<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996
REGISTRATION NO. 333-06713
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PARACELSUS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 8062 95-3565943
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
155 NORTH LAKE AVENUE, SUITE 1100
PASADENA, CALIFORNIA 91101
(818) 792-8600
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
JAMES T. RUSH
VICE PRESIDENT, FINANCE, AND CHIEF FINANCIAL OFFICER
155 NORTH LAKE AVENUE, SUITE 1100
PASADENA, CALIFORNIA 91101
(818) 792-8600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
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<S> <C> <C>
Thomas C. Janson, Jr. Wayne M. Whitaker, Esq. Alison S. Ressler, Esq.
Skadden, Arps, Slate, Meagher & Flom Michener, Larimore, Swindle, Whitaker, Sullivan & Cromwell
300 South Grand Avenue, Suite 3400 Flowers, Sawyer, Reynolds & Chalk, L.L.P. 444 South Flower Street
Los Angeles, California 90071 3500 City Center Tower II Los Angeles, California 90071
(213) 687-5000 301 Commerce Street (213) 955-8000
Fort Worth, Texas 76102
(817) 335-4417
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Senior Subordinated Notes due 2006..... $275,000,000(2) $1,000 $275,000,000 $94,828(3)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Includes $25,000,000 aggregate principal amount subject to an over-allotment
option granted to the Underwriters.
(3) $86,207 of the fee has been paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CROSS REFERENCE SHEET
REQUIRED BY ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Available Information.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors; Company Unaudited
Pro Forma Condensed Combining Financial Statements;
Paracelsus Selected Historical Consolidated
Financial and Operating Data.
4. Use of Proceeds...................................... Use of Proceeds.
5. Determination of Offering Price...................... Not applicable.
6. Dilution............................................. Not applicable.
7. Selling Security Holders............................. Not applicable.
8. Plan of Distribution................................. Underwriting.
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of the Notes.
10. Interests of Named Experts and Counsel............... Not applicable.
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Merger and
Financing; Use of Proceeds; Capitalization; Company
Unaudited Pro Forma Condensed Combining Financial
Statements; Paracelsus Selected Historical
Consolidated Financial and Operating Data;
Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Champion Selected Historical Consolidated Financial
and Operating Data; Champion Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Executive
Compensation; Certain Relationships and Related
Transactions; Security Ownership of Management and
Certain Beneficial Owners; Description of the Notes;
Available Information; Financial Statements.
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not applicable.
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE
IN WHICH SUCH OFFER TO SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 18, 1996
PROSPECTUS
, 1996
$250,000,000
[LOGO]
PARACELSUS HEALTHCARE CORPORATION
% SENIOR SUBORDINATED NOTES DUE 2006
The % Senior Subordinated Notes due 2006 are being offered by Paracelsus
Healthcare Corporation (the "Company") concurrently with the Merger pursuant to
which Champion Healthcare Corporation will become a wholly owned subsidiary of
the Company. Concurrently with the Notes Offering, the Company and certain
selling shareholders of the Company are offering an aggregate of 7,895,000
shares of the Company's common stock in the Equity Offering. Consummation of
each of the Notes Offering and the Equity Offering is contingent upon the
consummation of the Merger; however, neither the Notes Offering nor the Equity
Offering is contingent upon the consummation of the other.
The Notes will mature on , 2006. Interest on the Notes is payable
semi-annually, in arrears, on and of each year, commencing ,
1997. The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the redemption date. The
Company will not be required to make any mandatory redemption or sinking fund
payments with respect to the Notes prior to maturity; however, in the event of a
Change of Control, the Company will be required to make an offer to purchase the
Notes, at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the purchase date.
The Notes will be general unsecured obligations of the Company, will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including borrowings under the New Credit Facility, and will
rank PARI PASSU with $75.0 million aggregate principal amount of outstanding
9 7/8% Senior Subordinated Notes due 2003 of Paracelsus. On a pro forma basis
giving effect to the Merger, the Notes Offering and the Equity Offering and the
application of the net proceeds therefrom, the Notes would have been
subordinated to $120.6 million of the Company's indebtedness at May 31, 1996, of
which $112.1 million would have been secured Senior Indebtedness of the Company,
and $8.5 million would have been indebtedness and other obligations of
subsidiaries of the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN
THE NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
<S> <C> <C> <C>
Per Note........................................ % % %
Total (4)....................................... $ $ $
</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $ .
(4) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
$25,000,000 AGGREGATE PRINCIPAL AMOUNT OF ADDITIONAL NOTES SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
THE COMPANY WILL BE $ , $ AND $ , RESPECTIVELY.
SEE "UNDERWRITING."
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject any order in whole or
in part. It is expected that delivery of the Notes will be made in New York, New
York on or about , 1996, against payment in same-day funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BA SECURITIES, INC.
NATIONSBANC CAPITAL MARKETS, INC.
<PAGE>
[INSERT MAP HERE]
DESCRIPTION OF THE MAP ON THE INSIDE FRONT COVER PAGE UNDER THE TITLE OF
"PARACELSUS HEALTHCARE CORPORATION"
The map depicts the United States showing the locations of the Company's
facilities.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY OR OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO HEREIN. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "PARACELSUS" REFER TO
PARACELSUS HEALTHCARE CORPORATION PRIOR TO THE MERGER OF CHAMPION HEALTHCARE
CORPORATION ("CHAMPION") WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF PARACELSUS
(THE "MERGER"). REFERENCES TO THE "COMPANY" REFER TO PARACELSUS AFTER THE MERGER
AND INCLUDE THE COMBINED OPERATIONS OF PARACELSUS AND CHAMPION. IN ADDITION, ALL
REFERENCES TO PROCEEDS TO THE COMPANY FROM THE NOTES OFFERING OR THE OFFERINGS
(EACH AS DEFINED BELOW) AND ALL PRO FORMA AND ADJUSTED FINANCIAL INFORMATION
ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION WITH RESPECT TO
THE NOTES. CERTAIN STATEMENTS UNDER THIS CAPTION "PROSPECTUS SUMMARY" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
(THE "REFORM ACT"). SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS."
THE COMPANY
Paracelsus is a leading healthcare company that owns and operates acute care
and specialty hospitals and related healthcare businesses serving selected
markets in the United States. Paracelsus currently owns and operates 18 acute
care hospitals with a total of 1,685 licensed beds in California, Utah,
Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care
hospitals provide a broad array of general medical and surgical services on an
inpatient, outpatient and emergency basis. In addition, certain hospitals and
their related facilities offer rehabilitative medicine, substance abuse
treatment, psychiatric care and Acquired Immune Deficiency Syndrome ("AIDS")
care. In California, Paracelsus also owns and operates three psychiatric
hospitals with 218 licensed beds, four skilled nursing facilities with 232
licensed beds and a 60-bed rehabilitative hospital. In addition, Paracelsus owns
and operates 11 home health agencies and 16 medical office buildings adjacent to
certain of its hospitals. For the 12 months ended March 31, 1996 on a pro forma
basis after giving effect to acquisitions and dispositions, Paracelsus would
have had total operating revenues of $516.9 million, Adjusted EBITDA (as defined
below) of $55.8 million and a net loss of $3.1 million. The net loss includes an
unusual charge recorded in March 1996 of $22.4 million (or $13.2 million, net of
taxes) related to the settlement of two lawsuits.
On April 12, 1996, Paracelsus entered into an Agreement and Plan of Merger,
as amended and restated on May 29, 1996 (the "Merger Agreement"), with Champion
pursuant to which Champion will become a wholly owned subsidiary of the Company.
