 2,500,000 2,500
Issuance of preferred stock -
Series BB (net of $533 in
issue costs) 1,271,186 14,467
Preferred dividends
accrued, including
accretion of issuance
costs 611 107 141
--------- ------- --------- ------ --------- ------
BALANCE, DECEMBER 31, 1992 1,287,597 15,272 2,769,109 2,876 3,500,000 3,598
Exercise of stock warrants 289,950 3,422
Issuance of preferred stock -
Series C (net of $46 in issue
costs) 448,811 $ 8,033
Issuance of preferred stock -
Series D (net of $837 in
issue costs) 1,269,144 $ 22,008
Preferred dividends accrued,
including accretion of
issuance costs 56 1,301 128 167
--------- -------- ------- ------- --------- ------- --------- ------ --------- ------
BALANCE, DECEMBER 31, 1993 1,269,144 22,008 448,811 8,089 1,577,547 19,995 2,769,109 3,004 3,500,000 3,765
Issuance of preferred stock -
Series D (net of $327 in
issue costs) 836,114 14,723
Preferred dividends accrued,
including accretion of
issuance costs 2,023 651 1,556 202 278
--------- -------- ------- ------- --------- ------- --------- ------ --------- ------
BALANCE, DECEMBER 31, 1994 2,105,258 $ 38,754 448,811 $ 8,740 1,577,547 $21,551 2,769,109 $3,206 3,500,000 $4,043
========= ======== ======= ======= ========= ======= ========= ====== ========= ======
</TABLE>
F-36
<PAGE> 66
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9. COMMON STOCK
Common Stock
The Company amended its articles of incorporation on July 7, 1993, to effect a
two-for-one stock split of the Company's outstanding shares of common stock.
The rate and prices at which conversion of the Series A and Series A-1
preferred stock and Series BB preferred stock are convertible into common stock
and the number and prices of common shares under option have been restated to
give effect to the two-for-one stock split.
In connection with the Company's merger with AmeriHealth, Inc. ("AHH") on
December 6, 1994, the Company issued 1 share of $0.01 par value common stock in
exchange for each share of Company common stock outstanding prior to the
consummation of the merger. The Company's stockholders' equity accounts have
been retroactively restated to reflect the issuance of $.01 par value common
stock (See Note 4. "Acquisitions and Other Transactions"). Additionally, the
Company paid a cash distribution of $0.085 per share to all AHH common
stockholders.
Currently, payment of any cash dividends or other distributions or repurchases
of any capital stock of the Company are prohibited.
Stock Option Plans
The Company has five nonstatutory stock option plans in which certain officers
and/or directors are eligible to participate: Employee Stock Option Plan,
dated December 31, 1991 ("Plan No. 1"), Employee Stock Option Plan No. 2, dated
May 27, 1992 ("Plan No. 2"), Employee Stock Option Plan No. 3, dated September
1992 ("Plan No. 3"), Senior Executive Stock Option Plan No. 4, dated January 5,
1994 ("Plan No. 4"), and Directors' Stock Option Plan, dated 1992 (the
"Directors' Plan") (collectively, the "Plans"). Additionally, the Company had
options issued and outstanding to certain executive officers and key employees.
As a result of the Company's merger with AmeriHealth, Inc. on December 6, 1994,
all AmeriHealth options then outstanding became fully vested. At December 31,
1994, 244,017 options granted to certain former AmeriHealth directors, officers
and key employees were outstanding and fully vested.
The Plans are presently administered by the Option and Compensation Committee
(the "Committee") of the Board of Directors. Officers, other key employees
and, under limited circumstances, members of the Board of Directors are
eligible to participate in Plan No. 1. Officers and executive personnel of the
Company are eligible to participate in Plans No. 2, No. 3 and No. 4. The
Directors' Plan is available to members of the Board of Directors who are not
members of management or elected as representatives of the Company's preferred
stockholders pursuant to a voting agreement. At December 31, 1994, only Plan
No. 3 has additional options which may be granted.
With the exception of Plan 1, options granted under the Plans can not be less
than 80% of the fair market value of common stock on the date of the grant.
Under Plan 1, the per share price can not be less than 100% of the fair market
value of the common stock on the date of grant. The Plans provide that no
stock option shall be exercisable later than 10 years and 1 day from the date
of grant.
F-37
<PAGE> 67
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9. COMMON STOCK (CONTINUED)
The following table summarizes the activity under these stock option plans and
any special grants authorized by the Board of Directors:
<TABLE>
<CAPTION>
Number of Option Price Per
Shares Share
--------- ---------------
<S> <C> <C>
Stock options outstanding
at January 1, 1992 180,000 $1.00
Granted in 1992 510,000 $4.00 to $6.25
---------
Stock options outstanding
at December 31, 1992 690,000
Granted in 1993 15,000 $5.90 to $9.00
---------
Stock options outstanding
at December 31, 1993 705,000 $1.00 to $9.00
Granted in 1994 367,566 $9.00
Grants to former AmeriHealth employees 244,017 $1.07 to $35.65
---------
Stock options outstanding
at December 31, 1994 1,316,583 $1.00 to $35.65
=========
</TABLE>
At December 31, 1994, options for 922,350 common shares were exercisable.
Shares Reserved. Shares covered by stock options that expire or otherwise
terminate unexercised become available for awards under the respective Plans.
At December 31, 1994, the Company had reserved 1,010,000 shares of common stock
for awards under the Plans, of which 75,000 were available for new grants.
In January 1995, options were granted to certain officers to purchase 60,000
shares of common stock at an exercise price of $9.00 per share. The options
expire in January 2005.
Warrants
As of December 31, 1994, the Company had issued and outstanding a total of
2,291,962 warrants to purchase 2,677,832 shares of common stock at exercise
prices ranging from $0.01 per share to $9.00 per share. Such warrants expire
December 31, 1997 through December 31, 2003.
F-38
<PAGE> 68
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10. INCOME TAXES
The provision for income taxes consisted of the following for the years ended
December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $ (1,600) $ 1,310
State 200 236 $ 151
--------- -------- ----------
Total current (benefit) provision (1,400) 1,546 151
--------- -------- ----------
Deferred:
Federal 1,600 (537) (88)
State --
--------- -------- ----------
Total deferred expense (benefit) 1,600 (537) ( 88)
--------- -------- ----------
Provision for income taxes $ 200 $ 1,009 $ 63
========= ======== ==========
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax provision (benefit) at
statutory rate of 34% $ 831 $ (4,004) $ (520)
State income taxes, net of federal benefit 132 156
Changes in valuation allowance (849) 4,359
Extraordinary item (634)
Net operating loss for which no benefit is
recognizable 525 490
Other 86 (27) 93
--------- -------- ----------
Provision for income taxes 200 375 63
Amount allocated to extraordinary item -- 634
--------- -------- ----------
Total provision for income taxes $ 200 $ 1,009 $ 63
========= ======== ==========
</TABLE>
F-39
<PAGE> 69
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and (liabilities) for the year ended
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Dollars in thousands)
<S> <C> <C>
Net operating loss carryforward $ 5,894 $ --
Asset write-down 4,429
Depreciable equipment (12,532) (322)
Amounts expensed for book purposes not currently
deductible for tax 3,437 1,852
Tax credits 441
Less valuation allowance (2,046) (4,359)
--------- --------
Net deferred tax asset (liability) (4,806) 1,600
Less current portion (1,671) (600)
--------- --------
Noncurrent portion $ (6,477) $ 1,000
========= ========
</TABLE>
The current deferred tax asset is included in prepaid expenses and other
current assets in 1994 and 1993. The noncurrent deferred tax liability in 1994
and noncurrent deferred tax asset in 1993 are included in other long-term
liabilities and other assets, respectively.
At December 31, 1994, the Company had net operating losses and tax credit
carryforwards for income tax purposes of approximately $15,500,000 and
$441,000, respectively, which will expire in years 1999 through 2009. The tax
credit carryforwards consist of several business credits and alternative
minimum tax ("AMT") credits of approximately $366,000 and $75,000,
respectively.
For federal income tax purposes, due to certain changes in ownership of
AmeriHealth, Inc., its net operating loss carryforward of $7,850,000 may be
limited to approximately $2,100,000 per year under Internal Revenue Service
Code. If the available amount is not used to reduce taxes in any year, the
unused amount increases the allowable limit in subsequent years. These loss
carryforwards expire in years 1999 through 2008. AmeriHealth, Inc. also has
General Business Credit and AMT Credit carryforwards of approximately $75,000
and $100,000, respectively, which may also be limited because of the change in
ownership.
NOTE 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Income taxes paid $ 878 $ 478 $ 383
Interest paid 5,582 2,762 1,158
</TABLE>
F-40
<PAGE> 70
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) plan for qualified employees
of the Company. For those employees of the Company electing to participate,
the Company matches certain employee contributions and may make additional
discretionary contributions.
Total expense for employer contributions to the plan for 1994, 1993 and 1992
was $258,000, $84,000 and $70,000, respectively.
NOTE 13. RELATED PARTY TRANSACTIONS
Management Prescriptives, Inc. ("MPI"), a company owned by a Director of the
Company, has provided specialized consulting services to certain of the
Company's hospitals. During 1994, MPI received approximately $283,000 in fees
from the Company.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements related to
buildings and medical and computer equipment. Future annual minimum lease
payments under noncancellable operating leases as of December 31, 1994 were as
follows (dollars in thousands):
<TABLE>
<S> <C>
1995 $ 1,141
1996 932
1997 594
1998 408
1999 318
---------
$ 3,393
=========
</TABLE>
Rent expense for 1994, 1993 and 1992 was approximately $2,648,000, $2,348,000
and $1,118,000, respectively.
Litigation. The Company is from time to time subject to claims and suits
arising in the ordinary course of operations. In the opinion of management,
the ultimate resolution of such pending legal proceedings will not have a
material effect on the Company's financial position, results of operations or
cash flows.
Professional Liability. The Company is self-insured up to $1,000,000 per
occurrence for the payment of claims arising from professional liability risks.
The Company has accrued liabilities for potential professional liability risks
based on estimates for losses limited to $1,000,000 per occurrence and
$4,000,000 in the aggregate. The Company is further insured by a commercial
insurer for claims in excess of these limits up to an additional $5,000,000
over its self-insured retention. Such amount was increased to $10,000,000
effective January 1, 1995. At December 31, 1994 and 1993, the Company had
accrued approximately $2,681,000 and $1,764,000, respectively, related to such
claims. In the opinion of management, any unaccrued damages awarded will not
have a material adverse effect on the Company's financial position or results
of operation.
Contract Commitments. The Company had commitments outstanding for capital
expenditures under contracts of approximately $28,521,000 at December 31, 1994,
substantially all of which will be paid in 1995.
F-41
<PAGE> 71
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15. QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the Company's quarterly financial data for the
two years ended December 31, 1994 and 1993 (dollars in thousands).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 (1) QUARTER QUARTER QUARTER QUARTER
---- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 24,563 $ 23,403 $ 23,331 $ 32,896
Net income (loss) 1,473 757 1,028 (1,015)
Primary income (loss) per common
share (2) .21 (0.31) (0.12) (1.03)
Fully diluted income per common
share (2) .15 -- (5) -- (5) -- (5)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1993 QUARTER QUARTER QUARTER QUARTER (3)(4)
---- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 20,538 $ 23,234 $ 23,264 $ 22,796
Income (loss) before extraordinary
item 1,596 1,736 1,091 (15,346)
Net income (loss) 1,596 1,736 1,091 (16,576)
Primary:(2)
Income (loss) before
extraordinary item per common
share .86 .91 .44 (13.95)
Income (loss) per common share .86 .91 .44 (15.03)
Fully diluted income per
common share(2) .28 .30 .19 -- (5)
</TABLE>
================================================================================
(1) Results for the six months ended June 30, 1994, as previously reported
in the definitive Proxy Statement of AmeriHealth, Inc. dated November
11, 1994, and for the nine months ended September 30, 1994, as
previously reported in Form 8-K/A, Amendment No. 1, dated December 6,
1994, have been restated to reflect additional contractual allowances
at one of the Company's hospitals which was recorded in the fourth
quarter.
(2) The sum of the per share amounts does not equal the annual per share
amount due to quarterly fluctuations in weighted average common and
common equivalent shares outstanding.
(3) Net loss for the fourth quarter of 1993 includes a $15,456,000 write
down of one of two hospitals owned by the Company in Baytown, Texas,
following the consolidation of hospital operations onto one campus.
The closed facility was sold in June 1994 with restrictions limiting
its use to non-competing purposes without the Company's consent.
(4) Net loss for the fourth quarter of 1993 also included an extraordinary
loss, net of tax benefit, of approximately $1,230,000 from the early
extinguishment of debt.
(5) Fully diluted earnings per share for the period are not presented due
to the antidilutive effect of such calculation.
F-42
<PAGE> 72
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16. CONCENTRATION OF CREDIT RISK
The Company's revenues consist primarily of amounts due from the Medicare and
Medicaid programs in addition to amounts due from insurance carriers and
individuals. The Company determines the adequacy of a patient's third-party
payor coverage upon admission. However, it generally does not require any
collateral prior to performing services. The Company maintains reserves for
contractual allowances and potential credit losses based on past experience and
management's current expectations. Medicare and Medicaid gross revenue
accounted for approximately 39% and 18% in 1994, 39% and 12% in 1993 and 42%
and 10% in 1992, respectively, of the Company's total gross revenue.
NOTE 17. SUBSEQUENT EVENT
On January 25, 1995, the Company entered into a definitive agreement with
HealthTrust, Inc.-The Hospital Company ("HTI") to acquire Salt Lake Regional
Medical Center ("SLRMC"), a 200 bed tertiary care hospital and five clinics in
Salt Lake City, Utah for approximately $45,000,000, plus certain working
capital components and other consideration of approximately $15,000,000. SLRMC
was formerly a not-for-profit hospital acquired by HTI in August 1994 and is
being sold pursuant to a consent decree and settlement agreement between HTI
and the Federal Trade Commission.
F-43
<PAGE> 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
1994 Compared to 1993
The Company reported net income of $2,243,000 for the year ended December 31,
1994, compared to a net loss of $12,153,000 for the comparable period in 1993.
On a per share basis, after deducting dividend requirements for preferred
stockholders and other adjustments of $4,710,000 and $1,652,000 in 1994 and
1993, respectively, the Company reported a net loss of $1.69 per common share
for 1994 compared to a net loss of $12.31 per common share for 1993.
The net loss for the year ended December 31, 1993, included an extraordinary
loss of approximately $1,230,000 (net of income tax effect of $634,000), or
$1.10 per share, from the early extinguishment of debt. The net loss for 1993
also included an asset write down of approximately $15,456,000 pursuant to the
Company's decision in December 1993 to consolidate the operations of GCH onto
the campus of BMC. Both the former GCH facility and BMC are located in
Baytown, Texas. Initially, the Company pursued a market strategy of providing
inpatient services at the BMC facility and ambulatory services at the GCH
facility while eliminating duplicate overhead costs; however, after
approximately 16 months of operation, the Company determined that utilization
of the GCH facility as a separate ambulatory facility was not economically
feasible and discontinued all non-administrative uses of the GCH campus. The
write down was recorded in 1993 to recognize the limited alternative uses of
the GCH campus. In June 1994, the Company sold the former GCH property with
restrictions prohibiting its use to non-competing activities without the
Company's consent.
The Company's net revenue was $104,193,000 for the year ended December 31,
1994, compared to $89,832,000 for 1993, an increase of $14,361,000 or 16.0%.
This increase was due primarily to the inclusion of P&S for a full year in
1994, compared to eight months in 1993, the year the facility was acquired, and
the Company's acquisition of PHC and AHH in the fourth quarter of 1994. On a
same hospital basis, net revenue decreased approximately $2,550,000, or 3.2%,
in 1994 due to the elimination of a psychiatric program at BMC and a decline in
outpatient surgery cases due to capacity constraints following the
consolidation of GCH's operations onto the BMC campus in December 1993.
The average occupancy rates of the Company's hospitals declined from 40.1% in
1993 to 38.3% in 1994. This decline is consistent with the industry trend of
decreased inpatient utilization at acute care hospitals and is due primarily to
increased pressure from Medicare, Medicaid, HMOs, PPOs and other third party
payors to reduce hospital stays and to provide services, where possible, on a
less expensive outpatient basis. Gross outpatient revenue increased 6.1% from
$59,738,000 in 1993 to $63,387,000 in 1994. Outpatient revenue as a percent of
gross patient service revenue declined from 41.9% in 1993 to 38.1% in 1994,
due primarily to the Company's acquisition of PHC effective October 1, 1994.
In general, psychiatric hospitals derive a greater percentage of their gross
revenue from inpatient services than do acute care hospitals. Exclusive of
acquisitions, outpatient revenue comprised 41.3% of gross patient revenue in
1994.
Net patient service revenue is presented in the Consolidated Statement of
Operations net of the provision for contractual allowances. Such provision was
40.2% of gross patient service revenue for 1994 compared to 39.2% in 1993. The
provision for contractual allowances as a percentage of gross patient service
revenue is likely to increase in the future as rate increases at the Company's
hospitals exceed increases, if any, in fixed reimbursement rates; from
increased discounts in standard rates due to pressure from third-party payors,
such as HMOs, PPOs and private insurance companies; and from increased
inpatient utilization by Medicare and Medicaid patients. Payments received
under these programs are generally less than established billing rates.
Approximately 39% of gross patient revenue was attributable to Medicare in 1994
and 1993. Gross revenue attributable to Medicaid increased to 18% in 1994
compared to 12% in 1993, due primarily to the Company's acquisition of PHC
effective October 1, 1994, which derives approximately 53% of its gross patient
revenue from
F-44
<PAGE> 74
the Medicaid program, and due to a decline in revenue attributable to private
and other payor sources at hospitals owned by the Company for the twelve month
period ended December 31, 1994.
Net revenue for 1994 includes approximately $2,196,000 in interest income
earned on cash balances during the year.
The Company's operations are labor intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and
benefits increased 11.8% to $41,042,000 in 1994 compared to $36,698,000 in
1993, due primarily to the inclusion of P&S for a full year in 1994 and the
Company's acquisition of PHC and AHH in the fourth quarter of 1994. As a
percent of net revenue, salary and benefits decreased to 39.4% in 1994 compared
to 40.9% in 1993 as a result of the Company's ongoing efforts to improve
staffing efficiencies in its acquired hospitals. For hospitals owned for the
twelve month period ended December 31, 1994, salary and benefits were 37.7% of
net revenues in 1994 compared to 39.4% in 1993.
The major components of other operating expenses were professional fees, taxes
(other than income), insurance, utilities and other services. Other operating
and supply expenses increased by 19.2% to $42,511,000 in 1994 compared to
$35,674,000 in 1993. Other operating and supply expenses increased to 40.8% of
net revenue in 1994 compared to 39.7% in 1993. The increase in the percentage
of net revenue is due primarily to non-capitalizable costs associated with the
Company's acquisition activity.
Provision for bad debts was $7,812,000 in 1994, or 7.8% of net patient service
revenue, compared to $5,669,000, or 6.5% in 1993. This 37.8% increase is due
in part to the installation of a new computer system at one of the Company's
hospitals that disrupted the hospital's billing procedures and accounts
receivable detail. The hospital determined that approximately $700,000 in
accounts receivable produced by the new system should have been charged to
allowance for uncollectible accounts. Excluding this charge, provision for bad
debts was approximately 7.1% of net patient service revenue in 1994.
Depreciation and amortization expense was $4,010,000 in 1994 compared to
$3,524,000 in 1993, an increase of $486,000 or 13.8%. The increase in
depreciation and amortization expense was due primarily to the Company's
acquisitions in 1994, the Company's ongoing capital improvement programs at its
existing hospitals and the amortization of costs associated with the Company's
issuance of 11% Senior Subordinated Debentures effective December 31, 1993.
Interest expense increased from $2,725,000 in 1993 to $6,375,000 in 1994,
principally due to the Company's issuance of $37,833,000 of 11% Senior
Subordinated Notes effective December 31, 1993 and its incurrence of a
$20,000,000 variable rate term loan on November 3, 1993, as well as interest
expense associated with debt assumed and/or issued in the AHH and PHC
acquisitions (See "Liquidity and Capital Resources"). Interest expense also
increased due to an increase in the interest rate under which the Company
calculates its interest payment on its term loan (approximately 9.12% in 1994
as compared to 6.56% in 1993.)