Champion currently owns and operates five acute care hospitals with a total of
722 licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and
operates, a partnership that owns two additional acute care hospitals with a
total of 341 licensed beds in North Dakota under the name "Dakota Heartland
Health System" ("DHHS"). Champion's acute care hospitals generally offer the
same types of services provided by Paracelsus' acute care hospitals. Champion
also owns and operates two psychiatric hospitals with a total of 219 licensed
beds in Missouri and Louisiana. For the 12 months ended March 31, 1996 on a pro
forma basis after giving effect to acquisitions and dispositions, Champion would
have had net revenue of $198.2 million, Adjusted EBITDA of $32.2 million and net
income of $3.9 million.
Following the Merger, the Company will operate 31 hospitals in 11 states,
including 25 acute care hospitals with 2,748 licensed beds, five psychiatric
hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed
beds. On a pro forma combined basis for the 12 months ended March 31, 1996,
after giving effect to the Offerings, the Company would have had total operating
revenues of $714.8 million, Adjusted EBITDA of $88.1 million and a net loss of
$6.7 million. The net loss includes the unusual charge related to the settlement
of two lawsuits. These pro forma combined results do not give effect to any cost
savings that management believes will be realized as a result of the Merger due
to the combination of the corporate operations of Paracelsus and Champion and
the elimination of certain corporate consulting contracts of Paracelsus. In
addition, the combined entity should benefit
3
<PAGE>
from economies of scale in such areas as purchasing, marketing, information
systems, risk management, acquisitions and development, accounting,
reimbursement, corporate finance and quality assurance.
The Company believes that the Merger represents a unique opportunity to
integrate the operations of two companies that have a complementary portfolio of
hospitals. Upon completion of the Merger, 22 of the 31 hospitals owned or
operated by the Company will be located in markets where a hospital or hospital
network operated by the Company is a preeminent provider. On a pro forma
combined basis (excluding the PHC Salt Lake Hospital (as defined below) and the
two hospitals owned by DHHS), the remaining 19 hospitals would have accounted
for approximately 71% and 89% of the 28 remaining hospitals' operating revenues
and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996.
Following the Merger, the Company believes that it will be better positioned
to implement its business strategy due to its greater scale and diversity of
operations, expanded geographic presence and enhanced access to the public
capital markets and other financing sources. The Company also believes that it
will benefit from the addition to Paracelsus' management team of three key
Champion executives who, following the Merger, will have primary responsibility
for day to day management of the Company. These Champion executives have an
average of 29 years of hospital industry experience and a proven track record in
operating and growing publicly held hospital companies. Over the past five
years, these executives grew Champion's net revenue at a compounded annual
growth rate of 62.0%, from $24.3 million in 1991 to $167.5 million in 1995,
while improving its Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995
and 19.2% for the three months ended March 31, 1996.
After the Merger, the Company's principal executive offices will be located
at 515 West Greens Road, Suite 800, Houston, Texas 77067. Its telephone number
will be (713) 873-6623.
BUSINESS STRATEGY
The Company's strategic objective is to establish each of its hospitals or
hospital networks as the provider of choice in its market. To accomplish this,
the Company first seeks to establish a presence in geographic locations that are
best suited to developing a preeminent market position. These locations
primarily include small to mid-sized markets with more favorable demographics
and lower levels of penetration by managed care plans and alternative niche
competitors than larger metropolitan areas. Moreover, the competing hospitals in
the Company's target markets frequently will be not-for-profit facilities which
the Company believes have higher cost structures than its hospitals. Second, the
Company focuses on implementing operating strategies developed by the Company
for positioning each of its hospitals or hospital networks as providers of
measurably higher quality and lower cost healthcare services than competing
providers. The key elements of the Company's operating strategies are as
follows:
EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS
The Company plans to continue to pursue expansion opportunities through the
strategic acquisition of hospitals and complementary healthcare businesses in
existing or new markets. The Company has demonstrated this strategy most
recently by successfully acquiring four hospitals and a home health agency in
the Salt Lake City market. The Company believes that its primary sources of
acquisitions will be unaffiliated not-for-profit hospitals and facilities being
divested by hospital systems for strategic, regulatory or performance reasons.
INCREASE MARKET PENETRATION
The Company seeks to increase the market penetration of its hospitals by
offering a full range of hospital and related healthcare services and by gaining
market share from local competitors by providing measurably higher quality and
lower cost services. For example, this strategy has been successfully
demonstrated by the addition of obstetrics programs at each of The Medical
Center of
4
<PAGE>
Mesquite and Westwood Medical Center during the past 12 months. In addition,
over the past 24 months the Company has acquired or established five home health
agencies that cover 26 counties in Tennessee, providing a large referral base
for the Company's four hospitals in that market.
ESTABLISH A COMPETITIVE COST ADVANTAGE
The Company seeks to position each of its hospitals as the low cost provider
in its market by monitoring and controlling fixed and variable operating
expenses. Champion's executives have demonstrated an ability to reduce costs as
indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in
1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. Labor
costs are a primary focus of such efforts, and Champion's executives have
reduced salaries, wages and benefits as a percentage of net revenue at
Champion's hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and
35.4% for the three months ended March 31, 1996. The Company believes that a low
cost provider is better able to succeed in the current healthcare environment by
aggressively pricing its managed care contracts and direct employer arrangements
and by maintaining profitability under fixed payment systems.
IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE
The Company believes that preventing errors in the treatment process can
improve quality and lower the cost of care by reducing the risk of adverse
events to patients and the consequential costs of such events. For the past two
years, the Company has piloted a proprietary program in four of its hospitals
designed to identify and measure the incidence of patient treatment errors in
225 separate clinical categories. The Company believes the capability to
quantify data regarding the quality of care in its hospitals will enable the
Company to reduce the cost of care and will enhance the ability of its hospitals
to win and profit from managed care contracts.
DEVELOP A COMPETITIVE SERVICE ADVANTAGE
The Company believes that bureaucratic and impersonalized customer service
is a historical structural deficiency within the hospital industry caused by
service systems, policies and procedures that are designed for the convenience
of physicians and hospitals rather than patients, payors and employers. The
Company is developing a proprietary customer service system that it believes
will differentiate its hospitals and facilities from those of its competitors
and provide a competitive advantage.
REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY
The provision of high quality healthcare services is primarily a local
business, and the Company's business strategy and operating programs emphasize
local management initiative, responsibility and accountability combined with
corporate support and oversight.
REFINANCINGS IN CONNECTION WITH THE MERGER
The Company has filed a registration statement with respect to 5,200,000
newly-issued shares of common stock, no stated value per share (the "Common
Stock"), that it plans to offer (the "Equity Offering") concurrently with the
offering of Notes made hereby (the "Notes Offering" and, together with the
Equity Offering, the "Offerings"). Certain shareholders of the Company will also
be selling an aggregate of 2,695,000 shares of Common Stock in connection with
the Equity Offering (3,879,250 if the over-allotment option with respect to the
Common Stock is exercised in full). The Company will not receive any proceeds
from the sale of Common Stock made by such selling shareholders.
The Company currently intends that a portion of the estimated aggregate net
proceeds to the Company from the Offerings of $297.2 million (consisting of
$241.3 million from the Notes Offering and $55.9 million from the Equity
Offering) will be used by Champion to prepay an estimated $159.2 million of
outstanding Champion indebtedness (plus $6.6 million of prepayment premiums) as
of May 31, 1996. The remaining net proceeds to the Company from the Offerings
will be used to reduce outstanding indebtedness under either the existing
Paracelsus credit facility (the "Existing Paracelsus Credit Facility") or the
new credit facility (the "New Credit Facility") that the Company
5
<PAGE>
intends to establish as soon as practicable at or after the effective time of
the Merger (the "Effective Time"), as applicable. Neither the Notes Offering nor
the Equity Offering is contingent upon the consummation of the other. See "Risk
Factors -- Significant Leverage," "The Merger and Financing" and "Use of
Proceeds."
The Company currently intends to refinance as soon as practicable at or
after the Effective Time, through borrowings under the New Credit Facility, all
amounts outstanding under the Existing Paracelsus Credit Facility (the "Credit
Facility Refinancing"). The New Credit Facility will provide for borrowings of
up to $400.0 million, of which $104.0 million is expected to be outstanding
after giving effect to the Offerings and the Credit Facility Refinancing and the
application of the net proceeds therefrom.
THE NOTES OFFERING
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<S> <C>
SECURITIES OFFERED................ $250,000,000 principal amount of % Senior
Subordinated Notes due , 2006 (the "Notes").
In addition, the Company has granted to the Underwriters
an option exerciseable for 30 days from the date hereof
to purchase up to an additional $25,000,000 principal
amount of Notes solely to cover over-allotments, if any.
MATURITY DATE..................... , 2006.
INTEREST PAYMENT DATES............ and of each year, commencing , 1997.
OPTIONAL REDEMPTION............... In whole or in part, at any time on or after
, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest to the
redemption date.
CHANGE OF CONTROL................. Upon a Change of Control, the Company is required to
offer to purchase the Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the
purchase date. In addition, in the event that pursuant
to any Change of Control Offer (as defined below) made
in compliance with the Indenture governing the Notes
(the "Indenture") 80% or more of the outstanding Notes
are tendered and accepted for payment by the Company,
then the Company will have the right to redeem all, but
not less than all, of the outstanding Notes not so
tendered in such Change of Control Offer at a redemption
price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest. There can be
no assurance that the Company will be able to repurchase
the Notes in the event of a Change of Control. See "Risk
Factors -- Possible Inability to Repurchase Notes upon a
Change of Control."
RANKING........................... The Notes will be general unsecured obligations of the
Company and will be subordinated in right of payment to
all existing and future Senior Indebtedness of the
Company, including borrowings under the New Credit
Facility. On a pro forma basis giving effect to the
Merger and the Offerings and the application of the net
proceeds therefrom, the Notes would have been
subordinated to $120.6 million of the Company's
indebtedness at May 31, 1996, of which $112.1 million
would have been Senior Indebtedness of the Company, all
of which would have been secured indebtedness, and $8.5
million would have been indebtedness and other
obligations of
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
subsidiaries of the Company. See "The Merger and Financ-
ing," "Capitalization," "Description of the Notes --
General" and "-- Subordination" and "Description of the
New Credit Facility." In addition, upon the consummation
of the Credit Facility Refinancing and Offerings, the
Company expects to have available $296.0 million of
unused borrowing capacity under the New Credit Facility
(before reduction of $9.7 million for commitments
outstanding under letters of credit), all of which will
be permitted to be borrowed under the Indenture in
accordance with the terms thereof. Borrowings under the
New Credit Facility will be secured by a lien on certain
collateral owned by the Company and its subsidiaries.
The Notes will be effectively subordinated to all
indebtedness and other obligations of subsidiaries of
the Company, which, on a pro forma basis giving effect
to the Merger and the Offerings and the application of
the net proceeds therefrom, would have been $8.5 million
at May 31, 1996. The Notes will rank PARI PASSU with
$75.0 million aggregate principal amount of outstanding
9 7/8% Senior Subordinated Notes due 2003 of Paracelsus
(the "Existing Senior Subordinated Notes"). See "Company
Unaudited Pro Forma Condensed Combining Financial
Statements."
CERTAIN COVENANTS................. The Indenture will contain certain covenants, including,
but not limited to, covenants limiting: (i) the
incurrence by the Company and its subsidiaries of
additional indebtedness; (ii) certain restricted
payments, including the payment of dividends on and the
redemption of capital stock by the Company; (iii) the
creation of liens securing indebtedness; (iv)
restrictions on the ability of subsidiaries to pay
dividends, make certain payments and transfer property
to the Company; (v) transactions with affiliates; (vi)
the sale of assets; (vii) the entry into a new line of
business; and (viii) the Company's ability to
consolidate or merge with or into, or to transfer all or
substantially all of its assets to, another person.
USE OF PROCEEDS BY THE COMPANY.... The aggregate net proceeds to the Company from the
Offerings are estimated to be $297.2 million (consisting
of $241.3 million from the Notes Offering and $55.9
million from the Equity Offering). The Company intends
that a portion of the net proceeds from the Offerings
will be used by Champion to prepay an estimated $159.2
million of outstanding Champion indebtedness (plus $6.6
million of prepayment premiums) as of May 31, 1996. The
remaining estimated net proceeds of $131.4 million will
be used to reduce outstanding indebtedness under the
Existing Paracelsus Credit Facility or the New Credit
Facility, as applicable. See "Use of Proceeds."
</TABLE>
For definitions of certain capitalized terms used herein, see "Description
of the Notes."
RISK FACTORS
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN
THE NOTES OFFERED HEREBY.
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The Summary Unaudited Pro Forma Financial and Operating Data set forth below
have been derived from the Company Unaudited Pro Forma Condensed Combining
Financial Statements included elsewhere in this Prospectus. The Summary
Unaudited Pro Forma Financial and Operating Data reflect the effect of the
consummation of the Offerings, in each case as if such transactions had occurred
at the beginning of each period presented for purposes of the pro forma income
statement and operating data and on March 31, 1996 for purposes of the pro forma
balance sheet data. The Summary Unaudited Pro Forma Financial and Operating Data
set forth below also give effect to the Merger and the acquisitions and
dispositions completed by Paracelsus and Champion since the beginning of each of
the periods presented. All references in the Summary Unaudited Pro Forma
Financial and Operating Data and in this Prospectus to share and per share data
with respect to the Common Stock reflect the 66,159.426-for-one stock split to
be effected prior to the Merger.
The Summary Unaudited Pro Forma Financial and Operating Data set forth below
and the Company Unaudited Pro Forma Condensed Combining Financial Statements
included elsewhere herein do not purport to present the financial position or
results of operations of the Company had the transactions and events assumed
therein occurred on the dates specified, nor are they necessarily indicative of
the results of operations that may be expected in the future. The Summary
Unaudited Pro Forma Financial and Operating Data set forth below is qualified in
its entirety by reference to, and should be read in conjunction with, the
Company Unaudited Pro Forma Condensed Combining Financial Statements included
elsewhere in this Prospectus.
The Company currently intends to adopt a December 31 year end. Paracelsus
currently reports its financial information on the basis of a September 30
fiscal year. Champion currently reports its financial information on the basis
of a December 31 year. The Summary Unaudited Pro Forma Financial and Operating
Data for the fiscal year ended September 30, 1995 includes Paracelsus'
historical results of operations for the fiscal year ended September 30, 1995
and Champion's historical results of operations for the year ended December 31,
1995. The Summary Unaudited Pro Forma Financial and Operating Data for the six
months ended March 31, 1995 and 1996 includes Paracelsus' and Champion's
historical results of operations for the same six-month periods. The Summary
Unaudited Pro Forma Balance Sheet Data includes the historical balance sheets of
Paracelsus and Champion as of March 31, 1996. See "The Merger and Financing,"
"Company Unaudited Pro Forma Condensed Combining Financial Statements,"
"Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial
Statements," "Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements" and "Champion Unaudited Pro Forma Condensed Combining Statements of
Income and Unaudited Historical Condensed Balance Sheet."