1993 Compared to 1992
The Company reported a net loss of $12,153,000 for the year ended December 31,
1993, compared to a net loss of $1,592,000 for the comparative period in 1992.
On a per share basis, after deducting the dividend requirements for preferred
stockholders and other adjustments of $1,652,000 and $859,000 in 1993 and 1992,
respectively, the Company reported a net loss of $12.31 per common share for
1993 compared to a net loss of $2.23 per common share for 1992.
The net loss for the year ended December 31, 1993, included an extraordinary
loss of approximately $1,230,000 (net of income tax effect of $634,000), or
$1.10 per share, from the early extinguishment of debt. The net loss for 1993
also included an asset write down of approximately $15,456,000 pursuant to the
Company's decision in December 1993 to consolidate the operations of its two
hospitals in Baytown, Texas. See "1994 Compared to 1993" for further
discussion. The net loss in 1992 included a one-time charge of $1,300,000 in
underwriter and
F-45
<PAGE> 75
professional fees incurred as part of the Company's unsuccessful attempt to
purchase twelve hospitals from Humana, Inc.
The Company's net revenue was $89,832,000 for the year ended December 31,
1993, compared to $45,073,000 for fiscal 1992, an increase of $44,759,000 or
99.3%. This increase is due primarily to the acquisition of GCH and HMC on
September 1, 1992, and the acquisition of P&S on May 1, 1993. Prior to the
Company's acquisitions on September 1, 1992, the Company's only hospital was
Baytown Medical Center (which was subsequently renamed BayCoast Medical Center)
in Baytown, Texas.
Net patient service revenue is presented in the Consolidated Statement of
Operations net of the provision for contractual allowances. Such provision was
39.2% of gross patient service revenue for 1993 compared to 41.4% in 1992.
Medicare utilization at the Company's hospitals declined from 42% of total
inpatient utilization in 1992 to 39% in 1993, while Medicaid inpatient
utilization increased from 10% in 1992 to 12% in 1993.
The average occupancy rates of the Company's hospitals increased from 38.0% in
1992 to 40.1% in 1993. Outpatient revenue increased 118.3% from $27,372,000 in
1992 to $59,738,000 in 1993 as a result of the Company's acquisitions in
September 1992 and May 1993. Outpatient revenue as a percent of gross patient
service revenue increased to 41.9% in 1993 from 36.6% in 1992.
Salary and benefits increased 86.8% to $36,698,000 in 1993 compared to
$19,642,000 in 1992, due primarily to the inclusion of GCH and HMC for a full
year in 1993, and the Company's acquisition of P&S on May 1, 1993. As a
percent of net revenue, salary and benefits decreased to 40.9% in 1993 compared
to 43.6% in 1992 due to the Company's continued progress in improving staffing
efficiencies at its acquired hospitals.
The major components of other operating expenses were professional fees, taxes
(other than income), insurance, utilities and other services. Other operating
and supply expenses increased by 72.5% to $35,674,000 in 1993 compared to
$20,675,000 in 1992, due primarily to the inclusion of GCH and HMC for a full
year in 1993 and the Company's acquisition of P&S on May 1, 1993. Other
operating and supply expenses decreased to 39.7% of net revenue in 1993
compared to 45.9% in 1992, which reflects the Company's continued progress in
improving overall operating efficiencies at its acquired hospitals.
Provision for bad debts was $5,669,000, or 6.5% of net patient service revenue
in 1993 compared to $3,520,000, or 8.0% in 1992. The decline in provision for
bad debts as a percentage of net patient revenue was due principally to the
Company's efforts to improve collections at its acquired facilities.
Depreciation and amortization expense increased from $1,361,000 in 1992 to
$3,524,000 in 1993, primarily due to the Company's acquisition of GCH and BMC
on September 1, 1992 and P&S on May 1, 1993.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $48,424,000 at December 31, 1994
and also had available $30,000,000 under its senior secured bank facility. On
December 30, 1994, the Company exercised commitments from existing investors
for the issuance of an additional $11,222,000 of Series D Preferred Stock and
$19,133,000 of 11% Senior Subordinated Notes. These funds, which were included
in cash and cash equivalents at December 31, 1994, will be used primarily for
acquisitions and general corporate purposes.
The Company had a cash deficit of $717,000 from operations for the year ended
December 31, 1994. Cash flow from operations have not contributed
significantly to the Company's liquidity in the past, due principally to its
strategy of acquiring underperforming hospitals. The Company seeks to improve
cash flows at its acquired facilities through the implementation of improved
operating efficiencies over time. However, there can be no assurance that the
Company's efforts will be successful, nor can it give any assurance that these
improvements, if achieved, will result in increased cash flows from operations.
F-46
<PAGE> 76
Capital expenditures vary by hospital and from year to year, depending upon the
nature of the improvements undertaken at each facility. Excluding acquisitions,
capital expenditures for the year ended December 31, 1994 were $12,561,000,
which included $5,254,000 in expenditures related to the hospital and medical
building under construction in Midland, Texas and approximately $2,204,000
related to the construction of an ambulatory care center at BMC. Excluding
acquisitions, the Company expects to make capital expenditures of approximately
$58,600,000 in 1995, including approximately $34,600,000 to complete the
construction of its new facility in Midland, Texas and approximately $5,900,000
to complete the construction of an ambulatory care center at BMC.
The Company expended approximately $12,211,000 for principal payments on
long-term debt and capitalized lease obligations for the year ended December
31, 1994. Approximately $9,911,000 in principal payments related to the debt
assumed in connection with the PHC and AHH acquisitions.
The Company anticipates that existing capital sources and internally generated
cash flows will be sufficient to fund capital expenditures, debt service and
working capital requirements through the foreseeable future. The Company
intends to acquire additional acute care and specialty facilities and is
actively pursuing several of such acquisitions. However, depending upon the
individual circumstances, the Company will likely require additional debt or
equity financing as it pursues its acquisition strategy.
On October 21, 1994, the Company acquired PHC, which owned two free-standing
psychiatric hospitals with a combined total of 219 beds in Springfield,
Missouri, and Alexandria, Louisiana. PHC owned a third free-standing
psychiatric hospital in Sherman, Texas ("Sherman Hospital") that was closed and
held for sale or lease at the date of acquisition. The net purchase price,
including a "contingent" consideration feature of $1,300,000 (up to $2,000,000
in aggregate) and the assumption of long-term debt, was approximately
$23,000,000. The Company paid no cash (other than fractional share amounts) to
the PHC shareholders, instead issuing 212,661 shares of Series D Preferred
Stock, $5,737,000 of 11% Senior Subordinated Notes with 172,110 detachable
warrants to acquire common stock, and options expiring January 3, 1995, which
were subsequently exercised, to acquire an additional 7,561 shares of Series D
Preferred Stock, $202,000 of 11% Senior Subordinated Notes with 6,060 of
detachable warrants, with the balance of the consideration being assumption of
approximately $14,880,000 of long-term debt. The Company also agreed to issue
up to an additional $2,000,000 in contingent consideration through the issuance
of 44,494 shares of Series D Preferred Stock and $1,194,000 of 11% Senior
Subordinated Notes with 35,820 detachable warrants, if within the next two
years PHC receives up to $2,000,000 from a combination of sale of Sherman
Hospital, a recovery from a lawsuit and certain specified Medicaid payments.
In March 1995, the Company sold Sherman Hospital for approximately $1,300,000
to an unrelated third party. Accordingly, the Company expects to issue
additional preferred stock, notes and detachable warrants as required under the
PHC purchase agreement.
In connection with the Company's acquisition of PHC, the Company assumed
approximately $12,970,000 of mortgage financing on the PHC facilities, $257,000
in capitalized leases, and $159,000 of notes payable. A working capital credit
facility with a balance of approximately $1,494,000 was repaid from available
cash of the Company and PHC. At December 31, 1994, approximately $2,645,000
principal amount of the mortgage was collateralized by the assets comprising
Sherman Hospital. In connection with the sale of Sherman Hospital in March
1995, the Company made a required principal payment of $850,000 on this
mortgage and obtained a release of collateral from the lender. The remaining
principal balance is now collateralized by the Company's facility in
Alexandria, Louisiana.
On December 6, 1994, the Company merged with AmeriHealth, Inc., a Delaware
corporation, with AHH being the surviving corporation resulting from the merger
(the "Combined Company"). The merger was accounted for as a recapitalization
of the Company with the Company as the acquiror (a reverse acquisition).
Concurrent with the merger, the name of the Combined Company was changed to
Champion Healthcare Corporation, and the Combined Company adopted the Company's
certificate of incorporation provisions. The common shareholders of AHH
received 1 share of Company common stock for every 5.70358 shares of common
stock of AHH and a cash distribution of $0.085 per AHH common share, which
resulted in a net purchase price of approximately $38,300,000, including
approximately $17,700,000 of AHH debt assumed. AHH was engaged primarily in
the ownership and management of, and the provision of consulting services to,
hospitals and other health care facilities. AHH owned and managed two acute
care hospitals with a combined total of 265 licensed beds: Metropolitan
F-47
<PAGE> 77
Hospital in Richmond, Virginia with 180 beds and Autauga Medical Center in
Prattville, Alabama with 85 beds. AHH also owned a 72 bed skilled nursing
facility, Autauga Health Care Center in Prattville, Alabama.
As part of the AHH merger, the Company assumed and extended approximately
$10,000,000 principal amount of debt held by Wilmington Savings Fund Society
(the "WSFS Loan") and paid approximately $7,665,000 in cash to retire
$8,049,000 principal amount of AHH debt held by the Resolution Trust
Corporation. The WSFS loan matures April 15, 1996, and requires the monthly
payment of interest at an annual rate of 2% plus prime and quarterly principal
payments of $233,250 on the first day of each calendar quarter. The WSFS loan
is collateralized by certain assets of Metropolitan Hospital and guaranteed by
the Company.
On December 21, 1994, a wholly owned subsidiary of the Company that owned
Heartland Medical Center, a 142 bed general acute care facility in Fargo, North
Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199 bed general acute care hospital
also in Fargo, North Dakota. The partnership is operated as Dakota Heartland
Health System ("DHHS"). Also on December 21, 1994, the Company entered into an
operating agreement with the partnership and Dakota to manage the combined
operations of the two hospitals. Under the terms of the partnership
agreement, the Company is obligated to advance funds to the partnership to
cover any and all operating deficits of the partnership. The Company accounts
for its investment in DHHS under the equity method. DHHS began operations on
December 31, 1994.
The Company and Dakota contributed their respective hospitals debt and lien
free (except for capitalized lease obligations), including certain working
capital components, and the Company contributed an additional $20,000,000 in
cash, each in exchange for 50% ownership in the partnership. A $20,000,000
special distribution was made to Dakota after capitalization of the partnership
in accordance with the terms of the partnership agreement. The Company will
receive 55% of the net income and distributable cash flow ("DCF") of the
partnership until such time as it has recovered on a cumulative basis an
additional $10,000,000 of DCF in the form of an "excess" distribution.
The partnership is administered by a Governing Board comprised of six members
appointed by Dakota, three members appointed by the Company and three members
appointed by mutual consent of the Dakota members and the Company members.
Certain Governing Board actions require the majority approval of each of the
Company members and Dakota members. Because the partners through the
partnership agreement have delegated management of the partnership to the
Company through the operating agreement, the authority of the Governing Board
is limited.
From the 19th month after the commencement of the partnership, Dakota has the
right to require the Company to purchase its partnership interest free of debt
or liens for a cash purchase price equal to 5.5 times earnings before
depreciation, interest, income taxes and amortization less Dakota's pro-rata
share of the partnership's long-term debt. On a pro forma basis, the
partnership had earnings before depreciation, interest, income and amortization
of approximately $13,600,000 for the year ended December 31, 1994. From the
37th month after the commencement of the partnership, the purchase price for
Dakota's partnership interest shall not be less than $50,000,000. After
receipt of written notice of Dakota's intent to sell its partnership interest,
the Company would have 12 months to complete the purchase. Should the Company
not complete the purchase during this period, Dakota would have the right to,
among others, (i) terminate the operating agreement and engage an outside party
to manage the hospital, (ii) replace the Company's designees to the Governing
Board and (iii) enter into a fair market value transaction to sell
substantially all of the partnership's assets. The Company would likely
finance the purchase through bank or other borrowings.
On January 25, 1995, the Company entered into a definitive agreement with
HealthTrust, Inc.-The Hospital Company ("HTI"), to acquire Salt Lake Regional
Medical Center ("SLRMC"), a 200 bed tertiary care hospital and five clinics in
Salt Lake City, Utah for approximately $45,000,000, plus certain working
capital components and other consideration of approximately $15,000,000. SLRMC
was formerly a not-for-profit hospital acquired by HTI in August 1994 and is
being sold pursuant to a consent decree and settlement agreement between HTI
and the Federal Trade Commission.
F-48
<PAGE> 78
On November 5, 1993, the Company obtained a $50,000,000 credit facility
comprised of a $20,000,000 term loan (the "Term Loan") and a $30,000,000
revolving credit facility (the "Revolving Loan") with Banque Paribas, First
Union National Bank of North Carolina and NationsBank of Tennessee, N.A.
Effective May 1994, BankOne, N.A. became a participant in this credit facility.
Any working capital or acquisition related borrowings under the Revolving Loan
are due November 5, 2000; and any construction related borrowings under the
Revolving Loan begin amortizing 2.5% quarterly from November 3, 1997 through
November 5, 2000. The loans bear interest, at the Company's option, at the
LIBOR rate plus 3% or the defined lender's base rate plus 1.5%. At December
31, 1994 and 1993, the interest rates on the Term Loan were 9.12% and 6.56%,
respectively. As of December 31, 1994, the Company has not drawn any funds
available under the Revolving Loan. With the exception of certain assets
collateralizing debt assumed in the PHC and AHH acquisitions, the Loan
Agreement is collateralized by substantially all of the Company's assets.
Additionally, the Company is required to maintain a cash collateral account
with the lender in the amount of $5,000,000. The Company's future acquisitions
and divestitures may require, in certain circumstances, consent by lenders
under this agreement. The Company is currently negotiating with its syndicate
to expand its existing $50,000,000 facility to $100,000,000 during the first
half of 1995 and expects that the requirement to maintain the cash collateral
account will be eliminated.
On December 31, 1993, the Company issued $37,833,000 of Senior Subordinated
Notes (the "Notes") bearing interest at an annual fixed rate of 11%, payable
quarterly, and maturing on December 31, 2003. The Notes included detachable
warrants for the purchase of 1,134,990 shares of common stock. On December 30,
1994, pursuant to commitments obtained from the initial purchasers of the
Notes, the Company issued an additional $19,133,000 of Notes with detachable
warrants for the purchase of 573,990 shares of common stock. The Notes are
subject to redemption on or after December 31, 1995 at the Company's option at
prices declining from 112.5% of the principal amount at December 31, 1995 to
par on December 31, 2002. Additionally, there is a requirement to repurchase
all outstanding Notes in the event of a change of control of the Company, at
the holder's option, based on the declining redemption premium ranging from
112.5% to 103% of principal outstanding. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness of the Company. The detachable warrants are exercisable for
common stock at the holder's option at an exercise price of $9.00 per share
until December 31, 2003.
The Loans, Notes and Mortgages referenced above contain restrictive covenants
which include, among others, restrictions on additional indebtedness, the
payment of dividends and other distributions, the repurchase of common stock
and related securities under certain circumstances, and the requirement to
maintain certain financial ratios. The Company was in compliance with or has
obtained permanent waivers for all loan covenants to which it was subject as of
December 31, 1994 and 1993.
On December 31, 1993, the Company issued 1,269,144 shares of Series D
Cumulative Convertible Redeemable Preferred Stock ("Series D") for net proceeds
of approximately $22,008,000. On December 30, 1994, pursuant to commitments
obtained from the initial purchasers of Series D preferred stock, the Company
issued an additional 623,453 shares of preferred stock for net proceeds of
$11,222,000. See Note 8 to the Company's consolidated financial statements for
a discussion of the rights and preferences of Series D preferred stock.
On December 2, 1993, the Company issued 448,811 shares of Series C Cumulative
Convertible Redeemable Preferred Stock ("Series C") for net proceeds of
$8,033,000. See Note 8 to the Company's consolidated financial statements for
a discussion of the rights and preferences of Series C preferred stock.
On December 2, 1993, detachable warrants to purchase 289,950 shares of Series
BB preferred stock were exercised, resulting in net proceeds of $3,422,000.
The Company is subject to certain credit agreements that restrict its right to
pay cash dividends on its common stock and Series A - D Preferred Stock
(collectively, "Preferred Stock"). Further, the Company can not pay cash
dividends on its common stock until dividends on the Preferred Stock have been
paid in full. At December 31, 1994, the dividend arrearage on the Company's
Preferred Stock was $6,906,000 and will increase as dividends accumulate.
F-49
<PAGE> 79
At December 31, 1994, 10,400,725 shares of Preferred Stock were redeemable and
convertible into 9,905,306 shares of common stock. Additionally, at December
31, 1994, the Company had outstanding 2,291,962 warrants to purchase 2,677,832
shares of Common Stock.
INFLATION
The health care industry is labor intensive. Wages and other expenses are
subject to rapid escalation, especially during periods of inflation and when
shortages occur in the marketplace. In addition, suppliers attempt to pass
along increases in their costs by charging the Company higher prices. In
general, the Company's revenue increases through price increases or changes in
reimbursement levels have not kept up with cost increases. In light of cost
containment measures imposed by government agencies, private insurance
companies and managed-care plans, the Company is likely to experience continued
pressure on operating margins in the future.
F-50
<PAGE> 80
DAKOTA HEARTLAND HEALTH SYSTEM
__________________
BALANCE SHEET
WITH REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1994
F-51
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To the Governing Board
Dakota Heartland Health System:
We have audited the accompanying balance sheet of Dakota Heartland Health
System as of December 31, 1994. This financial statement is the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on this financial statement based on our audit.
We conducted our audit 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Dakota Heartland Health System as
of December 31, 1994, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
June 9, 1995
F-52
<PAGE> 82
DAKOTA HEARTLAND HEALTH SYSTEM
BALANCE SHEET
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Current assets: $ 397,300
Cash and cash equivalents
Patient receivables, net of allowance for
uncollectible accounts of $4,332,878 21,530,288
Due from partners 4,000,000
Supplies inventory 1,724,706
Prepaid expenses and other current assets 568,052
-----------
Total current assets 28,220,346
-----------
Property and equipment, at cost 41,422,576
Other assets:
Investment in and advances to affiliates 1,964,073
Property held for future expansion, at cost 911,066
-----------
Total assets $72,518,061
===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 3,788,183
Estimated third-party payor settlements 3,426,079
Accrued salaries, wages and employee benefits 4,754,690
Other current liabilities 242,563
-----------
Total current liabilities 12,211,515
-----------
Other liabilities 91,404
Minority interest 38,478
Contributed capital 60,176,664
-----------
Total liabilities and partners'
contributed capital $72,518,061
===========
</TABLE>
The accompanying notes are an integral
part of the balance sheet
F-53
<PAGE> 83
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO BALANCE SHEET
_____________
1. Organization and Accounting Policies:
On December 21, 1994, Dakota Heartland Health System, a general
partnership (the "Partnership"), was formed by a wholly owned
subsidiary of Champion Healthcare Corporation ("Champion") that owned
Heartland Medical Center, a 142-bed general acute care facility in
Fargo, North Dakota, and Dakota Hospital ("Dakota"), a not-for-profit
corporation that owned Dakota Hospital, a 199-bed general acute care
hospital also in Fargo, North Dakota. Champion and Dakota contributed
certain assets and liabilities, excluding long-term debt except
capital leases, of their respective hospitals, and Champion
contributed an additional $20,000,000 in cash, each in exchange for
50% ownership in the Partnership. The Partnership then made a
$20,000,000 cash distribution to Dakota. Also on December 21, 1994,
Champion entered into an operating agreement with the Partnership to
manage the combined operations of the two hospitals. Champion will
receive 55% of the net income and distributable cash flow ("DCF") of
the Partnership until such time as it has recovered on a cumulative
basis an additional $10,000,000 of DCF in the form of an "excess"
distribution.
CASH AND CASH EQUIVALENTS:
The Partnership considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
PATIENT RECEIVABLES:
Payments for services rendered to patients covered by third-party
payor programs are generally less than billed charges. Provisions for
contractual adjustments are made to reduce the charges to these
patients to estimated receipts based upon the third-party payor's
principles of payment/reimbursement (either prospectively determined
or retrospectively determined costs). Allowance for contractual
adjustments are netted against patient receivables.