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED ------------------------------
SEPTEMBER 30, 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues (1)..................................... $ 696,899 $ 347,240 $ 368,555
Costs and expenses:
Salaries and benefits........................................ 288,075 148,207 155,927
Supplies..................................................... 70,828 35,785 34,717
Purchased services........................................... 85,990 39,615 47,543
Provision for bad debts...................................... 55,616 27,004 27,845
Other operating expenses..................................... 117,911 57,419 59,328
Depreciation and amortization................................ 32,510 15,776 17,575
Interest..................................................... 37,895 19,263 19,219
Equity in earnings of DHHS (2)............................... (8,881) (2,363) (6,609)
Restructuring and unusual charges (3)........................ 4,177 -- --
Settlement costs (4)......................................... -- -- 22,356
---------- --------------- -------------
Total costs and expenses................................. 684,121 340,706 377,901
---------- --------------- -------------
Income (loss) before minority interests and income taxes......... 12,778 6,534 (9,346)
Minority interests............................................... (1,927) (1,204) (1,072)
---------- --------------- -------------
Income (loss) before income taxes................................ 10,851 5,330 (10,418)
Income taxes (benefit)........................................... 4,540 3,170 (3,730)
---------- --------------- -------------
Net income (loss) (5)............................................ $ 6,311 $ 2,160 $ (6,688)
---------- --------------- -------------
---------- --------------- -------------
Income (loss) per share (5)...................................... $ 0.11 $ 0.04 $ (0.13)
---------- --------------- -------------
---------- --------------- -------------
Weighted average number of common and common equivalent shares
outstanding..................................................... 55,524 55,527 52,201
---------- --------------- -------------
---------- --------------- -------------
OPERATING DATA:
Adjusted EBITDA (6).............................................. $ 85,433 $ 40,369 $ 48,732
Adjusted EBITDA margin........................................... 12.3% 11.6% 13.2%
Capital expenditures (7)......................................... $ 62,553 $ 18,170 $ 21,388
Ratio of Adjusted EBITDA to interest expense..................... 2.3x 2.1x 2.5x
Ratio of net debt to Adjusted EBITDA (8)......................... -- -- 4.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 8,819
Working capital........................................... 109,658
Total assets.............................................. 840,621
Total debt................................................ 377,562
Shareholders' equity...................................... 269,884
</TABLE>
- ------------------------------
(1) Includes pro forma interest income of $2,375, $1,429 and $1,144 for the
fiscal year ended September 30, 1995 and the six months ended March 31, 1995
and 1996, respectively.
(2) Champion operates DHHS pursuant to an operating agreement and accounts for
its investment in DHHS under the equity method. DHHS began operations on
December 31, 1994.
(3) Restructuring and unusual charges consisted of special bonuses of $4,177 (or
$0.04 per share, net of taxes) paid to certain executive officers of
Paracelsus.
(4) Settlement costs of $22,356 (or $0.25 per share, net of taxes) consisted of
settlement payments, legal fees and the write-off of certain accounts
receivable in connection with the settlement of two lawsuits.
(5) Without giving effect to the Equity Offering, net income (loss) would have
been $5,993, $2,160 and $(7,777) for the fiscal year ended September 30,
1995 and the six months ended March 31, 1995 and 1996, respectively. For the
same periods, income (loss) per share would have been $0.12, $0.04 and
$(0.17), respectively. At March 31, 1996, pro forma total debt and
shareholders' equity would have been $433,475 and $213,971, respectively.
(6) "Adjusted EBITDA" represents income before income taxes, depreciation and
amortization, interest, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
(7) Includes capital expenditures for special construction projects at BayCoast
Medical Center and Westwood Medical Center of $38,047, $9,449 and $10,496
for the fiscal year ended September 30, 1995 and the six months ended March
31, 1995 and 1996, respectively.
(8) Represents pro forma total debt outstanding less cash and cash equivalents
as of March 31, 1996 divided by pro forma Adjusted EBITDA of $88,104 for the
12 months ended March 31, 1996.
9
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE MAKING AN
INVESTMENT IN THE NOTES OFFERED HEREBY. CERTAIN STATEMENTS UNDER THIS CAPTION
"RISK FACTORS" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE
"-- FORWARD-LOOKING STATEMENTS."
SIGNIFICANT LEVERAGE
As of May 31, 1996, as adjusted on a pro forma basis to give effect to the
Merger and the Offerings, the Company's total indebtedness, including the
current portion of long-term indebtedness and capital lease obligations, would
have been $452.8 million, which represents 63% of its total capitalization. See
"Capitalization." In addition, upon consummation of the Offerings and the Credit
Facility Refinancing, the Company expects to have $296.0 million of available
credit under the New Credit Facility (before reduction of $9.7 million for
commitments outstanding under letters of credit), all of which will be permitted
to be borrowed under the New Credit Facility and the Indenture in accordance
with their respective terms. On a pro forma basis, after giving effect to the
Merger and the Offerings and the application of the net proceeds therefrom, the
Company's earnings would have been insufficient to cover fixed charges by $9.3
million for the six months ended March 31, 1996. The pro forma earnings
deficiency is primarily the result of an unusual charge recorded in March 1996
of $22.4 million related to the settlement of two lawsuits. See "Company
Unaudited Pro Forma Condensed Combining Financial Statements." The Company
believes that cash flows from operations will be sufficient to meet debt service
requirements for interest and scheduled payments of principal under the Notes,
the New Credit Facility and the Company's other indebtedness. However, there can
be no assurance that the Company will be able to generate the cash flows
necessary to permit the Company to meet such debt service requirements.
The Company expects that the New Credit Facility will include covenants that
prohibit or limit, among other things, the sale of assets, the making of
acquisitions and other investments, the incurrence of additional debt and liens
and the payment of dividends, and that require the Company to maintain a minimum
consolidated net worth and to comply with certain financial ratio tests. See
"Description of the New Credit Facility." In addition, the Indenture will
include covenants that limit, among other things, the ability of the Company and
its subsidiaries to incur additional indebtedness, make prepayments of certain
indebtedness, pay dividends or redeem capital stock, create certain liens, sell
certain assets, engage in certain transactions with affiliates, engage in
certain mergers and consolidations and enter a new line of business. See
"Description of the Notes -- Certain Covenants." The Company's failure to comply
with any of these covenants could result in an event of default, thereby
permitting acceleration of such indebtedness as well as indebtedness under other
instruments that contain cross-acceleration or cross-default provisions,
including the New Credit Facility, the indenture pursuant to which $75.0 million
aggregate principal amount of outstanding 9 7/8% Senior Subordinated Notes due
2003 of Paracelsus (the "Existing Senior Subordinated Notes") was issued (the
"Existing Senior Subordinated Notes Indenture") and the Indenture, which in turn
could have a material adverse effect on the Company's financial condition and
results of operations. See "Description of the New Credit Facility."
The degree to which the Company is leveraged and the covenants described
above may adversely affect the Company's ability to finance its future
operations and could limit its ability to pursue business opportunities that may
be in the interest of the Company and its security holders. In particular,
changes in medical technology, existing, proposed and future legislation,
regulations and the interpretation thereof, and the increasing importance of
managed care contracts and integrated healthcare delivery systems may require
significant investment in facilities, equipment, personnel or services. Although
the Company expects that cash generated from operations and amounts available
under the New Credit Facility will be sufficient to allow it to make such
investments, there can be no assurance that the Company will be able to obtain
the funds necessary to make such investments. Furthermore, tax-exempt or
government-owned competitors have certain financial advantages such
10
<PAGE>
as endowments, charitable contributions, tax-exempt financing and exemption from
sales, property and income taxes not available to the Company, providing them
with a potential competitive advantage in making such investments.
SUBORDINATION; HOLDING COMPANY STRUCTURE
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company. On a pro forma basis after giving
effect to the Merger and the Offerings and the application of the net proceeds
therefrom, the Notes would have been subordinated to $120.6 million of the
Company's indebtedness at May 31, 1996 ($176.5 million without giving effect to
the Equity Offering), of which $112.1 million would have been Senior
Indebtedness of the Company ($168.0 million without giving effect to the Equity
Offering), all of which would have been secured indebtedness. In addition, upon
the consummation of the Offerings and the Credit Facility Refinancing, the
Company expects to have available $296.0 million of unused borrowing capacity
under the New Credit Facility (before reduction for approximately $9.7 million
for commitments outstanding under letters of credit), all of which will be
permitted to be borrowed under the New Credit Facility and the Indenture in
accordance with their respective terms. All indebtedness incurred under the New
Credit Facility will constitute Senior Indebtedness and will be secured. In
addition, the Indenture limits the amount of indebtedness that may be incurred
by the Company; however, to the extent that the Indenture permits additional
indebtedness to be incurred, it does not limit the amount of such indebtedness
that may be senior to the Notes. See "Description of the Notes."
The Company generally may not pay the principal of, premium, if any, or
interest on, the Notes or repurchase, redeem or otherwise retire any Notes if
any obligation in respect of any Senior Indebtedness has not been paid when due
or any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms, unless, in
either case, the default has been cured or waived, any such acceleration has
been rescinded or such Senior Indebtedness has been paid in full. In addition,
if any other default exists with respect to certain Senior Indebtedness and
certain other conditions are satisfied, the Company may not make any payment on
the Notes for a designated period of time. Upon any payment or distribution of
the assets of the Company upon a total or partial dissolution of the Company or
in a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Notes are entitled to receive
any payment. See "Description of the Notes -- Subordination."
Borrowings under the New Credit Facility will be secured by a first priority
lien on the capital stock of most of the Company's significant subsidiaries. The
Notes will be unsecured. If the Company becomes insolvent or is liquidated, or
if its indebtedness is accelerated, the lenders under the New Credit Facility
will be entitled to payment in full from the proceeds of their security prior to
any payment to holders of the Notes. In such event, it is possible that there
would be no assets remaining from which claims of the holders of Notes could be
satisfied or, if any assets remain, such assets may be insufficient to satisfy
fully such claims. See "Description of the New Credit Facility."
The Notes will also be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. As of May 31, 1996, on a pro forma
basis after giving effect to the Merger and the Offerings and the application of
the net proceeds therefrom, the amount of all indebtedness and other obligations
of the Company's subsidiaries would have been $8.5 million of the $120.6 million
of the Company's indebtedness to which the Notes would have been effectively
subordinated. Substantially all of the Company's operations are conducted, and
substantially all of the Company's assets are owned, by its subsidiaries. As a
consequence, the Company's ability to make required principal and interest
payments with respect to the Company's indebtedness, including the Notes,
depends on the earnings of its subsidiaries and its ability to receive funds
from such subsidiaries through dividends or other payments. The Notes are
obligations of the Company only, and the Company's subsidiaries are not
obligated or required to pay any amounts due pursuant to the Notes or to make
funds available therefor in the form of dividends or advances to the Company.
Any right of the Company to participate in any distribution of the assets of any
of the Company's subsidiaries upon the liquidation, reorganization or insolvency
of such subsidiary (and the consequent right of the holders of the Notes to
11
<PAGE>
participate in those assets) will be subject to the claims of the creditors
(including trade creditors) and preferred shareholders, if any, of such
subsidiary, except to the extent the Company has a claim against such subsidiary
as a creditor of such subsidiary. In addition, in the event that claims of the
Company as a creditor of such subsidiary are recognized, such claims would be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company. However, the
ability of the Company and its subsidiaries to incur certain obligations in the
future is limited by certain of the restrictive covenants contained in the New
Credit Facility and in the Indenture. See "Description of the Notes" and
"Description of the New Credit Facility."
COMPETITION
The healthcare industry has been characterized in recent years by increased
competition for patients and quality staff physicians, excess inpatient capacity
at hospitals, a shift from inpatient to outpatient settings and increased
consolidation. The principal factors contributing to these trends are advances
in medical technology, cost-containment efforts by managed care plans, employers
and traditional health insurers, changes in regulations and reimbursement
policies, increases in the number and type of physicians and competing
healthcare providers and changes in physician practice patterns.
The Company's future success will depend, in part, on the ability of the
Company's hospitals to continue to attract quality physicians, to enter into
managed care contracts and to organize and structure integrated healthcare
delivery systems with other healthcare providers and physician practice groups.
Most of the Company's hospitals compete with other hospitals which provide
comparable services. Some of these hospitals may have significantly greater
financial resources than the Company and some offer a wider range of services
than those offered by the Company's hospitals. Some of these hospitals are owned
by governmental agencies that may be supported by Federal and/or state funding
and others by tax exempt entities supported by endowments and charitable
contributions, which support is not available to the Company's hospitals. The
competitive position of the Company is also affected by the growth of managed
care organizations, including health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs") and other purchasers of group
healthcare services. Such managed care organizations negotiate with hospitals
and other healthcare providers to obtain discounts from established charges. The
Company's ability to compete for managed care business in the future will
depend, in part, on its ability to operate profitably in a capitated payment or
negotiated price environment. There can be no assurance that the Company's
hospitals will be able, on terms favorable to the Company, to attract quality
physicians to their staffs, to enter into managed care contracts or to organize
and structure integrated healthcare delivery systems for which other healthcare
companies (including those with greater financial resources or a wider range of
services) may be competing.
Payor organizations have changed their payment methodologies and have
increased their monitoring of the utilization of services, which has resulted
in, among other things, a significant shift from inpatient to outpatient care.
This shift from inpatient to outpatient care, which typically results in more
cost effective care, has also resulted in substantial unused inpatient hospital
capacity and a concurrent increase in the utilization of outpatient services and
outpatient revenues. Partially as a result of these changes in the industry,
there has been significant consolidation in the hospital industry over the past
decade and many hospitals have closed, merged with a competitor or reduced their
services. While the Company has added to its outpatient services, there can be
no assurance that such additions will adequately compensate for the shift away
from inpatient services. Although the occupancy rates and facility utilization
for the Company's acute care facilities have remained fairly stable over the
last three fiscal years, a number of the foregoing factors could cause the
Company to experience a decrease in occupancy rates or overall facility
utilization. The Company cannot predict with any degree of certainty the effect
such changes or reforms or further changes or reforms might have on the business
of the Company, and no assurance can be given that such changes or reforms will
not have a material adverse effect on the Company's financial condition or
results of operations.