SUPPLIES INVENTORY:
Supplies inventory is stated at the lower of cost or market, with cost
determined substantially on the first-in, first-out basis.
The accompanying notes are an integral
part of the balance sheet.
F-54
<PAGE> 84
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO BALANCE SHEET, Continued
___________________
1. Organization and Accounting Policies, continued:
INCOME TAXES:
The Partnership's income is attributed to its partners for income tax
purposes. Accordingly, it has not accrued any liability for income
taxes.
2. Property and Equipment:
A summary of property and equipment as of December 31, 1994 is as
follows:
<TABLE>
<S> <C>
Land and land improvements $ 2,387,095
Buildings and improvements 20,087,268
Fixed equipment 8,171,406
Major movable equipment 9,068,924
Minor movable equipment 1,101,633
Construction in progress 606,250
------------
Total $ 41,422,576
============
</TABLE>
3. Investments in and Advances to Affiliates:
The Partnership owns portions of several entities. The investments in
these entities are recorded on the equity method. The investments in
and advances to affiliated companies on the accompanying balance sheet
consisted of the following:
<TABLE>
<CAPTION>
Ownership Investments
Corporation Percentage and Advances
----------- ---------- ------------
<S> <C> <C>
Orthopro, Inc. 50% $ 203,155
Country Health, Inc. 49% 665,629
Health Care Incinerators, Inc./
Thom Linen 33% 193,235
Dakota Outpatient Center 50% 311,604
Dakota Day Surgery 50% 590,450
------------
$ 1,964,073
============
</TABLE>
The Partnership has a 50% interest in Dakota Outpatient Center (DOC), a
general partnership which owns and operates a medical and office
building. As a general partner, the Partnership is contingently liable
on the outstanding debt of DOC. As of December 31, 1994, the balance of
the note was $2,608,140.
The accompanying notes are an integral
part of the balance sheet.
F-55
<PAGE> 85
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO BALANCE SHEET, Continued
_________________
3. Investments in and Advances to Affiliates, continued:
DOC also leases its real property to Dakota Hospital, Dakota Day
Surgery (DDS) and Dakota Clinic, Ltd. (an unrelated corporation),
under noncancellable 10-year net operating leases. Future minimum
annual lease payments to be paid by the Hospital and DDS are
$1,156,320 through 1997.
The Partnership also has a 50% interest in DDS, a general partnership
which provides outpatient surgical services. As a general partner,
the Partnership is contingently liable to cover any operating losses
of DDS.
4. Partners' Capital:
Following are the elements of partners' capital as of December 31,
1994:
<TABLE>
<CAPTION>
Champion Dakota Total
-------- ------ -----
<S> <C> <C> <C>
Net assets contributed $16,511,768 $39,664,896 $56,176,664
Cash contribution 20,000,000 20,000,000
Working capital contributions due from partners 2,000,000 2,000,000 4,000,000
Equalization of capital accounts 1,576,564 (1,576,564)
----------- ----------- -----------
Initial capital 40,088,332 40,088,332 80,176,664
Special distribution (20,000,000) (20,000,000)
----------- ----------- -----------
Contributed capital $40,088,332 $20,088,332 $60,176,664
=========== =========== ===========
</TABLE>
F-56
<PAGE> 86
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of Champion Healthcare
Corporation is included on Page F-3 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the financial
statement schedules listed on page F-2 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Houston, Texas
March 30, 1995
F-57
<PAGE> 87
Champion Healthcare Corporation
Schedule I -
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31,
1994 1993
--------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,512 $ 64,536
Restricted cash 5,000
Prepaid expenses and other current assets 2,635 728
----------- -----------
Total current assets 49,147 65,264
Investments in and advances to subsidiaries 117,562 28,553
Property and equipment 2,874 324
Less allowance for depreciation (376) (59)
----------- -----------
Property and equipment, net 2,498 265
Intangible assets, net of accumulated amortization of
$425 and $192 3,887 6,079
Other assets 9,333 1,305
----------- -----------
Total assets $ 182,427 $ 101,466
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 12,151 $ 3,953
Long-term debt 83,376 56,569
Other liabilities 12,773 240
Redeemable preferred stock 76,294 56,861
Common stock 42 11
Common stock subscribed 50 50
Common stock subscription receivable (50) (50)
Paid-in capital 15,998 --
Accumulated deficit (18,207) (16,168)
----------- -----------
Total liabilities and stockholders' equity $ 182,427 $ 101,466
=========== ===========
</TABLE>
See notes to condensed financial statements
F-58
<PAGE> 88
Champion Healthcare Corporation
Schedule I -
Condensed Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Equity in earnings (loss) of subsidiaries $ 10,500 $ (5,544) $ 2,110
Interest income 2,196 107 202
----------- ---------- ----------
Net revenue 12,696 (5,437) 2,312
Costs and expenses:
Salaries, wages and benefits 1,978 1,340 827
Other operating and administrative expenses 2,967 1,231 2,278
Interest expense 5,508 1,906 736
----------- ---------- ----------
10,453 4,477 3,841
Income (loss) before income taxes and
extraordinary item 2,243 (9,914) (1,529)
Provision for income taxes -- 1,009 63
----------- ---------- ----------
Income (loss) before extraordinary item 2,243 (10,923) (1,592)
Extraordinary item:
Loss on early extinguishment of debt, net of tax
benefit of $634 -- (1,230) --
----------- ---------- ----------
Net income (loss) $ 2,243 $ (12,153) $ (1,592)
=========== ========== ==========
</TABLE>
See notes to condensed financial statements.
F-59
<PAGE> 89
Champion Healthcare Corporation
Schedule I -
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net cash used in operating activities: $ (11,941) $ (6,338) $ (1,433)
---------- ---------- ----------
Investing activities:
Additions to property and equipment (103) (207) (65)
Payment for investment in partnership (20,000)
Cash acquired in acquisitions 4,341
Payment for purchase of net assets of
Physicians & Surgeons Hospital (5,813)
Payment for purchase of net assets of HCA
Gulf Coast Hospital (17,265)
Payment for purchase of net assets of
Heartland Medical Center (8,378)
Investment in note receivable (757)
Advances to hospitals, net (6,791) (970) (643)
---------- ---------- ----------
Net cash used in investing activities (23,310) (6,990) (26,351)
---------- ---------- ----------
Financing activities:
Proceeds from issuance of long-term debt 19,133 62,833 15,000
Payments on long-term obligations (1,505) (20,006) (12)
Payments on long-term obligations assumed through
acquisitions (9,911)
Payments related to issuance of long-term debt (2,396) (533)
Proceeds from issuance of preferred stock and
stock warrants 11,223 34,345 17,500
Payment of dividends relating to AmeriHealth merger (1,000)
Cash restricted under collateral agreement (5,000)
Other (713) (883) (532)
---------- ---------- ---------
Net cash provided by financing activities 12,227 73,893 31,423
---------- ---------- ---------
(Decrease) increase in cash and cash equivalents (23,024) 60,565 3,639
Cash and cash equivalents at beginning of year 64,536 3,971 332
---------- ---------- ---------
Cash and cash equivalents at end of year $ 41,512 $ 64,536 $ 3,971
========== ========== =========
</TABLE>
See notes to condensed financial statements.
F-60
<PAGE> 90
Champion Healthcare Corporation
Schedule I -
Notes to Condensed Financial Statements
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed financial statements are presented in accordance
with the requirements of Regulation S-X Rule 12-04 and consequently do not
include all of the disclosures normally required by generally accepted
accounting principles. Accordingly, these financial statements should be read
in conjunction with the annual audited consolidated financial statements
included elsewhere in this document.
NOTE 2. AMOUNTS ELIMINATED IN CONSOLIDATION
The following accounts, as reflected in the attached condensed financial
statements, are fully eliminated when consolidated with the financial
statements of the Company's wholly-owned subsidiaries: Investment in
subsidiaries; Advances to subsidiaries; and Equity in earnings (loss) of
subsidiaries. In addition, the following amounts are eliminated under the
equity method of accounting for intercompany transactions between the Company
and its subsidiaries and are therefore not included in the condensed statement
of operations.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Management fee income $ 2,283 $ 1,733 $ 867
Interest income on intercompany
receivable 4,680 4,310 1,487
Allocation of income taxes -- 236 --
</TABLE>
F-61
<PAGE> 91
Champion Healthcare Corporation
Schedule II -
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1992:
Accumulated amortization, deferred costs $ 311 $ 443 $ 754
======== ======== ========
Allowance for doubtful accounts, accounts
receivable $ 728 $ 3,520 $ 2,443(1) $ 1,968(2) $ 4,723
======== ======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1993:
Accumulated amortization, deferred costs $ 754 $ 683 $ 541(3) $ 896
======== ======== ======== ========
Allowance for doubtful accounts, accounts
receivable $ 4,723 $ 5,669 $ 371(4) $ 7,194(2) $ 3,569
======== ======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1994:
Accumulated amortization, deferred costs $ 896 $ 1,000 $ 212(5) $ 1,684
======== ======== ======== ========
Allowance for doubtful accounts, accounts
receivable $ 3,569 $ 7,812 $ 2,331(6) $ 8,753(7) $ 4,959
======== ======== ======== ======== ========
</TABLE>
(1) Represents allowance for doubtful accounts of Heartland Medical Center at
acquisition.
(2) Represents accounts written off as bad debt during the period.
(3) Represents deferred financing costs written off due to refinancing.
(4) Represents allowance for doubtful accounts of Physicians and Surgeons at
acquisition.
(5) Represents fully amortized organizational costs written off during the
year.
(6) Represents allowance for doubtful accounts of AmeriHealth at merger.
(7) Approximately $1,449,000 of deductions represent the allowance for bad
debt associated with accounts receivable contributed to the DHHS
partnership with the balance representing accounts written off as bad
debt during the period.
F-62
<PAGE> 92
JORDAN VALLEY HOSPITAL
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Coopers & Lybrand, L.L.P., Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-65
Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-66
Statement of Income - For the nine months ended September 30, 1995 . . . . . . . . . . . . . . . . . . . F-67
Statement of Cash Flows - For the nine months ended September 30, 1995 . . . . . . . . . . . . . . . . . F-68
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-69
</TABLE>
F-63
<PAGE> 93
JORDAN VALLEY HOSPITAL
(FORMERLY KNOWN AS
HOLY CROSS JORDAN VALLEY HOSPITAL)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995
F-64
<PAGE> 94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Jordan Valley Hospital:
We have audited the accompanying balance sheet of Jordan Valley Hospital (the
"Hospital"), (formerly known as Holy Cross Jordan Valley Hospital), as of
September 30, 1995 and the related statements of income and change in owner's
equity and cash flows for the period from January 1, 1995 through September 30,
1995. These financial statements are the responsibility of the Hospital's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Jordan Valley Hospital as of
September 30, 1995 and the results of its operations and its cash flows for the
period from January 1, 1995 through December 31, 1995 in conformity with
generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Houston, Texas
December 28, 1995
F-65
<PAGE> 95
JORDAN VALLEY HOSPITAL
BALANCE SHEET
September 30, 1995
(in thousands)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 260
Accounts receivable, less allowance for doubtful
accounts of $1,615 4,287
Supplies inventories 650
Prepaid expenses and other assets 223
Deferred income taxes 597
-----------
Total current assets 6,017
Property and equipment, net 14,197
Note receivable 207
-----------
Total assets $ 20,421
===========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable $ 692
Accrued and other liabilities 996
Accrued income taxes 538
Due to third-party payors 295
Due to owner 656
-----------
Total current liabilities 3,177
Deferred income taxes 899
Commitments and contingencies
Owner's equity 16,345
-----------
Total liabilities and owner's equity $ 20,421
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE> 96
JORDAN VALLEY HOSPITAL
STATEMENT OF INCOME AND CHANGE IN OWNER'S EQUITY
for the period from January 1, 1995 through
September 30, 1995
(in thousands)
<TABLE>
<S> <C>
Net patient service revenue $ 15,516
Other revenue 345
--------------
Net revenue 15,861
Operating expenses:
Salaries, wages and benefits 5,988
Supplies 2,087
Other operating expenses 3,546
Provision for bad debts 1,762
Depreciation 1,065
--------------
Total expenses 14,448
--------------
Income before income taxes 1,413
Provision for income taxes 523
--------------
Net income 890
Owner's equity at January 1, 1995 15,455
--------------
Owner's equity at September 30, 1995 $ 16,345
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-67
<PAGE> 97
JORDAN VALLEY HOSPITAL
STATEMENT OF CASH FLOWS
for the period from January 1, 1995 through
September 30, 1995
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 890
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,065
Provision for bad debts 1,762
Deferred income taxes 127
Changes in operating assets and liabilities:
Accounts receivable (1,460)
Supplies inventories (31)
Prepaid expenses and other assets 59
Accounts payable, accrued and other liabilities 364
Accrued income taxes 396
Due to third party payors 197
-------------
Cash provided by operating activities 3,369
INVESTING ACTIVITIES
Additions to property and equipment (983)
Issuance of note receivable (207)
-------------
Cash used for investing activities (1,190)
FINANCING ACTIVITIES
Payment of debt to owner (2,762)
-------------
Cash used for financing activities (2,762)
-------------
Change in cash and cash equivalents (583)
Cash and cash equivalents at beginning of period 843
-------------
Cash and cash equivalents at end of period $ 260
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE> 98
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Jordan Valley Hospital (the "Hospital") is a 50 bed tertiary care hospital
located in West Jordan, Utah. The Hospital was formerly a tax-exempt hospital,
Holy Cross Jordan Valley Hospital, which was owned by Holy Cross Health Systems
Corporation ("HCHSC"). The Hospital was acquired by HealthTrust, Inc. - The
Hospital Company ("HTI") in August 1994. In October 1994, HTI and Columbia/HCA
entered into an agreement and a Plan of Merger. The merger was approved by
both parties and effective in April 1995. In an agreement between the
Federal Trade Commission and Columbia/HCA, the Hospital is currently in the
process of being sold (see note 7). These financial statements are based on
HCHSC historical cost because the Columbia/HCA and HTI ownership of the
hospital were temporary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments, primarily
U.S. government backed securities and certificates of deposit, purchased with
an original maturity of three months or less. The Company maintains its cash
in bank deposits which, at times, may exceed federally insured limits.
ACCOUNTS RECEIVABLE AND NET PATIENT REVENUE
The Hospital has entered into agreements with third-party payors, including
U.S. government programs and managed care health plans, under which the
Hospital is paid based upon established charges, cost of providing services,
predetermined rates by diagnosis, fixed per diem rates or discounts from
established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third party payors.
Payments for services rendered to patients covered by the Medicare and Medicaid
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the programs' principles of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final
settlements under these programs are subject to administrative review and audit,
and provision is currently made for adjustments which may result during the
period in which such adjustments become known. Allowance for contractual
adjustments under these programs is netted in accounts receivable in the
accompanying balance sheet. Management is of the opinion that adequate
allowance has been provided for possible adjustments that might result
from such final settlements.
F-69
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ACCOUNTS RECEIVABLE AND NET PATIENT REVENUE, CONTINUED
Accounts receivable consists primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
Current earnings are charged with an allowance for doubtful accounts based on
experience and other circumstances that may affect the ability of payors to meet
their obligations. Accounts deemed uncollectible are charged against that
allowance.
SUPPLIES INVENTORIES
Inventories are stated at cost, determined principally by the first-in,
first-out (FIFO) method, and are not in excess of market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded on the basis of cost, if purchased, or fair
market value at the date of donation. Depreciation of property and equipment
is recognized using the straight-line method over the expected useful lives of
the assets ranging from 8 to 40 years.
INCOME TAXES
The Hospital utilizes Statement of Financial Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted marginal tax rates currently in
effect when the differences reverse. The Hospital has recorded current and
deferred income tax expense for the period subsequent to the acquisition by
HTI, determined as if it were filing a separate tax return.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at September 30, 1995:
<TABLE>
<S> <C>
(in thousands)
Buildings and improvements $ 14,765
Equipment 9,417
------------
24,182
Less accumulated depreciation (10,505)
------------
13,677
Land 497
Construction in progress 23
------------
$ 14,197
============
</TABLE>
F-70
<PAGE> 100
3. ACCRUED AND OTHER LIABILITIES:
Details of accrued and other liabilities at September 30, 1995 were as follows:
<TABLE>
<S> <C>
(in thousands)
Accrued salaries and wages $ 563
Accrued vacation 179
Property and sales tax 254
--------------
Total accrued and other liabilities $ 996
==============
</TABLE>
4. LEASES:
The Hospital leases certain land, buildings and equipment under operating
leases that expire at various dates through 2003. Rental expense, which
includes provisions for maintenance in some cases, amounted to approximately
$151,000 in 1995. Future minimum rental commitments at September 30, 1995,
under noncancelable operating leases with a remaining term of greater than one
year were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (in thousands)
<S> <C>
1996 $ 155
1997 123
1998 119
1999 114
2000 434
-------------
Total $ 945
=============
</TABLE>
F-71
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES:
The provision for income taxes consisted of the following for the period from
January 1, 1995 through September 30, 1995:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current:
Federal $ 364
State 32
-------------
Total current provision 396
Deferred:
Federal 117
State 10
-------------
Total deferred expense 127
-------------
Provision for income taxes $ 523
=============
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate of 34% $ 480
State income taxes, net of federal benefit 43
------------
Total provision for income taxes $ 523
============
</TABLE>
The components of the deferred taxes were as follows:
<TABLE>
<S> <C>
Allowance for bad debts $ 597
Excess of book over tax basis in property and equipment (899)
-------------
Net deferred tax liability (302)
Less current asset 597
-------------
Noncurrent liability $ (899)
=============
</TABLE>
F-72
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. RELATED PARTY TRANSACTIONS:
As of September 30, 1995, the Hospital has a liability due to owner of
approximately $656,000. This amount represents cash advances from its owner
used for normal operations.
The Hospital obtained its primary professional liability insurance through
premiums paid to Columbia/HCA totaling approximately $249,000 for the period
from January 1, 1995 through September 30, 1995. In addition, the Hospital has
limited its liability through the purchase of umbrella coverage from
third-party insurers.
Columbia/HCA provided certain management services in the normal course of
business to the Hospital. For 1995, the expenses allocated to the Hospital
were approximately $101,000.
7. SUBSEQUENT EVENT
In November 1995, CHC - Salt Lake City, Inc. entered into a definitive
agreement with Columbia/HCA to acquire the Hospital in exchange for Autauga
Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center,
a 72 bed skilled nursing facility, both in Prattville, Alabama, plus additional
cash consideration of approximately $7,500,000. The transaction is subject to
various third-party approvals, including that of the Federal Trade Commission.
F-73
<PAGE> 103
CHAMPION HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PRO FORMA FINANCIAL INFORMATION:
Champion - Jordan Valley and Recapitalization:
Pro Forma Combining Income Statement - For the nine months Ended September 30, 1995 . . . . . F-77
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-78
Pro Forma Combining Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . F-79
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-80
Champion Pro Forma Combined Group and Jordan Valley Hospital (Champion - Jordan Valley):
Pro Forma Combining Income Statement - For the nine months Ended September 30, 1995 . . . . . F-82
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-83
Pro Forma Combining Balance Sheet - September 30, 1995 . . . . . . . . . . . . . . . . . . . . F-84
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-85
Champion Combined Group and Salt Lake Regional Medical Center (Champion Pro Forma Combined Group):
Pro Forma Combining Income Statement - For the nine months Ended September 30, 1995 . . . . . F-88
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-89
Notes to Pro Forma Combining Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-90
Champion Combined Company and Dakota Hospital (Champion Combined Group):
Pro Forma Combining Income Statement - For the year ended December 31, 1994 . . . . . . . . . F-92
Notes to Pro Forma Combining Income Statement . . . . . . . . . . . . . . . . . . . . . . . . F-93
Champion Combined Company (Champion Healthcare Corporation, AmeriHealth, Inc.
and Psychiatric Healthcare Corporation):
Pro Forma Combining Income Statement - For the Year Ended December 31, 1994 . . . . . . . . . F-96
Notes to Pro Forma Combining Income Statement . . . . . . . . . . . . . . . . . . . . . . . . F-97
</TABLE>
F-74
<PAGE> 104
CHAMPION - JORDAN VALLEY AND RECAPITALIZATION
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following Pro Forma Combining Balance Sheet as of September 30,
1995, and the Pro Forma Combining Income Statements for the nine months ended
September 30, 1995, and the year ended December 31, 1994, illustrate the effect
of the 1995 Recapitalization Agreement (the "Recapitalization"). The Pro Forma
Combining Balance Sheet assumes that the Recapitalization occurred on September
30, 1995, and the Pro Forma Combining Income Statements assume that the
Recapitalization occurred on January 1, 1994.