12
<PAGE>
BUSINESS EXPANSION
The Company's ability to compete successfully for managed care contracts or
to form or participate in integrated healthcare delivery systems may depend
upon, among other things, the Company's ability to increase the number of its
facilities and services offered. Part of the Company's business strategy is to
expand its facilities and services through the acquisition of hospitals, other
healthcare businesses and ancillary healthcare providers and recruitment of
additional physicians. There can be no assurance that suitable acquisitions, for
which other healthcare companies (including those with greater financial
resources than the Company) may be competing, can be accomplished on terms
favorable to the Company or that financing, if necessary, can be obtained for
such acquisitions. See "-- Significant Leverage." In addition, there can be no
assurance that the Company will be able to operate profitably any hospital
facility, business or other asset it may acquire, effectively integrate the
operations of such acquisitions or otherwise achieve the intended benefits of
such acquisitions.
LIMITS ON REIMBURSEMENT
The Company's hospitals are licensed under applicable state law and
certified as providers under the Federal Medicare program and state Medicaid
programs, from which the Company derived in total approximately 58% and 60% of
its combined historical gross operating revenues for the fiscal year ended
September 30, 1995, and the six months ended March 31, 1996, respectively. Such
programs are highly regulated and subject to frequent and substantial changes.
In recent years, basic changes in Medicare reimbursement programs have resulted,
and are expected to continue to result, in reduced levels of reimbursement for a
substantial portion of hospital procedures and costs. In addition, further
changes are anticipated that are likely to result in further limitations on
reimbursement levels. There can be no assurance that reimbursement will continue
to be available for those procedures and costs of the Company currently
reimbursed by Medicare and Medicaid. See "Business -- Medicare, Medicaid and
Other Revenue."
In addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures or the assumption by healthcare providers of
all or a portion of the financial risk of delivering healthcare to their members
through prepaid capitation arrangements. Inpatient utilization, admissions and
occupancy rates continue to be negatively affected by payor-required pre-
admission authorization and utilization review and by payor pressure to
substitute less expensive outpatient and alternative healthcare services for
inpatient procedures for less acutely ill patients. See "-- Competition." In
addition, efforts to impose reduced allowances, greater discounts and more
stringent cost controls by government and other payors are expected to continue.
These changes could adversely affect the Company's financial condition and
results of operations. In particular, as the number of patients covered by
managed care payors increases, significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on the Company's financial condition and results of operations.
EXTENSIVE REGULATION
The healthcare industry is subject to extensive Federal, state and local
regulation relating to licensing, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services. In
particular, Medicare and Medicaid antifraud and abuse amendments codified under
Section 1128B(b) of the Social Security Act (the "Antifraud Amendments")
prohibit certain business practices and relationships that might affect the
provision and cost of healthcare services reimbursable under Medicare and
Medicaid. Sanctions for violating the Antifraud Amendments include criminal
penalties and civil sanctions, including fines and possible exclusion from the
Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid Patient
and Program Protection Act of 1987, the Department of Health and Human Services
("HHS") has issued regulations that describe some of the conduct and business
relationships permissible under the Antifraud Amendments (the "Safe Harbors").
The fact that a given business arrangement does not fall within a Safe Harbor
does not render the arrangement PER SE illegal. Business arrangements of
healthcare service providers that fail to satisfy the applicable Safe Harbor
criteria, however, risk increased scrutiny by enforcement authorities.
13
<PAGE>
The Company has joint ventures with physician investors that are subject to
regulation under the Antifraud Amendments. None of such joint ventures falls
within any of the Safe Harbors. Under the Company's joint venture arrangements,
physician investors are not and will not be under any obligation to refer or
admit their patients, including Medicare or Medicaid beneficiaries, to receive
services at the Company's facilities, nor are distributions to those physician
investors contingent upon or calculated with reference to referrals by the
investors. On the basis thereof, the Company does not believe the ownership of
interests in or receipt of distributions from the Company's joint ventures would
be construed to be knowing and willful payments to the physician investors to
induce them to refer patients in violation of the Antifraud Amendments. There
can be no assurance, however, that government officials charged with
responsibility for enforcing the prohibitions of the Antifraud Amendments will
not assert that one or more of the Company's joint ventures is in violation of
such provisions. To date, none of the Company's current joint ventures has been
reviewed by any governmental authority for compliance with the Antifraud
Amendments. See "Business -- Regulation and Other Factors -- Other Federal
Statutes and Regulations."
In addition, Section 1877 of the Social Security Act was amended effective
January 1, 1995 (such amendments being hereinafter referred to as "Stark II") to
broaden significantly the scope of prohibited physician referrals under the
Medicare and Medicaid programs to providers with which they have financial
arrangements. Many states have adopted or are considering legislative proposals
similar to Stark II, some of which extend beyond the Medicaid program to all
healthcare services. The Company's participation in and development of joint
ventures and other financial arrangements with physicians could be adversely
affected by these amendments and similar state enactments. See "Business --
Regulation and Other Factors -- Other Federal Statutes and Regulations" and "--
State Statutes and Regulations."
Certificates of need ("CONs"), which are issued by certain state
governmental agencies with jurisdiction over healthcare facilities, are at times
required for the construction of new facilities, the expansion of old
facilities, capital expenditures exceeding a prescribed amount, changes in bed
capacity or services and certain other matters. The Company operates facilities
in seven states that require state approval under CON programs. No assurance can
be given that the Company will be able to obtain additional CONs in any
jurisdiction where such CONs are required. See "Business -- Regulation and Other
Factors -- Certificate of Need Requirements."
The Company is unable to predict the future course of Federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the Company's financial condition and results of operations.
HEALTHCARE REFORM LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the healthcare system, either nationally or at the state level.
Among the proposals under consideration are price controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a government health insurance
plan or plans that would cover all citizens. There continue to be efforts at the
Federal level to introduce various insurance market reforms, expanded fraud and
abuse and anti-referral legislation and further reductions in Medicare and
Medicaid reimbursement. A broad range of both similar and more comprehensive
healthcare reform initiatives is likely to be considered at the state level. In
an effort to reduce the Federal budget deficit, Congress is considering
reductions to Medicaid spending that could reduce payments to the Company's
hospitals for services provided to Medicaid recipients, including, among others,
payments to teaching hospitals and hospitals providing a disproportionate amount
of care to indigent patients. A reduction in these payments could adversely
affect the Company's total operating revenues and operating margins. It is
uncertain what action Congress or state legislatures may take or if any such
action would become law.
14
<PAGE>
The Company cannot predict whether any of the above proposals or any other
proposals will be adopted, and, if adopted, no assurance can be given that the
implementation of such legislation will not have a material adverse effect on
the Company's financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS
The Company's operations are dependent on the efforts, ability and
experience of its key executive officers. In addition, the Company's continued
growth depends on its ability to attract and retain skilled employees, on the
ability of its officers and key employees to manage growth successfully and on
the Company's ability to attract and retain quality physicians and management
teams at its facilities. Further, since physicians generally control the
majority of hospital admissions, the success of the Company is, in part,
dependent upon the number, specialties and quality of physicians on its
hospitals' medical staffs, most of whom have no long-term contractual
relationship with the Company and may terminate their association with the
Company's hospitals at any time. No assurance can be given that the loss of some
or all of these key executive officers or an inability to attract or retain
sufficient numbers of qualified physicians or hospital management teams will not
have a material adverse effect on the Company's financial condition or results
of operations.