Effective December 31, 1995, the Company entered into the 1995
Recapitalization Agreement with the Company's preferred shareholders and
warrant holders. The principal purpose of the Recapitization is to reduce the
complexity of the Company's capital structure and to eliminate the accrual of
future dividends on its outstanding preferred stock and the resulting impact of
such accrual on earnings per share. As a result of the Recapitalization,
common shares outstanding increased from 4,262,386 to 11,868,230. Other than
for fractional shares, no cash consideration was paid pursuant to the
Recapitaliztion.
The following is a summary of the terms of the Recapitalization:
o All Series A, A-1, and BB preferred stock were converted to shares of
common stock.
o Holders of Series C and D preferred stock waived future dividends accruing
after December 31, 1995.
o Accrued dividends on all five series of preferred stock were paid through
December 31, 1995, by issuing common stock valued at a price of $7.00 per
common share.
o Series A, A-1 and BB preferred shareholders were paid approximately 9
months and Series C and D preferred shareholders were paid approximately
twenty-one months of future dividends in common stock valued at a price of
$8.00 per common share.
o Exercise prices of one series of 680,104 warrants and two series totaling
2,447,670 warrants were reduced from $5.90 to $5.25 and $9.00 to $7.00,
respectively, during the period from December 31, 1995, until 90 days after
the Company's shareholders approve an amendment to the Certificate of
Incorporation relating to the Recapitalization.
o The Series C and D preferred stock can now be forced to convert to common
stock if the Company conducts a $25,000,000 or more public offering of
common stock at a minimum of $10 per share, as compared to the prior per
share price of $19.06.
o Series A, A-1, BB, C and D preferred shareholders agreed to vote in favor
of amendments to the Certificate of Incorporation giving effect to certain
of the Recapitalization terms at a special stockholders meeting expected to
be held in February 1996.
The closing price of the Company's common stock on December 29, 1995,
(the last trading date prior to the date of the Recapitalization) was $5.3125.
F-75
<PAGE> 105
The following table reflects by series the shares issued on
conversion, in payment of accrued dividends, and in consideration of converting
at the present time and waiving all future dividend accruals. Share amounts
have been adjusted for fractional shares.
<TABLE>
<CAPTION>
Shares for
Common Waiver of
Shares on Shares for Future Total Common
Conversion Dividends Dividends Shares Issued
---------- --------- --------- -------------
<S> <C> <C> <C> <C>
Preferred Series:
Series A 949,794 125,210 26,247 1,101,251
Series A-1 692,275 95,736 20,765 808,776
Series BB 3,155,092 685,391 139,013 3,979,496
Series C -- 192,231 141,369 333,600
Series D -- 703,332 679,389 1,382,721
--------- --------- --------- ----------
Total 4,797,161 1,801,900 1,006,783 7,605,844
========= ========= ========= ==========
</TABLE>
These Pro Forma Combining Financial Statements should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 1994, and the Company's unaudited condensed
consolidated financial statements for the nine months ended September 30,
1995, each included elsewhere herein.
The Pro Forma Combining Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transaction occurred as of the dates indicated above, nor do
they purport to indicate results which may be attained in the future.
F-76
<PAGE> 106
CHAMPION - JORDAN VALLEY AND RECAPITALIZATION
PRO FORMA COMBINING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion - Pro Forma Pro Forma
Jordan Valley Adjustments Reference Combined
------------- ----------- --------- --------
<S> <C> <C> <C> <C>
Net revenue $144,459 $144,459
Expenses:
Salaries and benefits 60,476 60,476
Supplies 19,541 19,541
Other operating expenses 38,602 38,602
Provision for bad debts 11,443 11,443
Interest 11,196 11,196
Depreciation and amortization 6,716 6,716
Equity in earnings of DHHS (6,245) (6,245)
-------- --------
Total expenses 141,729 141,729
-------- --------
Income before taxes 2,730 2,730
Provision (benefit) for income taxes 978 978
-------- --------
Income from continuing operations 1,752 1,752
Adjustments to arrive at (loss) income from
continuing operations applicable to
common stock (4,483) 4,335 (1) (148)
-------- -------- --------
(Loss) income from continuing
operations applicable to common
stock $ (2,731) $ 4,335 $ 1,604
========= ======== ========
Loss from continuing operations per
common and common equivalent share:
Primary $ (0.64) $ 0.14
========== ========
Fully diluted $ - $ 0.11
========== ========
Shares used in loss from continuing
operations per common and common
equivalent share computation
(in thousands): 6,143 (2)
Primary 4,243 1,017 (3) 11,403
========== ======== ==========
6,143(2)
-- 10,426 (4) 16,569
Fully diluted ========== ======== ==========
</TABLE>
See notes to pro forma combining financial statements (Champion - Jordan Valley
and Recapitalization).
F-77
<PAGE> 107
CHAMPION - JORDAN VALLEY AND RECAPITALIZATION
PRO FORMA COMBINING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion - Pro Forma Pro Forma
Jordan Valley Adjustments Reference Combined
------------- ----------- --------- --------
<S> <C> <C> <C> <C>
Net revenue $202,545 $202,545
Expenses:
Salaries and benefits 85,055 85,055
Supplies 27,876 27,876
Other operating expenses 57,535 57,535
Provision for bad debts 15,886 15,886
Interest 13,320 13,320
Depreciation and amortization 10,789 10,789
Equity in earnings of DHHS (5,443) (5,443)
-------- --------
Total expenses 205,018 205,018
-------- --------
(Loss) income before taxes (2,473) (2,473)
(Benefit) provision for income taxes (574) (574)
-------- --------
(Loss) income from continuing
operations (1,899) (1,899)
Adjustments to arrive at loss from continuing
operations applicable to common stock (4,998) $ 4,860 (1) (138)
-------- ------- --------
Loss from continuing operations
applicable to common stock $ (6,897) $ 4,860 $ (2,037)
======== ======= ========
Loss from continuing operations per
common and common equivalent share $ (1.63) $ (0.20)
======== ========
Shares used in loss from continuing
operations per common and common
equivalent share computation
(in thousands) 4,224 6,143 (2) 10,367
======== ======= ========
</TABLE>
See notes to pro forma combining financial statements (Champion - Jordan
Valley and Recapitalization).
F-78
<PAGE> 108
CHAMPION - JORDAN VALLEY AND RECAPITALIZATION
PRO FORMA COMBINING BALANCE SHEET
SEPTEMBER 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Champion - Pro Forma Pro Forma
Jordan Valley Adjustments Reference Combined
------------- ----------- --------- --------
<S> <C> <C> <C> <C>
ASSETS:
-------
Current assets:
Cash and cash equivalents $ 7,848 $ 7,848
Accounts receivable, net 31,109 31,109
Supplies inventory 3,993 3,993
Other 7,529 7,529
-------- --------
Total current assets 50,479 50,479
Property and equipment, net 163,100 163,100
Investment in DHHS 46,324 46,324
Other assets 24,280 24,280
------------- -------------
Total assets $ 284,183 $ 284,183
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
---------------------
Current liabilities:
Current portion of debt and
capital lease obligations $ 2,169 $ 2,169
Accounts payable 9,319 9,319
Other current liabilities 25,521 25,521
------------- -------------
Total current liabilities 37,009 37,009
Debt and capital lease obligations 161,939 161,939
Other long-term liabilities 8,935 8,935
Redeemable preferred stock 81,491 $ (35,727) (5) 45,764
Common stock 43 74 117
Additional paid-in capital 12,294 35,653 (5) 47,947
Retained earnings (deficit) (17,528) -- (17,528)
------------- -------------- ------------
Total liabilities and
shareholders' equity $ 284,183 $ -- $ 284,183
============= ============== ============
</TABLE>
See notes to pro forma combining financial statements (Champion - Jordan Valley
and Recapitalization).
F-79
<PAGE> 109
CHAMPION - JORDAN VALLEY AND RECAPITALIZATION
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
The following is a summary of the pro forma adjustments by line item.
<TABLE>
<S> <C>
Reference to Notes to
Pro Forma Financial
Statements Explanations
- --------------------- -----------------------------------------------------------------------------------
(1) To remove the historical preferred stock dividend requirements on preferred
shares outstanding during the respective periods. The remaining deductions of
$148,000 and $138,000 for the nine months ended September 30, 1995, and the
year ended December 31, 1994, represent accretion of issuance costs on Series
C and D preferred stock. The pro forma adjustment does not reflect a non-
recurring deduction to income applicable to common stock resulting from the
issuance of 1,006,783 shares of common stock in exchange for the waiver of
future dividends on all series of preferred stock. Based on the closing market
price of $5.3125 at December 29, 1995, the issuance of such shares would have
reduced income applicable to common stock by approximately $5,349,000.
(2) To reflect the additional shares of common stock to be issued pursuant to the
Recapitalization, less approximately 1,462,545 common shares attributable to
preferred stock dividends accrued subsequent to January 1, 1994.
The pro forma presentation assumes that 836,114 shares of Series D preferred
stock issued during the year ended December 31, 1994, and 51,645 shares of Series
D preferred stock issued during the nine months ended September 30, 1995, were
outstanding as of January 1, 1994, because the proceeds from such issuances were
used for acquisitions that have been included in the pro forma financial presentation
as of January 1, 1994. Additionally, the pro forma presentation does not assume the
conversion of warrants since the exercise price of such instruments, as modified by
the Recapitalization, is either in excess or substantially the same as the closing
price of the Company's common stock on December 29, 1995, the last trading date prior
to the date of the Recapitalization.
(3) To reflect the dilutive effect of stock options and warrants on primary
earnings per share using the treasury stock method.
(4) To reflect the dilutive effect of stock options, warrants and conversion of
Series C and D preferred stock on fully diluted earnings per share for the
nine months ended September 30, 1995, using the treasury stock method. Fully
diluted loss per share is not presented for the year ended December 31, 1994,
due to the anti-dilutive effect of such calculation.
(5) To reflect the pro forma issuance of 7,401,739 shares of $.01 par value common
stock at September 30, 1995, as consideration for (i) the conversion of Series
A, A-1 and BB preferred stock into 4,797,161 shares of common stock, (ii) the
pro forma issuance of 1,597,795 shares of common stock in exchange for
approximately $11,185,000 in accrued dividends outstanding as of September 30,
1995, and (iii) the issuance of 1,006,783 shares of common stock in exchange
for the waiver of future dividends on all series of preferred stock.
</TABLE>
F-80
<PAGE> 110
CHAMPION PRO FORMA GROUP AND
JORDAN VALLEY HOSPITAL
(CHAMPION - JORDAN VALLEY)
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following Pro Forma Combining Balance Sheet as of September 30, 1995,
and the Pro Forma Combining Income Statements for the nine months ended
September 30, 1995, and the year ended December 31, 1994, illustrate the effect
of the Company's proposed acquisition of Jordan Valley Hospital ("Jordan
Valley"), a 50 bed acute care hospital located in West Jordan, Utah. The Pro
Forma Combining Balance Sheet assumes that the acquisition of Jordan Valley
occurred on September 30, 1995, and the Pro Forma Combining Income Statements
assume that the acquisition of Jordan Valley occurred at January 1, 1994.
The Company entered into a definitive agreement with Columbia/HCA on
November 9, 1995, to acquire Jordan Valley in exchange for Autauga Medical
Center, an 85 bed acute care hospital, and Autauga Health Care Center, a 72 bed
skilled nursing facility, both in Prattville, Alabama, (collectively,
"Autauga") plus cash consideration of approximately $7,500,000. The Company
also agreed to pay additional cash consideration for certain net working
capital components of Jordan Valley to the extent such amounts exceed working
capital at Autauga. The purchase price was arrived at through an arms length
negotiation, and the Company expects to fund the asset purchase from borrowings
under its revolving credit agreement. The Jordan Valley acquisition will be
accounted for as a purchase transaction. The purchase price is preliminary and
subject to final negotiations of the two parties. Adjustments, if any, are not
expected to be material to the overall purchase accounting. The transaction is
also subject to various third-party approvals, including that of the Federal
Trade Commission. The Company believes that consummation of this transaction is
probable.
These Pro Forma Combining Financial Statements should be read in
conjunction with the Company's audited consolidated financial statements for
the year ended December 31, 1994, the Company's condensed consolidated
financial statements for the nine months ended September 30, 1995, and the
historical financial statements of Jordan Valley, each included elsewhere
herein.
The Pro Forma Combining Financial Statements are presented for comparative
purposes only and are not intended to be indicative of actual results had the
transaction occurred as of the dates indicated above, nor do they purport to
indicate results which may be attained in the future.
F-81
<PAGE> 111
CHAMPION PRO FORMA GROUP AND
JORDAN VALLEY HOSPITAL
PRO FORMA COMBINING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion Jordan
Pro Forma Valley Pro Forma Pro Forma
Group Hospital Adjustments Reference Combined
----- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Net revenue $139,855 $ 15,861 $ (11,257) (2) $144,459
Expenses:
Salaries and benefits 58,988 5,988 (4,500) (2) 60,476
Supplies 18,763 2,087 (1,309) (2) 19,541
Other operating expenses 37,726 3,546 (2,670) (2) 38,602
Provision for bad debts 10,512 1,762 (831) (2) 11,443
Interest 10,542 -- 654 (2)(3) 11,196
Depreciation and amortization 6,498 1,065 (847) (2)(4) 6,716
Equity in earnings of DHHS (6,245) -- -- (6,245)
-------- -------- --------- --------
Total expenses 136,784 14,448 (9,503) 141,729
-------- -------- --------- --------
Income before taxes 3,071 1,413 (1,754) 2,730
Provision (benefit) for income taxes 907 523 (452) (5) 978
-------- -------- --------- --------
Income from continuing operations 2,164 890 (1,302) 1,752
Adjustments to arrive at (loss) income from
continuing operations applicable to common
stock (4,483) -- -- (4,483)
-------- -------- --------- --------
(Loss) income from continuing operations
applicable to common stock $ (2,319) $ 890 $ (1,302) $ (2,731)
======== ======== ========= ========
Loss from continuing operations per common
and common equivalent share $ (0.55) $ (0.64)
======== ========
Shares used in loss from continuing operations
per common and common equivalent share
computation (in thousands): 4,243 4,243
======== ========
</TABLE>
See notes to pro forma combining financial statements (Champion Pro Forma Group
and Jordan Valley Hospital).
F-82
<PAGE> 112
CHAMPION PRO FORMA GROUP AND
JORDAN VALLEY HOSPITAL
PRO FORMA COMBINING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion Jordan
Pro Forma Valley Pro Forma Pro Forma
Group Hospital Adjustments Reference Combined
--------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Net revenue $195,915 $ 21,343 $ (14,713) (2) $202,545
Expenses:
Salaries and benefits 82,492 8,492 (5,929) (2) 85,055
Supplies 27,192 2,948 (2,264) (2) 27,876
Other operating expenses 55,720 5,954 (4,139) (2) 57,535
Provision for bad debts 17,220 1,391 (2,725) (2) 15,886
Interest 12,710 562 48 (2)(3) 13,320
Depreciation and amortization 9,820 1,512 (543) (2)(4) 10,789
Equity in earnings of DHHS (5,443) -- -- (5,443)
-------- -------- --------- --------
Total expenses 199,711 20,859 (15,552) 205,018
-------- -------- --------- --------
(Loss) income before taxes (3,796) 484 839 (2,473)
(Benefit) provision for income taxes (598) 317 (293) (5) (574)
-------- -------- --------- --------
(Loss) income from continuing operations (3,198) 167 1,132 (1,899)
Adjustments to arrive at loss from continuing
operations applicable to common stock (4,998) -- -- (4,998)
-------- -------- --------- --------
Loss from continuing operations applicable
to common stock $ (8,196) $ 167 $ 1,132 $ (6,897)
======== ======== ========= ========
Loss from continuing operations per common
and common equivalent share $ (1.94) $ (1.63)
======== ========
Shares used in loss from continuing operations
per common and common equivalent share
computation (in thousands): 4,224 4,224
======== ========
</TABLE>
See notes to pro forma combining financial statements (Champion Pro Forma Group
and Jordan Valley Hospital).
F-83
<PAGE> 113
CHAMPION PRO FORMA GROUP AND
JORDAN VALLEY HOSPITAL
PRO FORMA COMBINING BALANCE SHEET
SEPTEMBER 30, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Champion Jordan
Healthcare Valley Pro Forma Pro Forma
Corporation Hospital Adjustments Reference Combined
ASSETS: ----------- -------- ----------- --------- --------
------- (1)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 7,848 $ 260 $ (260) (6) $ 7,848
Accounts receivable, net 28,477 4,287 (1,655) (7) 31,109
Supplies inventory 3,715 650 (372) (7) 3,993
Other 7,646 820 (937) (7) 7,529
--------- -------- --------- --------
Total current assets 47,686 6,017 (3,224) 50,479
Property and equipment, net 155,608 14,197 (6,705) (7)(8) 163,100
Investment in DHHS 46,324 46,324
Other assets 24,442 207 (369) (7)(8) 24,280
--------- -------- --------- --------
Total assets $ 274,060 $ 20,421 $ (10,298) $284,183
========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Current portion of debt and capital
lease obligations $ 2,243 $ -- $ (74) (7) $ 2,169
Accounts payable 9,250 692 (623) (7) 9,319
Other current liabilities 24,917 2,485 (1,881) (6)(7) 25,521
--------- -------- --------- --------
Total current liabilities 36,410 3,177 (2,578) 37,009
Debt and capital lease obligations 152,415 9,524 (3)(7)(8) 161,939
Other long-term liabilities 8,935 899 (899) (6) 8,935
Redeemable preferred stock 81,491 81,491
Common stock 43 43
Additional paid-in capital 12,294 15,093 (15,093) (6) 12,294
Retained earnings (deficit) (17,528) 1,252 (1,252) (6) (17,528)
--------- -------- --------- --------
Total liabilities and
shareholders' equity $ 274,060 $ 20,421 $ (10,298) $284,183
========= ======== ========= ========
</TABLE>
See notes to pro forma combining financial statements (Champion Pro Forma Group
and Jordan Valley Hospital).
F-84
<PAGE> 114
CHAMPION PRO FORMA GROUP AND JORDAN VALLEY HOSPITAL
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
The following is a summary of the pro forma adjustments by line item.
Reference to Notes to
Pro Forma Financial
Statements Explanations
- --------------------- ---------------------------------------------------------
(1) Summarized from the Company's quarterly report on Form
10-Q.
(2) To remove the historical operating results of Autauga
for the year and nine months ended December 31, 1994,
and September 30, 1995, respectively.
(3) To record the pro forma increase in the Company's
revolving credit facility and related interest expense as
a result of its acquisition of Jordan Valley. The Pro
Forma Combining Income Statements assume the Company
increased the principal amount outstanding under its
revolving credit facility by $9,694,000 as of January 1,
1994. Such amount is comprised of $7,500,000 in cash
consideration attributable to property and equipment and
approximately $2,194,000 for certain net working capital
components, as defined. The average interest rates in
effect under the Company's existing credit facility for
the nine months ended September 30, 1995, and the year
ended December 31, 1994, were 9.21% and 7.81%,
respectively. Interest expense increased approximately
$670,000 and $758,000 on a pro forma basis for the nine
months ended September 30, 1995, and the year ended
December 31, 1994, respectively. The pro forma adjustment
for the nine months ended September 30, 1995, is net of
approximately $16,000 in interest expense attributable to
Autauga. The pro forma adjustment for the year ended
December 31, 1994, is net of approximately $148,000 in
interest expense attributable to Autauga and
approximately $562,000 in interest expense attributable
to Jordan Valley debt extinguished in fiscal 1994.
(4) To adjust depreciation expense based on the revaluation
of Jordan Valley's depreciable assets in connection with
the allocated purchase price. The acquired assets are
estimated to have an average remaining useful life of
approximately 17 years based on management's assumption
that an acute care hospital's assets consist of 50%
buildings and 50% equipment with a 30 year life and a 5
year life, respectively. Based on this preliminary
allocation, depreciation expense increased approximately
$308,000 and $319,000 on a pro forma basis for the nine
months ended September 30, 1995, and the year ended
December 31, 1994, respectively. The pro forma
adjustments for the nine months ended September 30, 1995,
and the year ended December 31, 1994, are net of
approximately $1,155,000 and $862,000, respectively, in
depreciation and amortization expense attributable to
Autauga.
(5) To reflect the pro forma provision for income taxes due
to the inclusion of the acquired operations. For the
purposes of the pro forma provision for income taxes,
loss carryovers of the Company can be utilized to reduce
the provision for income taxes.
(6) To remove Jordan Valley assets not acquired, liabilities
not assumed and the retained earnings of seller.
(7) To remove Autauga assets and liabilities exchanged as
part of consideration paid for Jordan Valley.
F-85
<PAGE> 115
CHAMPION PRO FORMA GROUP AND JORDAN VALLEY HOSPITAL
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
Reference to Notes to
Pro Forma Financial
Statements Explanations
- --------------------- ---------------------------------------------------------
(8) To record the acquisition of Jordan Valley using the
purchase method of accounting, including the adjustment
of Jordan Valley's balance sheet to reflect the estimated
fair market value of property and equipment acquired in
excess of predecessor's cost. The purchase price
allocation reflected in the pro forma financial
statements is based upon the best information currently
available without a final independent appraisal of the
Jordan Valley facility. For the purpose of allocating net
acquisition costs among the various assets acquired, the
Company has tentatively allocated excess acquisition cost
over the predecessor entity's carrying value of the
acquired assets to property and equipment. It is
management's intention to more fully evaluate the net
assets acquired and, as a result, the allocation of
acquisition cost among the acquired assets may change.
Management does not expect the final allocation of
acquisition cost to be materially different from that
assumed in the Pro Forma Combining Financial Statements.
The following table summarizes the calculation of the
preliminary purchase price allocation:
Total cash consideration (see Note 3) $ 9,694
Less working capital acquired (2,194)
--------
Cash consideration attributable to
property and equipment 7,500
Plus basis of Autauga net long term assets
exchanged for Jordan Valley 23,840
--------
Total estimated purchase price 31,340
Less: Predecessor's net property and
equipment (14,197)
Predecessor's other long term
assets (207)
--------
Purchase price allocated to property and
equipment in excess of predecessor cost 16,936
Less: Autauga property and equipment
transferred to seller (23,641)
--------
Net pro forma adjustment $ (6,705)
========
F-86
<PAGE> 116
CHAMPION COMBINED GROUP AND
SALT LAKE REGIONAL MEDICAL CENTER
(CHAMPION PRO FORMA GROUP)
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following Pro Forma Combining Income Statements for the nine months
ended September 30, 1995, and the year ended December 31, 1994, illustrate the
effect of the Company's acquisition of Salt Lake Regional Medical Center
("SLRMC") on April 13, 1995. The Pro Forma Combining Income Statements assume
that the acquisition of SLRMC occurred at January 1, 1994.
SLRMC is comprised of a 200 bed tertiary hospital and five associated
clinics in Salt Lake City, Utah. The Company, through a wholly owned
subsidiary, acquired SLRMC from HealthTrust, Inc.-The Hospital Company ("HTI")
pursuant to an Asset Purchase Agreement, as amended, dated January 25, 1995.
SLRMC was formerly a not-for-profit hospital acquired by HTI in August 1994,
and was sold pursuant to a consent decree and settlement agreement between HTI
and the Federal Trade Commission. Consummation of the sale had been subject to
approval by the Federal Trade Commission, which was received on April 7, 1995.
The Company paid total consideration of approximately $58,015,000, which
consisted of $56,248,000 in cash and additional consideration due of
approximately $1,767,000. Cash consideration included approximately $11,521,000
for certain working capital components and reimbursement of certain capital
expenditures made previously by the seller. The purchase price was arrived at
through an arms length negotiation, and the Company funded the asset purchase
from available cash and approximately $30,000,000 in borrowings under a former
revolving credit facility, which the Company subsequently repaid with proceeds
from the issuance of senior subordinated notes. The SLRMC acquisition was
accounted for as a purchase transaction with the purchase price allocated
preliminarily to the fair value of acquired net working capital and property
and equipment. Adjustments, if any, are not expected to be material to the
overall purchase accounting.
These Pro Forma Combining Income Statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
December 31, 1994, and the Company's unaudited condensed consolidated financial
statements for the nine months ended September 30, 1995, each included
elsewhere herein, and in conjunction with the historical financial statements
of SLRMC included in the Company's Report on Form 8-K/A, as amended, dated
April 13, 1995.
The Pro Forma Combining Income Statements are presented for comparative
purposes only and are not intended to be indicative of actual results had the
transaction occurred as of the dates indicated above, nor do they purport to
indicate results which may be attained in the future.
F-87
<PAGE> 117
CHAMPION COMBINED GROUP AND
SALT LAKE REGIONAL MEDICAL CENTER
PRO FORMA COMBINING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion
Healthcare Pro Forma Pro Forma
Corporation SLRMC Adjustments Reference Combined
----------- ----- ----------- --------- --------
(1) 3 months & 13
days
<S> <C> <C> <C> <C> <C>
Net revenue $ 117,835 $ 22,438 $ (418) (2) $139,855
Expenses:
Salaries and benefits 50,898 8,090 58,988
Supplies 14,751 4,012 18,763
Other operating expenses 31,819 5,907 37,726
Provision for bad debts 8,985 1,527 10,512
Interest 9,406 45 1,091 (3) 10,542
Depreciation and amortization 5,971 1,372 (845) (4) 6,498
Equity in earnings of DHHS (6,245) -- -- (6,245)
--------- -------- ------ --------
Total expenses 115,585 20,953 246 136,784
--------- -------- ------ --------
Income before taxes 2,250 1,485 (664) 3,071
Provision (benefit) for income taxes 833 557 (483) (5) 907
--------- -------- ------ --------
Income from continuing operations 1,417 928 (181) 2,164
Adjustments to arrive at (loss) income from
continuing operations applicable to common
stock (4,483) -- -- (4,483)
--------- -------- ------ --------
(Loss) income from continuing operations
applicable to common stock $ (3,066) $ 928 $ (181) $ (2,319)
========= ======== ====== ========
Loss from continuing operations per
common and common equivalent share $ (.73) $ (0.55)
========= ========
Shares used in loss from continuing operations
per common and common equivalent share
computation (in thousands): 4,243 4,243
========= ========
</TABLE>
See notes to pro forma combining income statements (Champion Combined Group and
Salt Lake Regional Medical Center).
F-88
<PAGE> 118
CHAMPION COMBINED GROUP AND
SALT LAKE REGIONAL MEDICAL CENTER
PRO FORMA COMBINING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion
Combined Pro Forma Pro Forma
Group SLRMC Adjustments Reference Combined
----- ----- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Net revenue $118,344 $ 83,836 $ (881) (2) $195,915
(5,384) (6)
Expenses:
Salaries and benefits 51,416 34,206 (3,130) (6) 82,492
Supplies 13,078 14,488 (374) (6) 27,192
Other operating expenses 33,510 24,327 (2,117) (6) 55,720
Provision for bad debts 13,701 3,557 (38) (6) 17,220
Interest 9,153 1,023 2,534 (3)(6) 12,710
Depreciation and amortization 8,117 4,552 (2,849) (4)(6) 9,820
Equity in earnings of DHHS (5,443) -- -- (5,443)
-------- -------- ------- --------
Total expenses 123,532 82,153 (5,974) 199,711
-------- -------- ------- --------
(Loss) income before taxes (5,188) 1,683 (291) (3,796)
(Benefit) provision for income taxes (682) 632 (548) (5) (598)
-------- -------- ------- --------
(Loss) income from continuing operations (4,506) 1,051 257 (3,198)
Adjustments to arrive at loss from continuing
operations applicable to common stock (4,998) -- -- (4,998)
-------- -------- ------- --------
Loss from continuing operations applicable
to common stock $ (9,504) $ 1,051 $ 257 $ (8,196)
======== ======== ======= ========
Loss from continuing operations per common
and common equivalent share $ (2.25) $ (1.94)
======== ========
Shares used in loss from continuing operations
per common and common equivalent share
computation (in thousands): 4,224 4,224
======== ========
</TABLE>
See notes to pro forma combining income statements (Champion Combined Group and
Salt Lake Regional Medical Center).
F-89
<PAGE> 119
CHAMPION COMBINED GROUP AND SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO PRO FORMA COMBINING INCOME STATEMENTS
The following is a summary of the pro forma adjustments by line item.
Reference to Notes to
Pro Forma Income
Statements Explanations
- --------------------- ---------------------------------------------------------
(1) Summarized from the Company's quarterly report on Form
10-Q.
(2) To reflect a decrease in interest earnings for the pro
forma decrease in cash. This adjustment assumes that
approximately $26,248,000 of acquisition costs were paid
from available cash at January 1, 1994. Interest earnings
are computed at 5.63% and 3.35% for the nine months ended
September 30, 1995, and the year ended December 31, 1994,
respectively. Such percentages represent the Company's
average investment rate for the respective periods.
(3) To record interest expense on the pro forma increase in
the Company's subordinated debentures and notes payable
as a result of its acquisition of SLRMC. The Pro Forma
Combining Income Statements assume the Company issued
$30,000,000 principal amount of subordinated debentures
as of January 1, 1994, at an effective annual interest
rate of 11.35%. The Company anticipates that the
additional consideration due of approximately $1,767,000
will be paid in the form of a note payable bearing
interest at an effective annual rate of 10%. The Pro
Forma Combining Income Statements assume that such note
was issued as of January 1, 1994. Interest expense with
respect to the above increased approximately $1,091,000
and $3,503,000 on a pro forma basis for the nine months
ended September 30, 1995, and the year ended December 31,
1994, respectively. The pro forma adjustment for the year
ended December 31, 1994, is net of approximately $969,000
in interest expense on debt extinguished prior to the
Company's acquisition of SLRMC (see note 6).
(4) To adjust depreciation expense based on the revaluation
of SLRMC's depreciable assets in connection with the
allocated purchase price. The acquired assets are
estimated to have an average remaining useful life of
approximately 25 years based on a preliminary appraisal
that the hospital's depreciable assets consist of
approximately 81% buildings with a 30 year life and 19%
equipment with a five year life. Based on this
preliminary allocation, depreciation expense decreased
approximately $845,000 and $2,685,000 on a pro forma
basis for the nine months ended September 30, 1995, and
the year ended December 31, 1994, respectively. The pro
forma adjustment for the year ended December 31, 1994, is
net of approximately $164,000 in depreciation expense
related to operations not acquired by HTI in connection
with its acquisition of SLRMC in August 1994 (see
note 6).
(5) To reflect the pro forma provision for income taxes due
to the inclusion of the acquired operations. For the
purposes of the pro forma provision for income taxes,
loss carryovers of the Company can be utilized to reduce
the provision for income taxes.
(6) To remove the historical operating results for the period
January 1, 1994, to August 15, 1994, associated with
operations not acquired by HTI in connection with its
acquisition of SLRMC in August 1994.
F-90
<PAGE> 120
PRO FORMA COMBINED SELECTED FINANCIAL DATA
CHAMPION COMBINED COMPANY AND DAKOTA HOSPITAL
(COMBINED GROUP)
PRO FORMA COMBINING INCOME STATEMENT
The following Pro Forma Combining Income Statement for the year ended
December 31, 1994, illustrates the effect of the formation of the partnership
(the "Partnership") between the wholly owned subsidiary of the Company that
owned Heartland Medical Center ("HMC"), a 142 bed general acute care hospital
in Fargo, North Dakota, and Dakota Hospital ("Dakota"), a not-for-profit
corporation that owned a 199 bed general acute care hospital also in Fargo,
North Dakota. The Partnership is operated as Dakota Heartland Health System
("DHHS"). The Pro Forma Combining Income Statement assumes the Partnership was
entered into on January 1, 1994.
In connection with the formation of the Partnership, the Company and Dakota
contributed their respective hospitals both debt and lien free (except for
capitalized leases), and the Company contributed an additional $20,000,000 in
cash, each in exchange for 50% ownership in the Partnership. In addition, each
partner contributed $2,000,000 in cash to the working capital of the
Partnership. A $20,000,000 special distribution was made to Dakota after
capitalization of the Partnership in accordance with the terms of the
Partnership agreement. The ownership interest acquired by each partner was
based on the value of the assets contributed to the Partnership.
Also on December 21, 1994, the Company entered into an operating
agreement with the Partnership and Dakota to manage the combined operations of
the two hospitals. Under the terms of the Partnership agreement, the Company is
obligated to advance funds to the Partnership to cover any and all operating
deficits of the Partnership. The Company will receive 55% of the net income and
distributable cash flow ("DCF") of the Partnership until such time as it has
recovered on a cumulative basis an additional $10,000,000 of DCF in the form of
an "excess" distribution. The Company accounts for its investment in DHHS under
the equity method. DHHS began operations on December 31, 1994.
The Pro Forma Combining Income Statement should be read in conjunction the
Company's consolidated financial statements for the year ended December 31,
1994, and the Company's unaudited condensed consolidated financial statements
for the nine months ended September 30, 1995, each included elsewhere herein,
and in conjunction with the historical financial statements of Dakota,
included in the Company's Report on Form 8-K/A, as amended, dated December 21,
1994.
The Pro Forma Combining Income Statement is presented for comparative
purposes only and is not intended to be indicative of actual results had the
transaction occurred as of January 1, 1994, nor does the Pro Forma Combining
Income Statement purport to indicate results which may be attained in the
future.
F-91
<PAGE> 121
CHAMPION COMBINED COMPANY AND DAKOTA HOSPITAL
PRO FORMA COMBINING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion Pro Forma
Combined Pro Forma Combined
Company Adjustments Reference Group
------- ----------- --------- -----
<S> <C> <C> <C> <C>
Net revenue $ 159,339 $ (40,995) (1)(2) $118,344
Expenses:
Salaries and benefits 65,812 (14,396) (2) 51,416
Supplies 18,169 (5,091) (2) 13,078
Other operating expenses 44,818 (11,308) (2) 33,510
Provision for bad debts 14,919 (1,218) (2) 13,701
Interest 9,190 (37) (2) 9,153
Depreciation and amortization 8,845 (728) (2) 8,117
Equity in earnings of DHHS -- (5,443) (3) (5,443)
--------- --------- --------
Total expenses 161,753 (38,221) 123,532
--------- --------- --------
Loss before taxes (2,414) (2,774) (5,188)
Benefit for income taxes (488) (194) (4) (682)
--------- --------- --------
Loss from continuing operations (1,926) (2,580) (4,506)
Adjustments to arrive at loss from continuing
operations applicable to common stock (4,998) -- (4,998)
--------- --------- --------
Loss from continuing operations applicable
to common stock $ (6,924) $ (2,580) $ (9,504)
========= ========= ========
Loss from continuing operations per common
and common equivalent share $ ( 1.64) $ (2.25)
========= ========
Shares used in loss from continuing operations
per common and common equivalent share
computation (in thousands): 4,224 4,224
========= ========
</TABLE>
See notes to pro forma combining income statement (Champion Combined Company
and Dakota Hospital).
F-92
<PAGE> 122
CHAMPION COMBINED COMPANY AND DAKOTA HOSPITAL
NOTES TO PRO FORMA COMBINING INCOME STATEMENT
The following is a summary of the pro forma adjustments by line item.
Reference to Notes to
Pro Forma Income
Statement Explanations
- --------------------- ---------------------------------------------------------
(1) To reflect a decrease in interest earnings for the pro
forma decrease in cash. This adjustment assumes the
Company's $20,000,000 capital contribution to the
Partnership and its $2,000,000 contribution to
Partnership working capital were made from available cash
at January 1, 1994. Interest earnings are computed at
3.35%, the Company's average investment rate for the
period.
(2) To remove the historical operating results of HMC for
the year ended December 31, 1994. HMC was contributed
to the Partnership effective December 31, 1994.
(3) To record the Company's equity in the pro forma earnings
of DHHS for the year ended December 31, 1994, calculated
as follows:
<TABLE>
<CAPTION>
December 31, 1994
-----------------
<S> <C> <C>
Dakota operating loss $ (210)
Pro forma adjustments to Dakota
operating loss (a) 2,627
-------
Dakota pro forma operating income
attributable to the Partnership 2,417
HMC operating income 7,286
Pro forma adjustments to HMC operating
income - interest associated with debt
not contributed to Partnership 194
-------
HMC pro forma operating income
attributable to the Partnership 7,480
-------
Pro forma Partnership operating income 9,897
Company's equity participation in the
pro forma earnings of DHHS 55%
-------
Company's equity in the pro forma
earnings of DHHS $ 5,443
=======
</TABLE>
(a) Pro forma adjustments to Dakota's pre-tax earnings
consist of approximately $2,481,000 in interest
expense associated with debt not contributed to the
Partnership and a loss of approximately $146,000 on
investments not contributed to the Partnership.
(4) To reflect the pro forma benefit for income taxes
resulting from the allocation of pro forma operating
income to the Dakota partner.
F-93
<PAGE> 123
PRO FORMA COMBINED SELECTED FINANCIAL DATA
CHAMPION HEALTHCARE CORPORATION, AMERIHEALTH, INC.
AND PSYCHIATRIC HEALTHCARE CORPORATION
(COMBINED COMPANY)
PRO FORMA COMBINING INCOME STATEMENT
The following Pro Forma Combining Income Statement for the year ended
December 31, 1994, illustrates the effect of the merger ("Merger") of Champion
Healthcare Corporation, a Texas Corporation, ("Old Champion") with AmeriHealth,
Inc. on December 6, 1994, and the Company's acquisition ("Acquisition") of
Psychiatric Healthcare Corporation ("PHC") on October 21, 1994. The Pro Forma
Combining Income Statement assumes the Merger and Acquisition occurred on
January 1, 1994.
MERGER WITH AMERIHEALTH, INC.
In connection with the consummation of the Merger, holders of the
AmeriHealth ("AHH") Common Stock received one share of Combined Company Common
Stock for each 5.70358 shares of AHH Common Stock and cash in lieu of
fractional shares. Holders of AHH Series B Preferred Stock not converted into
AHH Common Stock received cash equal to the redemption price of such shares
plus accrued dividends. Such shares were then canceled in connection with the
Merger. Also, in connection with the Merger, the Combined Company issued
shares of the Combined Company Common Stock and issued five new series of
preferred stock of the Combined Company to the Old Champion shareholders in
exchange for their Old Champion Common and Preferred Stock.
AHH has also declared dividends on AHH Common Stock and AHH Series B
Preferred Stock as follows: (a) to holders of record of AHH Common Stock at the
close of business on the business day immediately preceding the date of
consummation of the Merger in the amount of 8 1/2 cents ($0.085) per share; and
(b) to holders of record of AHH Series B Preferred Stock immediately prior to
consummation of the Merger in the amount of $21.72 per share. The foregoing
dividend payments were conditioned upon consummation of the Merger.
The Merger was accounted for as a purchase transaction. For accounting
purposes, the Company was deemed to be the surviving entity of the Merger with
the name of the Combined Company changed to Champion Healthcare Corporation, a
Delaware Corporation.
ACQUISITION OF PSYCHIATRIC HEALTHCARE CORPORATION
The Company acquired the two operating psychiatric hospitals and one closed
psychiatric hospital of PHC by merger of PHC with and into a wholly-owned
subsidiary of the Company for a net purchase price of approximately
$24,600,000, which included the assumption of approximately $14,880,000 in
long-term debt and contingent consideration of up to $2,000,000 in additional
preferred stock, notes and detachable warrants. The Company paid no cash (other
than fractional share amounts) to the PHC shareholders, instead issuing a
combination of Company Series D Preferred Stock and 11% Senior Subordinated
Notes with detachable Warrants. To date, the Company has issued approximately
$1,440,000 in additional preferred stock, notes and detachable warrants as
required under the PHC purchase agreement. The remaining contingent
consideration of approximately $560,000 was issued in the fourth quarter of
1995. The PHC acquisition was accounted for as a purchase transaction.
F-94
<PAGE> 124
The Pro Forma Combining Income Statement should be read in conjunction with
the Company's consolidated financial statements for the year ended December 31,
1994, and the Company's unaudited condensed consolidated financial statements
for the nine months ended September 30, 1995, each included elsewhere herein,
and the historical financial statements of AHH and PHC included in the
definitive Proxy Statement of AmeriHealth, Inc., dated November 11, 1994 and
the Company's Report on Form 8-K/A, as amended, dated December 6, 1994,
The Pro Forma Combining Income Statement is presented for comparative
purposes only and is not intended to be indicative of actual results had the
transaction occurred as of December 31, 1994, nor does the Pro Forma Combining
Income Statement purport to indicate results which may be attained in the
future.