CONCENTRATION OF OPERATIONS
Of the 31 hospital facilities to be operated by the Company after
consummation of the Merger, five will be located in the Salt Lake City
metropolitan area. On a pro forma combined basis, excluding the effect of the
Company's acquisition of assets relating to FHP Hospital, a 125-bed acute care
hospital, and its surrounding campus, in Salt Lake City (the "PHC Salt Lake
Hospital"), these hospitals would have accounted for 25% and 34% of the
Company's total hospital operating revenues and Adjusted EBITDA, respectively,
for the 12 months ended March 31, 1996. The Company expects that total hospital
operating revenues and Adjusted EBITDA anticipated to be received by the Company
in connection with the operation of PHC Salt Lake Hospital will further increase
the contribution of the Utah operations to the Company's total hospital
operating revenues and Adjusted EBITDA. See "Business -- Recent Transactions."
The Company's management believes that its strategy of acquiring hospitals in
the Salt Lake City area will enhance its ability to compete for managed care
contracts and organize and structure an integrated healthcare delivery system in
that market, although there can be no assurance that such strategy will be
successful. In addition, the Company has eight hospitals in the Los Angeles
metropolitan area, a competitive and overbedded environment. On a pro forma
combined basis, these hospitals would have accounted for 23% and 9% of the
Company's total hospital operating revenues and Adjusted EBITDA, respectively,
for the 12 months ended March 31, 1996. The Company may be particularly
sensitive to economic, competitive and regulatory conditions in these
metropolitan areas, and the future success of the Company may be substantially
affected by its ability to compete effectively in these markets.
PROFESSIONAL LIABILITY INSURANCE
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business. In
the past, the Company established self-insurance programs and related trust
funds for the settlement of claims not covered by third-party insurance. In
October 1992, the Company established an insurance subsidiary to insure the
Company and its other subsidiaries against liability for future general
liability and malpractice claims. Such subsidiary insures the Company's
hospitals for the first $500,000 per occurrence of general and professional
liability risks occurring after October 1, 1987 and the first $250,000 per
occurrence of workers' compensation liability risks occurring after October 1,
1992. Although management expects that the Company's self-insurance and
related-party insurance, together with its third-party insurance coverage, will
be adequate to provide for liability claims, there can be no assurance that such
insurance will prove to be adequate.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to offer
to purchase the Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to
15
<PAGE>
the purchase date. In addition, in the event of a change of control under the
Existing Senior Subordinated Notes Indenture, the Company is required to offer
to purchase all of the Existing Senior Subordinated Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the purchase date.
Not all events that result in a change of control with respect to the Existing
Senior Subordinated Notes will result in a Change of Control with respect to the
Notes. The terms of the New Credit Facility will prohibit the Company from
repurchasing Notes upon the occurrence of a Change of Control. Accordingly, the
Company may not be able to satisfy its obligations to repurchase the Notes
unless the Company is able to refinance or obtain waivers with respect to the
New Credit Facility and certain other indebtedness. There can be no assurance
that the Company will have the financial resources necessary to purchase all of
the Notes and the Existing Senior Subordinated Notes tendered by the holders
thereof in the event of a Change of Control, particularly if such Change of
Control requires the Company to refinance, or results in the acceleration of,
the New Credit Facility or any other indebtedness. See "Description of the
Notes" and "Description of the New Credit Facility."
LACK OF PUBLIC MARKET
The Notes are a new issue of securities with no established trading markets.
The Underwriters (as defined below) have advised the Company that each of them
currently intends to make a market in the Notes as permitted by applicable laws
and regulations. However, the Underwriters are under no obligation to do so and
may discontinue any market making activities at any time at the sole discretion
of each Underwriter. There can be no assurance as to the liquidity of any market
that may develop for the Notes, the ability of holders to sell their Notes or
the price at which holders would be able to sell their Notes. If a trading
market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling them or may be unable to sell them at all. If
a trading market for the Notes develops, the Notes may trade at a discount from
their principal amount. Future trading prices of the Notes will depend on many
factors, including prevailing interest rates, the Company's operating results,
factors relating to the healthcare market generally and the market for similar
securities. The Company does not intend to apply for listing of the Notes on any
securities exchange.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation statements containing the words "believes," "anticipates,""intends,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Reform Act. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in the regions in which the Company operates; industry capacity;
demographic changes; existing government regulations and changes in, or the
failure to comply with, government regulations; legislative proposals for
healthcare reform; the ability to enter into managed care provider arrangements
on acceptable terms; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition; the loss
of any significant customers; changes in business strategy or development plans;
the ability to attract and retain qualified personnel, including physicians; the
significant indebtedness of the Company after the Merger; the availability and
terms of capital to fund the expansion of the Company's business, including the
acquisition of additional facilities; and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including without limitation under the captions "Prospectus
Summary," "Risk Factors," "Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Champion Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
16
<PAGE>
THE MERGER AND FINANCING
THE MERGER; PARACELSUS STOCK SPLIT
On April 12, 1996, Paracelsus, PC Merger Sub, Inc., a Delaware corporation
and a newly formed wholly owned subsidiary of Paracelsus, and Champion entered
into the Merger Agreement pursuant to which Champion will become a wholly owned
subsidiary of Paracelsus. Prior to the Effective Time, each of the 450 issued
and outstanding shares of Common Stock will be split into, and each share will
become and thereafter represent, 66,159.426 shares of Common Stock (the
"Paracelsus Stock Split"). At the Effective Time, as a result of the Merger, (i)
each share of Champion common stock (the "Champion Common Stock") will
automatically be converted into the right to receive one share of Common Stock
and (ii) each share of Champion preferred stock (the "Champion Preferred Stock"
and, together with the Champion Common Stock, the "Champion Capital Stock") will
automatically be converted into the right to receive two shares of Common Stock.
Approval of the Merger requires (i) the affirmative vote of the holders of a
majority of the total voting power represented by the outstanding shares of
Champion Capital Stock, voting together as a single class, (ii) the affirmative
vote of the holders of at least 90% of the outstanding shares of Champion Series
C Cumulative Convertible Preferred Stock, voting as a separate class and (iii)
the affirmative vote of the holders of at least 90% of the outstanding shares of
Champion Series D Cumulative Convertible Preferred Stock, voting together as a
separate class. The holders of all of the outstanding shares of Champion
Preferred Stock, which in the aggregate represent approximately 26% of the total
voting power of the outstanding shares of Champion Capital Stock, have entered
into an agreement with Champion to vote all shares of Champion Preferred Stock
beneficially owned by them in favor of the Merger.
PARACELSUS DIVIDEND PRIOR TO EFFECTIVE TIME
Prior to the Effective Time, Paracelsus will declare a dividend (the
"Dividend") in the amount of $21.1 million, plus $3,574 for each day from and
including July 31, 1996 to the date the Dividend is paid, payable to Park
Hospital GmbH, a German corporation wholly owned by Dr. Manfred George
Krukemeyer, the Chairman of the Board and principal shareholder of the Company
(the "Paracelsus Shareholder"), to be paid on a date not later than 60 days
after the Effective Time.
Pursuant to the dividend and note agreement between the Paracelsus
Shareholder and Paracelsus (the "Dividend and Note Agreement") to be entered
into immediately prior to the Effective Time, the Paracelsus Shareholder will
agree to purchase promptly after receipt of the Dividend a 6.51% subordinated
note due 2006 of Paracelsus (the "Shareholder Subordinated Note") for $7.2
million. The Shareholder Subordinated Note will have a term of 10 years, will
bear interest at the rate of 6.51% per year and will provide for payments of
principal and accrued interest in an aggregate annual amount of $1.0 million.