F-95
<PAGE> 125
CHAMPION HEALTHCARE CORPORATION, AMERIHEALTH, INC. AND
PSYCHIATRIC HEALTHCARE CORPORATION
PRO FORMA COMBINING INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(Thousands, except per share data)
<TABLE>
<CAPTION>
Champion Pro Forma
Healthcare Pro Forma Combined
Corporation AmeriHealth Psychiatric Adjustments Ref. Company
----------- ----------- ----------- ----------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $ 104,193 $ 36,953 $ 18,442 $ (249) (1) $159,339
Expenses:
Salaries and benefits 41,042 16,558 8,212 65,812
Supplies 12,744 5,425 -- 18,169
Other operating expenses 29,767 11,025 5,377 (1,351) (2) 44,818
Provision for bad debts 7,812 4,163 2,944 14,919
Interest 6,375 1,666 1,205 (56) (3) 9,190
Depreciation and amortization 4,010 1,909 869 2,057 (4) 8,845
--------- -------- -------- -------- --------
Total expenses 101,750 40,746 18,607 650 161,753
--------- -------- -------- -------- --------
Income (loss) before taxes 2,443 (3,793) (165) (899) (2,414)
Provision (benefit) for income taxes 200 (948) ( 78) 338 (5) (488)
--------- -------- -------- -------- --------
Income (loss) from continuing operations 2,243 (2,845) (87) (1,237) (1,926)
Adjustments to arrive at loss from continuing
operations applicable to common stock (4,710) (4) (286) 2 (6) (4,998)
--------- -------- -------- -------- --------
Loss from continuing operations
applicable to common stock $ (2,467) $ (2,849) $ (373) $ (1,235) $ (6,924)
========= ======== ======== ======== ========
Loss per common and common equivalent
share $ (1.69) $ (0.20) $ (1.64)
========= ======== ========
Shares used in loss from continuing
operations per common and common
equivalent share computation (in
thousands): 1,457 14,449 (11,682) (7) 4,224
========= ======== ======== ========
</TABLE>
See notes to pro forma combining income statement (Champion Healthcare
Corporation, AmeriHealth, Inc. and Psychiatric Healthcare Corporation).
F-96
<PAGE> 126
CHAMPION HEALTHCARE CORPORATION, AMERIHEALTH, INC. AND
PSYCHIATRIC HEALTHCARE CORPORATION NOTES
TO PRO FORMA COMBINING INCOME STATEMENT
The following is a summary of the pro forma adjustments by line item.
Reference to Notes to
Pro Forma Income
Statement Explanations
- --------------------- ---------------------------------------------------------
(1) To reflect a decrease in interest earnings for the pro
forma decrease in cash. This adjustment assumes a
$8,516,000 loan held by the Resolution Trust Corporation
(the "RTC Loan") was retired from available cash at
January 1, 1994, net of a discount of approximately
$384,000 obtained by the Company concurrent with the
Merger. Interest earnings are computed at 3.35%, the
Company's average investment rate for the period.
(2) Reduce other operating expenses for expenses incurred
by AHH as a result of the merger.
(3) To reduce interest expense by approximately $650,000
relating to the assumed retirement of debt as discussed
in the following paragraph, net of approximately $594,000
of additional interest expense on the 11% Senior
Subordinated Notes issued in the acquisition of PHC.
In connection with the Company's merger with AHH, the Pro
Forma Combining Income Statement for the year ended
December 31, 1994, assumes the Company retired the RTC
Loan ($8,516,000 principle amount net of a discount of
approximately $384,000) from available funds and assumed
approximately $10,000,000 principal amount of a Loan held
by Wilmington Savings Fund Society, F.S.B. at an interest
rate of prime plus 1.5% through September 1994 and prime
plus 2.0% thereafter, or an average of approximately 8.8%
for the year ended December 31, 1994. Funds to retire the
debt were available as a result of the Company's December
31, 1993, issuance of Series D Preferred Stock and
related 11% Senior Subordinated Notes.
(4) To adjust depreciation expense based upon the step up in
basis for the depreciable assets of AHH and PHC. The
allocation with respect to PHC was based on an
independent appraisal obtained by the Company which
resulted in the allocation of approximately $8,800,000 of
excess purchase price to goodwill. The pro forma
combining income statement assumes goodwill is amortized
over a 20 year period. The acquired assets of AHH are
estimated to have an average remaining useful life of
approximately 17 years based on management's assumption
that an acute care hospital's assets consist of 50%
buildings and 50% equipment with a 30 year life and
a 5 year life, respectively.
(5) To reduce income tax benefit associated with certain
merger related expenses incurred by the acquired
entities.
(6) December 31,
1994
----
Dividend requirements of the Company
Series D Preferred stock issued as
acquisition consideration $ (288)
Reversal of dividend requirements on
AHH's Series B Preferred Stock 4
Reversal of dividend requirements on
PHC's Series A and Series B redeemable
convertible Preferred Stock 286
-------
$ 2
=======
F-97
<PAGE> 127
CHAMPION HEALTHCARE CORPORATION AND AMERIHEALTH, INC.
NOTES TO PRO FORMA COMBINING INCOME STATEMENT
Reference to Notes to
Pro Forma Income
Statement Explanations
- --------------------- ---------------------------------------------------------
(7) To adjust common and common equivalent shares used to
calculate income (loss) from continuing operations per
share. The pro forma adjustment reflects the
following events:
(a) The exchange of each 5.70358 shares of AHH common
and common equivalent shares into one share of the
Combined Company Common Stock. At December 6, 1994,
AHH's common and common equivalent shares would have
decreased from 14,449,000 shares to 2,533,000 common
and common equivalent shares of the Combined Company
Common Stock.
(b) The Company purchased 880,000 shares of the AHH's
Common Stock in a private transaction. In connection
with the Merger, these shares were retired,
resulting in a reduction of 154,000 shares of
Combined Company Common Stock that would have
otherwise been issued.
The common shareholders of Old Champion received one
share of Combined Company Common Stock for each share of
Old Champion Common Stock outstanding prior to the
merger. The preferred shareholders of Old Champion
received one share of Combined Company Preferred Stock
for each share of Old Champion Preferred Stock
outstanding prior to the merger. Therefore, the Company's
common equivalent shares at December 31, 1994, are
not adjusted as a result of the Merger.
The following table summarizes the adjustments to shares
used in the calculation of loss from continuing
operations per common and common equivalent share:
December 31,
1994
-----------
Adjustment to AHH's common and common
equivalent shares for the exchange
ratio (a) 11,916
AHH common shares canceled (b) (726)
Dilutive effect of shares of (i) AHH Common
Stock issued in exchange for shares of AHH
Series B Preferred Stock during the period
and (ii) Combined Company common stock
issued in connection with the Merger. 492
------
11,682
======
F-98
<PAGE> 128
December 29, 1995
Special Committee of the Board of Directors
Champion Healthcare Corporation
14340 Torrey Chase
Suite 320
Houston, TX 77014
Gentlemen:
We understand that Champion Healthcare Corporation, a Delaware
corporation ("Champion" or the "Company"), intends, subject to certain
requirements, to enter into a recapitalization agreement substantially in the
form delivered to us on December 21, 1995 ( the "Recapitalization Agreement")
with the holders of the Series A, A-1, BB, C and D preferred stock (the
"Preferred Stock") and Series BB, D and E warrants (the "Warrants") pursuant to
which, among other things: (a) the holders of Series A, A-1 and BB preferred
stock will convert all of their holdings into Common Stock; (b) the holders of
the Preferred Stock will receive cumulative dividends through December 31, 1995
and certain additional amounts of Common Stock in exchange for the actions
taken and the elimination of all dividend requirements on the Series C and D
Preferred Stock, and (c) the holders of the Warrants will, for the period from
December 31, 1995 through the 90th day following adoption of the amendment to
the Certificate of Incorporation, have the right to exercise the Warrants at
reduced exercise prices (collectively, the "Recapitalization").
The Recapitalization Agreement is expected to be executed by the
Company on or before December 31, 1995. The amendment to the Company's
Certificate of Incorporation is expected to be considered by the stockholders
of the Company at a special meeting of stockholders and to be approved on or
shortly after the date of such meeting.
You have asked for our opinion as to whether the Recapitalization is
fair to the current holders of Champion Common Stock from a financial point of
view.
Jefferies & Company, Inc. ("Jefferies"), as part of its investment
banking business, is regularly engaged in the evaluation of capital structures
and the rendering of advice in financial restructurings and recapitalizations.
In addition, Jefferies performs the valuations of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, financial restructurings and other
financial services. As you are aware, Jefferies will receive a fee for
providing this opinion in connection with the Recapitalization.
ATTACHMENT I
<PAGE> 129
Page 2
In connection with our opinion, we have reviewed a draft copy of the
Recapitalization Agreement and other transaction documents (draft dated
December 21, 1995) and related exhibits thereto and certain financial and other
information that was publicly available or furnished to us by Champion,
including the Company's Annual Report to Shareholders and Annual Report on Form
10-K for the fiscal year ended on December 31, 1994, and its Quarterly Reports
on Form 10-Q for the periods ended March 31, June 30, and September 30, 1995,
and certain internal financial analyses, financial forecasts, reports and other
information prepared by management of Champion. We have also discussed with
representatives of management of Champion the business, properties and
prospects of Champion and undertaken other reviews, analyses and inquiries
relating to Champion, which we deemed relevant to our opinion.
In our review and analysis and in rendering this opinion, we have
relied upon, and have not independently verified, the accuracy, completeness
and fair presentation of all financial and other information (including
financial projections and estimates) that were provided to us by or on behalf
of Champion, or which were publicly available, and this opinion is conditioned
upon such information (whether written or oral) being complete, accurate and
fair in all material respects. With regard to the full-year historical
financial information, we have relied upon the opinion, issued by Champion's
independent public accountants, in connection with the Company's audited
financial statements. With respect to the above noted projected financial
information, we have assumed with your permission and without independent
verification, that such information has been reasonably prepared on bases
reasonably reflecting management's best currently available estimates and good
faith judgments as to the future performance of Champion and that Champion will
perform in accordance with such projections for all periods specified therein.
We have not made an independent evaluation or appraisal or conducted a physical
inspection of any of the assets of Champion, nor have we been furnished with
any such appraisals. Our opinion is based on economic, monetary, political,
market, and other conditions existing and which can be evaluated as of the date
of this opinion; however, such conditions are subject to rapid and
unpredictable change.
Without limiting the foregoing, we expressly disclaim any undertaking
or obligation to advise any person of any change in any fact or matter
affecting our opinion of which we become aware after the date hereof.
ATTACHMENT I
<PAGE> 130
Page 3
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others: (i) the terms and
business and financial aspects of the Recapitalization, (ii) the Company's
current capital structure and its need for growth capital; (iii) the historical
and current markets for the Company's Common Stock (including float, liquidity
and sell side analytical research coverage) and for other securities of certain
companies believed by Jefferies to be comparable to the Company; (iv) the
financial impact of the Recapitalization on the holders of the Company's Common
Stock; (v) certain of the Company's operating and financial information,
including projections provided by management relating to the Company's business
and the Company's prospects; (vi) publicly available financial data and stock
market performance data of other public companies which Jefferies deemed
generally comparable to the Company; (vii) the potential effect of such
Preferred Stock redemption requirements on the Company's ability to obtain bank
or other debt financing.
Based upon and subject to the foregoing, and based upon such other
matters as we considered relevant, it is our opinion as investment bankers
that, as of the date hereof, the recapitalization is fair, from a financial
point of view, to the current holders of Champion Common Stock.
It is understood that this letter is for the use of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent. Without limiting the foregoing, this letter does not
constitute a recommendation to any stockholder of Champion as to how such
stockholder should vote with respect to the Recapitalization. Jefferies
reserves the right to approve all references to Jefferies and this opinion that
may appear in any proxy materials that may be filed with the Securities and
Exchange Commission in connection with the Recapitalization.
Sincerely,
JEFFERIES & COMPANY, INC.
By /s/ JEFFRY K. WEINHUFF
-------------------------------
Jeffry K. Weinhuff
Executive Vice President
Director of Corporate Finance
ATTACHMENT I
<PAGE> 131
RESTATED CERTIFICATE OF INCORPORATION
OF
CHAMPION HEALTHCARE CORPORATION
================================================================================
PURSUANT TO SECTIONS 242 AND 245 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
================================================================================
CHAMPION HEALTHCARE CORPORATION, a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Champion Healthcare
Corporation (the "Corporation"). The Corporation was originally incorporated
under the name AmeriHealth, Inc. The original Certificate of Incorporation of
the Corporation was filed with the Secretary of State of the State of Delaware
on November 27, 1985.
2. This Restated Certificate of Incorporation restates
and integrates and further amends the Certificate of Incorporation of the
Corporation and has been adopted and approved in accordance with Sections 242
and 245 of the General Corporation Law of the State of Delaware.
3. The text of the Certificate of Incorporation as
heretofore amended or supplemented is hereby amended and restated to read in
its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is:
CHAMPION HEALTHCARE CORPORATION
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the Corporation in the State of
Delaware is located at Corporation Trust Center, 1209 Orange Street, in the
city of Wilmington, County of New Castle, 19801. The name of the registered
agent of the Corporation at such address is The Corporation Trust Company.
ARTICLE III
CORPORATE PURPOSE
-1- ATTACHMENT II
<PAGE> 132
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may now or hereafter be organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
1. SHARES AND CLASSES AUTHORIZED. The total number of shares of
all classes of capital stock which the Corporation shall have authority to
issue is 27,700,000 shares, which shall include:
(a) 25,000,000 shares of common stock of the par value of $.01
each (hereinafter referred to as "Common Stock"); and
(b) 2,700,000 shares of Preferred Stock, which shall be
divided into the following two series:
(i) 500,000 shares of the par value of $.01
each, which are to be designated Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock"); and
(ii) 2,200,000 shares of the par value of $.01
each, which are to be designated Series D Cumulative Convertible Preferred
Stock (the "Series D Preferred Stock").
The Series C Preferred Stock and Series D Preferred Stock are sometimes
collectively referred to herein as the "Preferred Stock". The voting powers,
designations, preferences, and relative, participating, optional or other
special rights and qualifications, limitations or restrictions in respect of
the shares of each series of Preferred Stock of the Corporation are as follows:
1.A. RANKING OF PREFERENCE OF PREFERRED STOCK. Without
limiting any other provision herein, the Series C Preferred Stock and Series D
Preferred Stock shall have the preferences to and the benefit of the
restrictions on each other series of Preferred Stock and the Common Stock as
to (a) Dividends as set forth in Paragraph 2, (b) Redemption as set forth in
Paragraph 3, (c) Liquidation as set forth in Paragraph 4, and (d) Voting as set
forth in Paragraphs 6 and 7.
1.B. DEFINITIONS. The following terms shall have the
following definitions or shall be subject to the following rules of
construction.
A. "DGCL" means the General Corporation Law of
the State of Delaware.
B. "Board of Directors" means the Board of
Directors of the Corporation.
C. "Change in Control Event" shall mean (i) the
acquisition in one or more transactions not
involving a public offering of Common Stock
by any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act)
together with any Affiliate of such Person or
member of such group of beneficial ownership,
direct or indirect, of securities of the
Corporation representing 50% or more of the
combined voting power of the Corporation's
then outstanding voting securities, or (ii)
the sale, transfer or other disposition in
one or more transactions of all or
substantially all of the assets of the
Corporation or (iii) the merger or
consolidation of the Corporation with or into
another Person, other than a wholly-owned
subsidiary, unless such merger or
consolidation does not result in a
reclassification, conversion, exchange or
cancellation of any
-2- Attachment II
<PAGE> 133
outstanding shares of Common Stock of the
Corporation, or (iv) the Corporation proceeds
to acquire its Common Stock (or undertakes a
corporate reorganization or recapitalization
or other action) if the effect of such
acquisition (or other action) would be either
(1) to reduce substantially or to eliminate
any public market for the shares of the
Corporation's Common Stock or (2) to remove
the Corporation from registration with the
Securities and Exchange Commission under the
Exchange Act or (3) to require the
Corporation to make a filing under Section
13(e) of the Exchange Act or (4) to cause a
delisting of the Corporation's Common Stock
from the National Association of Securities
Dealers, Inc. Automated Quotation System
(unless such stock is delisted as a result of
being listed on a national securities
exchange) or to cause a delisting of the
Corporation's Common Stock from a national
securities exchange, or (v) either the
Corporation and/or one or more Subsidiaries
of the Corporation is materially or
completely liquidated or is the subject of
any voluntary or involuntary dissolution or
winding up except as to any Subsidiary, as
may be otherwise permitted under the terms of
the Series D Senior Subordinated Agreement
and Series E Senior Subordinated Agreement.
D. "Common Stock" means shares of the
Corporation's Common Stock, $.01 par value.
E. "Conversion Date" as used herein shall have
the meaning set forth in paragraph 5(b).
F. "Conversion Price" as used herein shall mean
as to the Series C Preferred Stock or Series
D Preferred Stock that price determined in
accordance with paragraph 5(a)(1) and as
further adjusted as herein provided.
G. "Default Event" shall have the meaning set
forth in paragraph 6(b)(4).
H. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
I. "Fiscal Year" means the fiscal year of the
Corporation determined from time to time by
the Board of Directors for financial
reporting purposes.
J. "Market Price" shall mean, for any day, the
average of the final sale prices of the
Common Stock on all exchanges on which the
Common Stock may at the time be listed or the
final bid prices on the NASDAQ National
Market System or NASDAQ over-the-counter
market if the Common Stock is not so listed
on an exchange.
K. "Preferred Stock" means shares of any class
of the Corporation's Preferred Stock.
L. "Purchase Rights" shall have the meaning set
forth in paragraph 5(e).
M. "Securities Act" shall mean the Securities
Act of 1933, as amended.
N. "Series D Senior Subordinated Agreement"
shall mean the Series D Note and Stock
Purchase Agreement dated December 31, 1993 as
it may be amended from time to time.
-3- Attachment II
<PAGE> 134
O. "Series E Senior Subordinated Agreement"
shall mean the Series E Note Purchase
Agreement dated May 1, 1995, as it may be
amended from time to time.
P. "Series C Preferred Stock" means shares of
the Corporation's Series C Cumulative
Convertible Preferred Stock, $0.01 par value.
Q. "Series D Preferred Stock" means shares of
the Corporation's Series D Cumulative
Convertible Preferred Stock, $0.01 par value.
R. "Series C Stated Value" means an assigned
value of the Series C Preferred Stock, being
$18.00 per share.
S. "Series D Stated Value" means an assigned
value of the Series D Preferred Stock, being
$18.00 per share.
T. The term "outstanding", when used with
reference to shares of capital stock, shall
mean issued shares, excluding shares held by
the Corporation or a subsidiary of the
Corporation.
U. All accounting terms used herein and not
expressly defined herein shall have the
meanings given to them in accordance with
generally accepted accounting principles
consistently applied and in effect as of the
date of the relevant calculation.
2. DIVIDENDS.
(a) RIGHT TO DIVIDENDS WITH COMMON STOCK. Subject to paragraphs
2(b)(3) and 2(c)(3) any dividend or distribution declared and
paid on Common Stock shall be declared and paid on the Series
C Preferred Stock and Series D Preferred Stock in such amounts
determined as though the Series C Preferred Stock and Series D
Preferred Stock had, immediately prior to the time used to
determine those holders of Common Stock entitled to such
dividend, fully converted into Common Stock in accordance with
the terms hereof.
(b)(1) SERIES C PREFERRED STOCK. The holders of Series C Preferred
Stock shall not be entitled to receive any preferential
dividends and any dividends thereon that shall have accrued
from January 1, 1996 in accordance with any prior provisions
of this Article IV are waived and canceled.
(2) SERIES C DIVIDEND RESTRICTIONS. Notwithstanding the
foregoing, the declaration and payment of cash
dividends on the Series C Preferred Stock shall be
subject to any restrictions imposed under the DGCL,
herein, or by any financial covenants contained in a
credit, loan or other similar agreement between the
Corporation and its senior secured lender or lenders
as may from time to time be in effect, the Series D
Senior Subordinated Agreement, or the Series E Senior
Subordinated Agreement. Subject to the foregoing,
the Corporation may pay dividends on Series C
Preferred Stock when and as declared by the
Corporation.
(3) PRIORITY OF SERIES C DIVIDENDS TO COMMON STOCK. So
long as any of the Series C Preferred Stock remains
outstanding, no dividends or distributions (other
than dividends or distributions on Common Stock
payable in Common Stock) shall be paid upon, or
declared or set apart for the Common Stock nor Common
Stock be purchased, redeemed,
-4- Attachment II
<PAGE> 135
retired or otherwise acquired by the Corporation
except if approved by the vote of the holders of not
less than two-thirds (2/3) of all outstanding Series
C Preferred Stock, voting as a class.
(c)(1) SERIES D PREFERRED STOCK. The holders of Series D Preferred
Stock shall not be entitled to receive, preferential
dividends, and any dividends thereon that shall have accrued
from January 1, 1996 in accordance with any prior provisions
of this Article IV are waived and canceled.
(2) SERIES D DIVIDEND RESTRICTIONS. Notwithstanding the
foregoing, the declaration and payment of cash
dividends on the Series D Preferred Stock shall be
subject to any restrictions imposed under the DGCL,
herein, or by any financial covenants contained in a
credit, loan or other similar agreement between the
Corporation and its senior secured lender or lenders
as may from time to time be in effect, the Series D
Senior Subordinated Agreement, or the Series E Senior
Subordinated Agreement. Subject to the foregoing,
the Corporation may pay dividends on Series D
Preferred Stock when and as declared by the
Corporation.
(3) PRIORITY OF SERIES D DIVIDENDS TO SERIES C AND COMMON
STOCK. So long as any of the Series D Preferred
Stock remains outstanding, no dividends or
distributions (other than dividends or distributions
on Common Stock payable in Common Stock) shall be
paid upon, or declared or set apart for the Series C
Preferred Stock or Common Stock, nor shall any Series
C Preferred Stock or Common Stock be purchased,
redeemed, retired or otherwise acquired by the
Corporation except if approved by the vote of the
holders of not less than two-thirds (2/3) of the
Series D Preferred Stock.
(d) COMMON STOCK. Subject to paragraphs 2(a), 2(b) and 2(c) above
and the other provisions of this Article IV, (i) dividends may
be declared and paid on the Common Stock, and (ii) the Common
Stock may be purchased, retired or otherwise acquired, when
and as determined by the Board of Directors, out of any funds
legally available for such purposes.
3. REDEMPTION.
(a) SERIES C AND SERIES D PREFERRED STOCK.
(1) NO OPTIONAL REDEMPTION. Except as provided in
subparagraph 3(a)(3), the Corporation shall not have
the right or option to call or redeem any of the
shares of Series C Preferred Stock or Series D
Preferred Stock.
(2) CERTAIN RESTRICTIONS ON SERIES C AND SERIES D. The
Corporation shall in no event redeem any shares of
Series C Preferred Stock or Series D Preferred Stock
under subparagraph (3), (i) if funds are not legally
available therefor under the DGCL, or (ii) if and to
the extent such redemption would violate any
financial covenants contained in a credit, loan or
other similar agreement between the Corporation and
its senior secured lender or lenders as may from time
to time be in effect, the Series D Senior
Subordinated Agreement or the Series E Senior
Subordinated Agreement; provided, however, that if at
any time the Corporation is unable to redeem the full
number of shares of Series C Preferred Stock and
Series D Preferred Stock on any date called for as
provided above, whether due to any restrictions
imposed by the DGCL, herein, or such financial
covenants, then the Corporation (x) shall on such
date redeem such number of shares of Series C
Preferred Stock and Series D Preferred Stock to the
maximum extent permitted by the
-5- Attachment II
<PAGE> 136
DGCL and under such covenants, and (y) shall
thereafter redeem the balance of the shares of Series
C Preferred Stock and Series D Preferred Stock not so
redeemed on such date, at such intervals, which shall
be no less often than quarterly, to the maximum
extent funds are available therefor under the DGCL
and such covenants. In case of any Series C
Preferred Stock or Series D Preferred Stock which is
required to be redeemed but which is not redeemed as
a result of the restrictions provided above, such
unredeemed Series C Preferred Stock or Series D
Preferred Stock shall continue to be outstanding.
(3) COMPLETE REDEMPTION DATE. The Corporation shall
redeem all outstanding Series C Preferred Stock and
Series D Preferred Stock on June 1, 2000 at a
redemption price equal to the Series C Stated Value
as to the Series C Preferred Stock and the Series D
Stated Value as to the Series D Preferred Stock.
(4) PRIORITY OF SERIES C AND SERIES D REDEMPTION. If any
Series C Preferred Stock or Series D Preferred Stock
is required to be redeemed pursuant to subparagraph
(3) above, no shares of Common Stock shall be
purchased, redeemed, retired or otherwise acquired by
the Corporation, unless and until funds necessary for
redemption of the Series C Preferred Stock and Series
D Preferred Stock have been set aside in the manner
prescribed in subparagraph (5) below.
(5) GENERAL. From and after the setting aside of the
funds necessary for redemption pursuant to
subparagraph (3) above, notwithstanding that any
certificate for shares of Series C Preferred Stock or
Series D Preferred Stock so called for redemption
shall not have been surrendered for cancellation, the
shares to be redeemed shall no longer be deemed
outstanding, and the holders of certificates
representing such shares shall have with respect to
such shares no rights in or with respect to the
Corporation except the right to receive, upon the
surrender of such certificates, the redemption price
therefor, plus an amount equal to accrued and unpaid
dividends thereon to the date of redemption without
interest. Notwithstanding the foregoing and
providing the holders of the shares of Series C
Preferred Stock and Series D Preferred Stock called
for redemption shall have delivered such shares to
the Corporation for redemption, until the holders of
any such shares of Series C Preferred Stock or Series
D Preferred Stock shall have received in cash the
redemption price therefor, without interest, (i) such
shares shall continue to be convertible, in whole or
in part, pursuant to paragraph 5 of this Article IV
and (ii) such holders shall continue to have the
voting and other rights set forth in paragraphs 6 and
7 of this Article IV. Shares of Series C Preferred
Stock and shares of Series D Preferred Stock redeemed
by the Corporation pursuant to this paragraph 3(a),
or shares of Series C Preferred Stock or Series D
Preferred Stock otherwise purchased by the
Corporation, shall not be reissued and shall be
canceled and retired in the manner provided by the
laws of the State of Delaware.
(6) PRIORITY BETWEEN SERIES C AND SERIES D UPON
REDEMPTION. If at any time the Corporation is unable
to redeem the full amount of Series D Preferred Stock
and Series C Preferred Stock on any date as provided
in subparagraph (3) above, whether due to any
restrictions imposed by law, herein, or such
financial covenants referred to in subparagraph (2),
or otherwise, then the Corporation shall on such
date, first redeem from the holders of the Series D
Preferred Stock an amount equal to 80% of the
outstanding Series D Preferred Stock, thereafter next
redeem from the holders of the Series C Preferred
Stock an amount equal to 80% of the outstanding
Series C Preferred Stock, thereafter next redeem from
the holders of the
-6- Attachment II
<PAGE> 137
Series D Preferred Stock the remaining amount of
Series D Preferred Stock, and thereafter next redeem
from the holders of the Series C Preferred Stock the
remaining amount of Series C Preferred Stock
requested to be redeemed pursuant to whichever of
such subparagraphs is applicable; in each instance
from such holders pro rata, to the greater of the
maximum amount permitted by the DGCL, herein, or
under such covenants. Any amount not so paid on the
date of redemption as provided in subparagraph (3)
above (whether such amount is restricted from being
paid, pursuant to subparagraph (2) above or
otherwise), together with interest thereon at the
rate of 10% per annum, at such intervals, which shall
be no less often than quarterly, shall thereafter be
paid in satisfaction of such unpaid amounts according
to and in the order of the priorities set forth above
to the maximum extent funds are available therefor
under the DGCL and such covenants.
4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation, a
sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of
the Corporation of any class shall not be regarded as
"liquidation, dissolution or winding up of the affairs of the
Corporation" within the meaning of this paragraph 4.
(b) SERIES C AND SERIES D PREFERRED STOCK. During any proceedings
for the voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of
the Series C Preferred Stock shall be entitled to receive
$18.00 in cash for each share of Series C Preferred Stock and
the holders of the Series D Preferred Stock shall be entitled
to receive $18.00 in cash for each share of Series D Preferred
Stock, before any distribution of the assets of the
Corporation shall be made to the holders of the outstanding
Common Stock, or funds necessary for such payment shall have
been set aside in trust for the account of the holders of the
outstanding Series C Preferred Stock and Series D Preferred
Stock so as to be and continue to be available therefor. If
upon such liquidation, dissolution or winding up, the assets
distributable to the holders of the Series C Preferred Stock
and Series D Preferred Stock shall be insufficient to permit
the payment in cash of $18.00 per share to the holders of
Series C Preferred Stock and $18.00 per share to the holders
of Series D Preferred Stock, the assets of the Corporation
shall be distributed first to the holders of Series D
Preferred Stock in an amount equal to 80% of the outstanding
Series D Stated Value, thereafter next to the holders of
Series C Preferred Stock in an amount equal to 80% of the
outstanding Series C Stated Value, thereafter next to the
holders of the Series D Preferred Stock in an amount equal to
the remaining amount of Series D Stated Value, and thereafter
next to the holders of Series C Preferred Stock in an amount
equal to the remaining amount of Series C Stated Value; in
each instance among such holders pro rata. Any amount not so
paid in distribution on such date shall thereafter be paid in
satisfaction of such unpaid amounts according to and in the
order of the priorities set forth above to the maximum extent
funds are available therefor under the DGCL and such
covenants. If the assets of the Corporation are sufficient to
permit the payment of such amounts to the holders of the
Series D Preferred Stock and Series C Preferred Stock, the
remainder of the assets of the Corporation, if any, after the
distributions as aforesaid shall be distributed and divided
ratably among the holders of Common Stock then outstanding
according to their respective shares.
5. CONVERSION.
(a) SERIES C AND SERIES D PREFERRED STOCK. The Series C Preferred
Stock and Series D Preferred Stock shall be convertible into
Common Stock in accordance with the following provisions of
this paragraph 5(a).
-7- Attachment II
<PAGE> 138
(1) OPTIONAL CONVERSION OF SERIES C AND SERIES D
PREFERRED STOCK. The holder of any shares of Series C
Preferred Stock and Series D Preferred Stock shall
have the right, at such holder's option, at any time
or from time to time to convert any or all of such
holder's shares of Series C Preferred Stock or Series
D Preferred Stock into fully paid and nonassessable
shares of Common Stock (the "Conversion Shares") in
accordance with subparagraph 5(a)(5) below at a
conversion price initially equal to $9.00 per share
for the Series C Preferred Stock and Series D
Preferred Stock (as to each of the Series C Preferred
Stock and Series D Preferred Stock the "Conversion
Price"). The Conversion Shares and the Conversion
Price are subject to certain adjustments as set forth
herein, and the terms Conversion Shares and
Conversion Price as used herein shall as of any time
be deemed to include all such adjustments to be given
effect as of such time in accordance with the terms
hereof.
Upon the exercise of the option of the holder of any
shares of Series C Preferred Stock or Series D
Preferred Stock to convert such Preferred Stock into
Common Stock, the holder of such shares of Series C
Preferred Stock or Series D Preferred Stock to be
converted shall surrender the certificates
representing the shares of Series C Preferred Stock
or Series D Preferred Stock so to be converted in the
manner provided in paragraph 5(b) below.
(2) MANDATORY CONVERSION OF SERIES C. Notwithstanding
anything to the contrary contained in this Article
IV, the Corporation shall have the right and option
to cause all of the shares of Series C Preferred
Stock then outstanding to be converted into the
number of shares of Common Stock calculated in
accordance with paragraph (a)(1) above, upon the
completion of a successful secondary public offering
of the Common Stock of the Corporation yielding net
proceeds to the Corporation of not less than
$25,000,000 at a public offering price per share of
at least $10.00.
(3) MANDATORY CONVERSION OF SERIES D. Notwithstanding
anything to the contrary contained in this Article
IV, the Corporation shall have the right and option
to cause all of the shares of Series D Preferred
Stock then outstanding to be converted into the
number of shares of Common Stock calculated in
accordance with paragraph (a)(1) above, upon the
completion of a successful secondary public offering
of the Common Stock of the Corporation yielding net
proceeds to the Corporation of not less than
$25,000,000 at a public offering price per share of
at least $10.00. The Corporation shall not exercise
the option referred to in this sub-paragraph (3)
until or unless it has exercised in full the similar
option referenced in paragraph 5(a)(2) above.
(4) EXERCISE OF MANDATORY CONVERSION OPTION. In order to
exercise the option referred to in subparagraphs (2)
and (3) above, the Corporation shall deliver to each
holder of then outstanding Series C Preferred Stock
or Series D Preferred Stock, not less than 30 days
nor more than 60 days preceding the anticipated
closing date of such public offering, a written
notice setting forth the fact of such conversion, the
anticipated closing date of such public offering, the
number of shares of Common Stock into which such
holder's shares of Series C Preferred Stock, or
Series D Preferred Stock will be converted in
accordance with this paragraph 5(a), and a statement
that such holder will be entitled to receive a new
certificate representing such number of shares of
Common Stock in exchange for the certificates
representing such holder's shares of Series C
Preferred Stock or Series D Preferred Stock.
Notwithstanding that any certificates for shares of
Series C Preferred Stock or Series D Preferred Stock
shall not have been surrendered for cancellation,
-8- Attachment II
<PAGE> 139
following the delivery of such notice referred to
above and from and after the closing of any such
public offering, the shares of Series C Preferred
Stock or Series D Preferred Stock shall no longer be
deemed outstanding and the holders of certificates
representing such shares of Series C Preferred Stock
or Series D Preferred Stock shall have, from and
after such date, the same rights in or with respect
to the Corporation as holders of shares of Common
Stock and each such holder shall have the right, upon
surrender of such certificates, to receive from the
Corporation a certificate or certificates
representing the number of shares of Common Stock
calculated as provided above registered in the name
of such holder.
(5) CONVERSION PROCEDURE. Each share of Series C
Preferred Stock and Series D Preferred Stock shall be
converted into the number of shares of Common Stock
as is determined by multiplying each such share of
Series C Preferred Stock or Series D Preferred Stock
to be converted times a fraction, the numerator of
which is the Series C Stated Value as to each such
share of Series C Preferred Stock being converted and
the Series D Stated Value as to each such share of
Series D Preferred Stock being converted and the
denominator of which is the appropriate Conversion
Price. The Conversion Price shall be subject to
adjustment as set forth in subparagraph (d) below.
(b) DELIVERY OF STOCK CERTIFICATES; NO FRACTIONAL SHARES. The
holder of any shares of Series C Preferred Stock or Series D
Preferred Stock may exercise the conversion right pursuant to
paragraph 5(a) above respectively by delivering to the
Corporation during regular business hours at the principal
executive offices of the Corporation the certificate or
certificates for the shares to be converted, duly endorsed or
assigned either in blank or to the Corporation (if required by
it), accompanied by written notice stating that such holder
elects to convert such shares. Conversion shall be deemed to
have been effected on the date when the aforesaid delivery is
made, and such date is referred to herein as the "Conversion
Date." As promptly as practicable thereafter, the Corporation
shall issue and deliver to or upon the written order of such
holder, to the place designated by such holder, a certificate
or certificates for the number of full shares of Common Stock
to which such holder is entitled and a check or cash in
respect of any fractional interest in a share of Common Stock,
as provided below, payable with respect to the shares of
Series C Preferred Stock or Series D Preferred Stock so
converted; provided, however, that in the case of a conversion
in connection with liquidation, no such certificates need be
issued. The person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed
to have become the stockholder of record in respect of such
Common Stock on the applicable Conversion Date. Upon
conversion of only a portion of the number of shares covered
by a certificate representing shares of Series C Preferred
Stock or Series D Preferred Stock surrendered for conversion,
the Corporation shall issue and deliver to or upon the written
order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new
certificate covering the number of shares of Series C
Preferred Stock or Series D Preferred Stock as appropriate,
representing the unconverted portion of the certificate so
surrendered. If the new certificate or certificates are to be
issued to a person who is not the registered holder of the
certificate delivered for conversion, any transfer taxes
applicable to the transaction shall be paid by such
transferee.
(c) NO FRACTIONAL SHARES OF COMMON STOCK. No fractional shares of
Common Stock shall be issued upon conversion of shares of
Preferred Stock. Instead of any fractional share of Common
Stock which would otherwise be issuable upon conversion of any
shares of Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount
equal to the then current Market Price of a share of Common
Stock multiplied by such fractional interest. The holders of
fractional interests shall not be entitled to any rights as
stockholders of the
-9- Attachment II
<PAGE> 140
Corporation in respect of such fractional interests. In
determining the number of shares of Common Stock and the
payment, if any, in lieu of fractional shares that a holder of
Preferred Stock shall receive, the total number of shares of
Preferred Stock surrendered for conversion by such holder
shall be aggregated.
(d) DIVIDENDS; PURCHASE RIGHTS. In case at any time after
December 31, 1995 the Corporation shall declare a dividend or
make any other distribution upon the shares of Common Stock of
any class, the Corporation shall pay on the dividend payment
date to each holder of Series C and Series D, but not in
duplication of payments provided by paragraph 2(a) above, the
securities and other property (including cash) which such
holder would have received (together with all distributions
thereon) if such holder had converted the Preferred Stock held
by it on the record date fixed in connection with such
dividend, and the Corporation shall take whatever steps are
necessary or appropriate to keep in reserve at all times such
securities and other property as shall be required to fulfill
its obligations hereunder in respect of the shares issuable
upon the conversion of all Series C Preferred Stock and Series
D Preferred Stock.
(e) PURCHASE RIGHTS. If at any time or from time to time on or
after December 31, 1995 the Corporation shall grant, issue or
sell any options or rights to purchase stock, warrants,
securities or other property pro rata to the holders of Common
Stock of all classes ("Purchase Rights"), then each holder of
Preferred Stock shall be entitled, at such holder's option, to
acquire (whether or not such holder's Preferred Stock shall
have been converted), upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number
of shares of Common Stock issuable upon the conversion of such
Preferred Stock, immediately prior to the time or times at
which the Corporation granted, issued or sold such Purchase
Rights.
(f) SUBDIVISION OR COMBINATION OF STOCK. In case the Corporation
shall at any time subdivide its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Corporation shall be
combined into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall be
proportionately increased.
(g) CHANGES IN COMMON STOCK. If any capital reorganization or
reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with another
corporation, or sale, transfer or other disposition of all or
substantially all of its properties to another corporation,
shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, sale,
transfer or other disposition, lawful and adequate provision
shall be made whereby each holder of Preferred Stock shall
thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions herein specified and
in lieu of the shares of the Common Stock of the Corporation
immediately theretofore issuable upon the conversion of the
Preferred Stock, such shares of stock, securities or
properties, if any, as may be issuable or payable with respect
to or in exchange for a number of outstanding shares of such
Common Stock equal to the number of shares of such Common
Stock immediately theretofore issuable upon the conversion of
the Preferred Stock had such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition not
taken place, and in any such case appropriate provisions shall
be made with respect to the rights and interests of each
holder of Preferred Stock to the end that the provisions
hereof (including without limitation provisions for adjustment
of the Conversion Price) shall thereafter be applicable, as
nearly equivalent as may be practicable in relation to any
shares of stock, securities or properties thereafter
deliverable upon the conversion thereof. The Corporation
shall not effect any such consolidation, merger, sale,
transfer or other disposition, unless prior to or
simultaneously
-10- Attachment II
<PAGE> 141
with the consummation thereof the successor corporation (if
other than the Corporation) resulting from such consolidation
or merger or the corporation purchasing or otherwise acquiring
such properties shall assume, by written instrument executed
and mailed or delivered to the holders of Preferred Stock at
the last address of such holders appearing on the books of the
Corporation, the obligation to deliver to such holders such
shares of stock, securities or properties as, in accordance
with the foregoing provisions, such holders may be entitled to
acquire. The above provisions of this subparagraph shall
similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers,
or other dispositions.
(h) NOTICE OF ADJUSTMENT. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall
promptly certify, or if requested by a majority of the
outstanding shares of Series D Preferred Stock, obtain a
certificate of a firm of independent public accountants of
recognized national standing selected by the Board of
Directors of the Corporation (who may be the regular auditors
of the Corporation) certifying, the Conversion Price resulting
from such adjustment and the increase or decrease, if any, in
the number of shares of Common Stock issuable upon the
conversion of the Preferred Stock held by each holder of
Preferred Stock, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is
based. The Corporation shall promptly mail a copy of such
certification to each holder of Preferred Stock.
(i) CERTAIN EVENTS. If any event occurs as to which in the opinion
of the Board of Directors of the Corporation the other
provisions of this paragraph 5 are not strictly applicable or
if strictly applicable would not fairly protect the conversion
rights of the holders of the Preferred Stock in accordance
with the essential intent and principles of such provisions,
then such Board of Directors shall appoint a firm of
independent certified public accountants (which may be the
regular auditors of the Corporation) of recognized national
standing, which shall give their opinion upon the adjustment,
if any, on a basis consistent with such essential intent and
principles, necessary to preserve, without dilution, the
rights of the holders of the Series C Preferred Stock and
Series D Preferred Stock. Upon receipt of such opinion by the
Board of Directors, the Corporation shall forthwith make the
adjustments described therein; provided, however, that no such
adjustment pursuant to this paragraph 5(i) shall have the
effect of increasing the Conversion Price as otherwise
determined pursuant to this paragraph 5 except in the event of
a combination of shares of the type contemplated in paragraph
5(f) and then in no event to an amount larger than the
Conversion Price as adjusted pursuant to paragraph 5(j).
(j) PROHIBITION OF CERTAIN ACTIONS. The Corporation will not (a)
authorize or issue, or agree to authorize or issue, any shares
of its capital stock of any class preferred as to dividends or
as to the distribution of assets upon voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation
unless the rights of the holders thereof shall be limited to a
fixed sum or percentage of par value in respect of
participation in dividends and in the distribution of such
assets or (b) take any action which would result in any
adjustment of the Conversion Price if the total number of
shares of Common Stock issuable after such action upon
conversion of all of the Preferred Stock would exceed the
total number of shares of Common Stock then authorized by the
Corporation's Articles of Incorporation or (c) authorize more
than one class of Common Stock.
(k) STOCK TO BE RESERVED. The Corporation will at all times
reserve and keep available out of its authorized Common Stock,
solely for the purpose of issue upon the conversion of
Preferred Stock as herein provided, such number of shares of
Common Stock as shall then be issuable upon the conversion of
all outstanding Preferred Stock, and the Corporation will
maintain at all times all other rights and privileges
sufficient to enable it to fulfill all its obligations
hereunder. The Corporation covenants that all shares of
Common Stock which shall be so issuable shall, upon issuance,
be duly authorized, validly issued, fully paid and
nonassessable, free from preemptive or
-11- Attachment II
<PAGE> 142
similar rights on the part of the holders of any shares of
capital stock or securities of the Corporation, and free from
all liens and charges with respect to the issue thereof; and
without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all
such action as may be required to assure that the par value,
if any, per share of the Common Stock is at all times equal to
or less than the then effective and applicable Conversion
Price. The Corporation will take all such action as may be
necessary to assure that such shares of Common Stock may be so
issued without violation by the Corporation of any applicable
law or regulation, or of any requirements of any domestic
securities exchange upon which the Common Stock may be listed.
Without limiting the foregoing, the Corporation will take all
such action as may be necessary to assure that upon conversion
of any of the Preferred Stock, an amount equal to the lesser
of (a) the par value of each share of Common Stock outstanding
immediately prior to such conversion, or (b) the Conversion
Price, shall be credited to the Corporation's stated capital
account for each share of Common Stock issued upon such
conversion, and that the balance of the principal amount of
the Preferred Stock converted shall be credited to the
Corporation's capital surplus account.
(l) REGISTRATION AND LISTING OF COMMON STOCK. If any shares of
Common Stock required to be reserved for the purpose of the
conversion of the Preferred Stock hereunder require
registration with or approval of any governmental authority
under any Federal or state law (other than the Securities Act)
before such shares may be issued upon such conversion, the
Corporation will, at its expense and as expeditiously as
possible, use its best efforts to cause such shares to be duly
registered or approved, as the case may be. Shares of Common
Stock issuable upon the conversion of the Preferred Stock
shall be registered by the Corporation under the Securities
Act or similar statute then in effect if required by (1) the
Stock Registration Agreement dated December 31, 1990, as
amended, (2) the Series B and Series C Stock Registration
Agreement dated December 2, 1993, as amended, (3) the Series D
Stock Registration Agreement dated December 31, 1993, as
amended, and (4) the Series E Stock Registration Agreement, as
amended, and subject to the conditions stated in such
Agreements. If and so long as the Common Stock is listed on
any national securities exchange, the Corporation will, at its
expense, obtain promptly and maintain the approval for listing
on each such exchange upon official notice of issuance, of
shares of Common Stock issuable upon the conversion of the
then outstanding Preferred Stock and maintain the listing of
such shares after their issuance; and the Corporation will
also list on such national securities exchange, will register
under the Exchange Act and will maintain such listing of, any
other securities that at any time are issuable upon the
conversion of the Preferred Stock, if and at the time that any
securities of the same class shall be listed on such national
securities exchange by the Corporation or shall require
registration under the Exchange Act.
(m) TAXES. The Corporation shall pay all documentary, stamp or
other transactional taxes attributable to the issuance or
delivery of shares of capital stock of the Corporation upon
conversion of any shares of Preferred Stock.
(n) CLOSING OF BOOKS. The Corporation will at no time close its
transfer books against the transfer of any Preferred Stock or
of any shares of Common Stock issued or issuable upon the
conversion of any Preferred Stock in any manner which
interferes with the timely conversion of such Preferred Stock.
6. VOTING RIGHTS.
(a) SERIES C PREFERRED STOCK, AND SERIES D PREFERRED
STOCK. Each holder of Series C Preferred Stock, and
Series D Preferred Stock shall be entitled to vote
for each share of such Preferred Stock (standing in
his, her or its name on the books of the Corporation
on
-12- Attachment II
<PAGE> 143
the record date for determination of stockholders
entitled to notice of and to vote) that number of
votes determined as if such stock had been converted
to Common Stock at the then applicable Conversion
Price on any matter to be voted on by the holders of
the Corporation's Common Stock (whether at any annual
or special meeting or otherwise and when exercising
any other voting rights provided for by law or
herein).
(b) SPECIAL VOTING RIGHTS.
(1) ELECTION OF DIRECTORS. Notwithstanding the
other provisions of this Article IV, upon the
occurrence of a Default Event (hereafter
defined) and for the duration of the Default
Period (hereafter defined) the number of
positions on the Board of Directors shall be
increased as follows and the manner of
election of the new additional Directors
shall be as follows: the holders of the
outstanding Series C Preferred Stock and D
Preferred Stock, voting together as a class
by a majority of the votes which they are
eligible to cast as such holders, shall be
entitled to increase the size of the Board of
Directors so that the size thereof shall
consist of, and shall be entitled to elect,
(i) six new additional Directors if the
existing number of Directors at the time a
Default Event occurs is eleven or less, and
(ii) one additional Director for each
Director that exceeds eleven at the time a
Default Event occurs. In case the holders of
the Series C Preferred Stock and D Preferred
Stock become entitled to exercise such
special voting rights, they may during the
Default Period call a special meeting of
stockholders, in the manner provided herein
or in the by-laws or otherwise as provided by
law, for the purpose of increasing or
decreasing the number of positions on the
Board of Directors, electing such members to
the Board of Directors and (if deemed
necessary) removing any incumbent directors
in order to achieve the proportion described
above. In addition, the holders of the
Series C Preferred Stock and D Preferred
Stock shall have such special voting rights
at any annual or regular meeting of
stockholders (or any other special meeting
not called by the holders of Series C
Preferred Stock and D Preferred Stock) held
during the Default Period. In lieu of the
foregoing, the holders of the Series C
Preferred Stock and D Preferred Stock may
take any of such action by a written consent
in accordance with the DGCL.
(2) REMOVAL; VACANCIES. During the Default
Period, each director elected by the holders
of Series C Preferred Stock and Series D
Preferred Stock may be removed only by the
vote of the holders of the outstanding shares
of Series C Preferred Stock and Series D
Preferred Stock, voting together as a class,
by a majority of the votes which they are
entitled to cast as such holders, at a
meeting of the stockholders, or of the
holders of shares of Preferred Stock called
for that purpose. During the Default Period,
any vacancy in the office of a director
elected by the holders of the Series C
Preferred Stock and Series D Preferred Stock
may be filled by a vote of the remaining
directors then in office elected by the
holders of such series of Preferred Stock,
or, if not so filled, by the holders of such
series of Preferred Stock at any meeting,
annual or special, for the election of
directors held thereafter. A special meeting
of stockholders, or of the holders of shares
of Series C Preferred Stock and Series D
Preferred Stock, may be called for the
purpose of filling any such vacancy. In the
case of removal of any such director, the
vacancy may be filled at the same meeting at
which such removal shall be voted. Holders
of such Preferred Stock shall be entitled to
-13- Attachment II
<PAGE> 144
notice of each meeting of stockholders at
which they shall have any right to vote or
notice of which is otherwise required by law.
(3) EXPIRATION OF RIGHT. Upon termination of the
Default Period, the special voting rights of
the holders of the Series C Preferred Stock
and Series D Preferred Stock provided under
this paragraph 6(b) shall be immediately
divested, but always subject to the revesting
of such right in the holders of such
Preferred Stock upon the occurrence of any
subsequent Default Event. In the event that
such rights of the holders of Series C
Preferred Stock and Series D Preferred Stock
under this paragraph 6(b) shall cease as
provided above, then the directors elected to
the Board of Directors by the holders of such
Preferred Stock under this paragraph 6(b)
shall at such time be automatically removed
from office, and their respective positions
terminated and the number of positions on the
Board of Directors shall return to the number
prior to the exercise of the rights provided
in this paragraph 6(b), without further
action on the part of the holders of the
Series C Preferred Stock and Series D
Preferred Stock, the holders of the Common
Stock or the Board of Directors.
(4) DEFAULT EVENT. For purposes hereof, "Default
Event" means the occurrence or continuance of
any of the following:
a. failure by the Corporation to redeem
the full number of shares of
Preferred Stock on any date called
for under paragraphs 3(a)(3) subject
to the limitations set forth in
paragraphs 3(a)(2) or the breach or
failure to perform by the
Corporation of any of its covenants
contained in paragraph 7 of this
Article IV;
b. any payment default (beyond any
applicable grace period) under any
material loan agreement, bond, note,
indenture, debenture or other
evidence of indebtedness of the
Corporation;
c. the acceleration of the indebtedness
due under any material loan
agreement, bond, note, indenture,
debenture or other evidence of
indebtedness of the Corporation,
regardless of whether such
acceleration relates to a payment
default or any other kind of default
if the effect of such acceleration
is to render the Corporation
insolvent;
d. the breach or failure to perform by
the Corporation of any of its
covenants not exclusively applicable
to Noteholders set forth in Article
V of the Note and Stock Purchase
Agreement dated May 27, 1992 among
the Corporation, Olympus Private
Placement Fund, L.P., Equus
Investments II, L.P. and Equus
Capital Partners, L.P., Sprout
Growth, L.P., Sprout Capital VI,
L.P. and DLJ Venture Capital Fund
II, L.P., Virginia Retirement System
and certain parties named therein,
and the continuance without cure of
such breach or failure for 15 days
following written notice thereof by
any Purchaser (as defined in such
agreement) or its transferees;
e. a Change in Control Event shall
occur;
-14- Attachment II
<PAGE> 145
f. an Event of Default, as defined in
the Amended and Restated Loan
Agreement dated as of May 31, 1995
by and among the Corporation and
Banque Paribas, as Agent and the
Banks named therein, as the same may
be amended, exists and such Event of
Default continues for 15 days
without cure and any remedy as
provided for in such Loan Agreement
is taken by the lenders;
g. the breach or failure to perform by
the Corporation of any of its
covenants not exclusively applicable
to Noteholders set forth in Article
V of the Series D Senior
Subordinated Agreement, and the
continuance without cure of such
breach or failure for 15 days
following written notice thereof by
any Purchaser (as defined in such
agreement) or its transferees; and
h. if the Corporation commences any
proceedings under any bankruptcy,
reorganization, insolvency,
readjustment of debts, dissolution
or other liquidation law of any
jurisdiction; or the Corporation
makes an assignment for the benefit
of creditors or applies to any
tribunal for the appointment of a
trustee or receiver of a substantial
part of the assets of the
Corporation; or any such proceedings
are commenced, or any such
application is filed, against the
Corporation and the Corporation
indicates its consent to such
proceedings, or an order is entered
appointing such trustee or receiver
or adjudicating the Corporation
bankrupt or insolvent, or approving
the petition in any such
proceedings, and such order remains
in effect for sixty (60) days.
i. DEFAULT PERIOD. For purposes
hereof, "Default Period" means a
period commencing on the date a
Default Event occurs and ending, as
the case may be: (a) upon redemption
of the full number of shares of
Preferred Stock required under
paragraphs 3(a)(3) and payment of
the full redemption price therefor;
(b) upon the cure and irrevocable
waiver of the payment default
referred to in clause (b) of
paragraph 6(b)(4) above; (c) upon
the cure or irrevocable waiver of
the default referred to in clause
(c) of paragraph 6(b)(4) above,
provided that the indebtedness so
accelerated has been reinstated to
previously-stated maturities and the
Corporation's lenders have ceased to
exercise control over any material
assets of the Corporation; (d) upon
the cure or irrevocable waiver of
the default referred to in clause
(d), (f) or (g) of paragraph 6(b)(4)
above; (e) upon the cure or
irrevocable waiver of the default
referred to in clause (e) of
paragraph 6(b)(4) above; or (f) the
dismissal, revocation or termination
of the proceedings described in
clause (h) of paragraph 6(b)(4)
above.
(c) COMMON STOCK. Each holder of Common Stock shall be
entitled to one vote for each share of such Common
Stock standing in his or her name on the books of the
Corporation on the record date for the determination
of stockholders entitled to notice of and to vote at
any annual or special meeting of stockholders.
7. ADDITIONAL CAPITAL STOCK, ETC. The Corporation shall not, (A)
without the affirmative consent or approval of the holders of
shares representing at least 75% of the Series C Preferred
Stock then outstanding, together voting as a class (i)
authorize the issuance of any new, or increase the
-15- Attachment II
<PAGE> 146
authorized number of shares of any existing, class of capital
stock of the Corporation (or any other series of Preferred
Stock) which would be senior or superior as to dividends,
redemption or upon liquidation to any of the Series C
Preferred Stock or (ii) increase the number of shares of
Preferred Stock authorized in the Certificate of Incorporation
or create any other class of stock (or any other series of
Preferred Stock) ranking on a parity with any of the Series C
Preferred Stock as to redemption or upon liquidation, or (B)
without the affirmative consent or approval of the holders of
shares representing at least 90% of the Series C Preferred
Stock then outstanding, together voting as a class,(x) amend
the voting powers, designations, preferences, or relative,
participating, optional or other special rights or
qualifications, limitations or restrictions in respect of the
Series C Preferred Stock; (y) reissue any shares of Series C
Preferred Stock that have been redeemed or repurchased; or (z)
take any action to cause any amendment, alteration or repeal
of any of the provisions of the Certificate of Incorporation
or the by-laws that would materially adversely affect the
rights of holders of Series C Preferred Stock, or (C) without
the affirmative consent or approval of the holders of shares
representing at least 75% of the Series D Preferred Stock then
outstanding, (i) authorize the issuance of any new, or
increase the authorized number of shares of any existing,
class of capital stock of the Corporation (or any other series
of Preferred stock) which would be senior or superior as to
dividends, redemption or upon liquidation to the Series D
Preferred Stock, or (ii) increase the number of shares of
Preferred Stock authorized in the Certificate of Incorporation
or create any other class of stock (or any other series of
Preferred Stock) ranking on a parity with the Series D
Preferred Stock as to dividends, redemption or upon
liquidation, or (D) without the affirmative consent or
approval of the holders of shares representing at least 90% of
the Series D Preferred Stock then outstanding (x) amend the
voting powers, designations, preferences, or relative,
participating, optional or other special rights or
qualifications, limitations or restrictions in respect of the
Series D Preferred Stock, or (y) reissue any shares of Series
D Preferred Stock that have been redeemed or repurchased, or
(z) take any action to cause any amendment, alteration or
repeal of any of the provisions of the Certificate of
Incorporation or the by-laws that would materially adversely
affect the rights of the holders of Series D Preferred Stock.
8. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law,
neither the shares of Preferred Stock nor the shares of Common
Stock shall have any voting powers, preferences, or relative,
participation, optional or other special rights other than
those specifically set forth herein.
ARTICLE V
The provisions for the regulation of the internal affairs of the
Corporation will include the following, but such enumeration is not in
limitation of the power of the stockholders or the Board of Directors to
formulate in the Bylaws, by resolution, or any other proper manner any other
lawful provision not inconsistent with law or these articles:
1. CUMULATIVE VOTING. The right of stockholders to cumulate
votes in the election of directors is expressly denied.
2. BYLAWS. The Board of Directors will adopt the initial
Bylaws, and from time to time may, except as otherwise provided herein, alter,
amend or repeal the Bylaws or adopt new Bylaws; but the stockholders from time
to time may alter, amend or repeal any Bylaws adopted by the Board of Directors
or may adopt new Bylaws.
3. DENIAL OF PREEMPTIVE RIGHTS. The stockholders of the
Corporation will not have the preemptive right to acquire additional, unissued
or treasury shares of the Corporation, or securities of the Corporation
convertible into or carrying a right to subscribe to or acquire shares.
-16- Attachment II
<PAGE> 147
4. NUMBER AND QUALIFICATION OF DIRECTORS. The number and
qualifications of directors constituting the Board of Directors of the
Corporation will be fixed and determined in the manner provided in the Bylaws
of the Corporation. The number of directors may be increased or decreased from
time to time in the manner set forth in the Bylaws of the Corporation and
herein.
ARTICLE VI
LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach by the
director of his duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for
any transaction from which the director derived an improper personal benefit.
No repeal, modification or amendment of, or adoption of any provision
inconsistent with this Article VI nor, to the fullest extent permitted by law,
any modification of law shall adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal, amendment,
adoption or modification or affect the liability of any director of the
Corporation for any action taken or any omission that occurred prior to the
time of such repeal, amendment, adoption or modification.
If the DGCL shall be amended after the date hereof to authorize
corporate action further eliminating or limiting the liability of directors,
then a director of the Corporation, in addition to the circumstances in which
he is not liable immediately prior to such amendment, shall be free of
liability to the fullest extent permitted by the DGCL, as so amended.
IN WITNESS WHEREOF, Champion Healthcare Corporation has caused this
Restated Certificate of Incorporation to be executed by its President this
________________ day of _________________________________, 1996.
By:
------------------------------------
Charles R. Miller, President
-17- Attachment II
<PAGE> 148
PROXY
CHAMPION HEALTHCARE CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS ON FEBRUARY 12, 1996.
The undersigned hereby appoints Charles R. Miller and James G. VanDevender or
any one of them, with full power of substitution, attorneys and proxies of the
undersigned to vote all shares of common stock of Champion Healthcare
Corporation (the "Company") which the undersigned is entitled to vote at the
special meeting of stockholders of the Company to be held on February 12, 1996,
at Houston, Texas at 10:00 a.m. Texas time:
/ / FOR / / Against / / Abstain
Proposal to approve the adoption of amendments to, and
restatement of, the Certificate of Incorporation.
All as described in the Notice of Special Meeting of Stockholders and Proxy
Statement, receipt of which is hereby acknowledged.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE HEREIN. IF
NO CONTRARY SPECIFICATION IS MADE, IT WILL BE VOTED "FOR" THE PROPOSAL SET
FORTH.
Dated this _____ day of __________, 1996
-----------------------------------------
-----------------------------------------
Signature(s) of stockholder(s)
Please sign exactly as your name appears
on your stock certificate. When signing
as an executor, administrator, trustee
or other representative, please sign
your full title. All joint owners
should sign.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY.