The Shareholder Subordinated Note will be generally subordinated in right of
payment to: (i) all "senior indebtedness" as defined in the Existing Senior
Subordinated Notes Indenture (including without limitation the New Credit
Facility); (ii) the Existing Senior Subordinated Notes; (iii) the Notes and any
other indebtedness ranking PARI PASSU with the Notes and/or refinancing
indebtedness; and (iv) any other indebtedness for borrowed money with an initial
principal amount in excess of $50.0 million that is designated by the Company as
ranking senior to the Shareholder Subordinated Note.
CREDIT FACILITY REFINANCING
In connection with the Merger and the Credit Facility Refinancing, the
Company currently intends to arrange for the New Credit Facility with Bank of
America National Trust and Savings Association ("Bank of America NT&SA"), as
Administrative Agent, Banque Paribas, as Documentation Agent, and NationsBank of
Texas, N.A. ("NationsBank"), as Managing Agent, and a syndicate of other lenders
at or as soon as practicable after the Effective Time. The New Credit Facility
will provide for borrowings of up to $400.0 million. The Company currently
intends to refinance, through borrowings under the New Credit Facility, all
amounts outstanding under the Existing Paracelsus Credit Facility. At May 31,
1996, the balance outstanding under the Existing Paracelsus Credit Facility was
approximately $189.0 million. The Merger is not conditioned upon the closing of
the Credit Facility
17
<PAGE>
Refinancing. However, if the Credit Facility Refinancing is not consummated,
Champion and Paracelsus may be required to obtain certain consents and waivers
under their respective existing credit facilities in order to consummate the
Merger. The failure to obtain such consents and waivers may be deemed to give
rise to a default thereunder and perhaps cause other defaults under the
outstanding obligations of Champion and Paracelsus. There can be no assurance
that such consents and waivers, if required, would be obtained. Although the
Company currently intends to consummate the Credit Facility Refinancing
concurrently with or promptly following the consummation of the Notes Offering,
unless the context otherwise requires, all references in this Prospectus to the
Company's indebtedness assume that the Credit Facility Refinancing has not
occurred and that the Existing Paracelsus Credit Facility is in effect. See
"Risk Factors -- Significant Leverage."
FINANCING PLAN
The following sets forth as of May 31, 1996 the pro forma sources and uses
of funds raised in the Offerings, assuming (i) $250,000,000 aggregate principal
amount of Notes are sold by the Company in the Notes Offering at 100% of their
principal amount and (ii) 5,200,000 newly issued shares of Common Stock are
offered and sold by the Company in the Equity Offering at a public offering
price of $11.50 per share.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS
Notes Offering.................................................................................... $ 250,000
Equity Offering................................................................................... 59,800
--------------
Total..................................................................................... $ 309,800
--------------
--------------
USE OF FUNDS
Existing Paracelsus Credit Facility/New Credit Facility (1)....................................... $ 131,449
Champion Credit Facility (as defined below)....................................................... 54,200
Champion Series D Notes (as defined below)........................................................ 59,258
Champion Series E Notes (as defined below)........................................................ 35,000
Certain other Champion indebtedness............................................................... 10,701
Prepayment premiums on Champion indebtedness...................................................... 6,555
Estimated fees and expenses (2)................................................................... 12,637
--------------
Total..................................................................................... $ 309,800
--------------
--------------
</TABLE>
- ------------------------
(1) After giving effect to the Offerings and the application of net proceeds
therefrom, $100.0 million would have been outstanding under the Existing
Paracelsus Credit Facility as of May 31, 1996 on a pro forma basis. After
giving effect to the Credit Facility Refinancing, this amount would be
$104.0 million (assuming fees and expenses to effect the Credit Facility
Refinancing of $4.0 million.)
(2) Includes estimated underwriting discounts and commissions and other
estimated expenses of the Company in connection with the Offerings.
18
<PAGE>
USE OF PROCEEDS
The Company intends that a portion of the estimated aggregate net proceeds
to the Company of $241.3 million from the Notes Offering and $55.9 million from
the Equity Offering, in each case after deducting estimated expenses and
underwriting discounts and commissions, will be loaned or contributed to
Champion to be used to prepay the following Champion indebtedness as of May 31,
1996: (i) $54.2 million outstanding under Champion's existing credit facility
(the "Champion Credit Facility") (which currently bears interest at the weighted
average rate of 8.6% per annum and matures on March 31, 1999); (ii) $59.3
million outstanding principal amount of Champion's 11% Series D Subordinated
Notes due December 31, 2003 (the "Champion Series D Notes"), plus prepayment
premiums equal to 6% of the face value of such notes; (iii) $35.0 million
outstanding principal amount of Champion's 11% Series E Senior Subordinated
Notes due December 31, 2003 (which currently bears interest at the rate of 11.5%
per annum) (the "Champion Series E Notes" and, together with the Champion Series
D Notes, the "Champion Notes"), plus prepayment premiums equal to 6% of the face
value of such notes; and (iv) $10.7 million principal amount of certain other
outstanding Champion indebtedness (which currently bears interest at the rate of
13.05% per annum and matures on November 1, 2008), plus aggregate prepayment
premiums equal to approximately $900,000. The estimated remaining aggregate net
proceeds to the Company of $131.4 million from the Offerings will be used to
reduce outstanding indebtedness under the Existing Paracelsus Credit Facility or
the New Credit Facility, as applicable. Consummation of the Notes Offering is
not contingent upon the Equity Offering, and there can be no assurance as to
whether or when the Equity Offering will be consummated. In the event that the
Equity Offering is not consummated, the net proceeds of the Notes Offering will
be sufficient to refinance the Champion indebtedness described above, however
the Company will have more debt outstanding and less borrowing capacity
available under the Existing Paracelsus Credit Facility or New Credit Facility,
as applicable. See "Capitalization."
19
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company at March 31, 1996 (i) as adjusted to give
effect to the Merger and (ii) as further adjusted to give effect to the
Offerings and the application of the net proceeds therefrom, in each case as if
such transactions had occurred on March 31, 1996. The Notes Offering is not
contingent upon the consummation of the Equity Offering. See "The Merger and
Financing" and "Use of Proceeds."
<TABLE>
<CAPTION>
ADJUSTED FOR
THE MERGER
ADJUSTED AND THE
FOR THE OFFERINGS
MERGER (1)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents (2)......................................................... $ 8,819 $ 8,819
----------- ------------
----------- ------------
Short-term debt (including current maturities of long-term debt)...................... $ 3,292 $ 2,464
----------- ------------
----------- ------------
Long-term debt and capital lease obligations (net of current maturities):
Existing Paracelsus Credit Facility(3).............................................. $ 137,109 $ 22,582
Champion Credit Facility(4)......................................................... 66,200 --
Mortgages payable, notes and capitalized leases..................................... 37,596 27,516
Existing Senior Subordinated Notes.................................................. 75,000 75,000
Notes offered hereby................................................................ -- 250,000
Champion Series D Notes(5).......................................................... 63,705 --
Champion Series E Notes(6).......................................................... 34,371 --
----------- ------------
Total long-term debt.............................................................. 413,981 375,098
----------- ------------
Shareholders' equity:
Preferred Stock, $0.01 par value (7)................................................ -- --
Common stock, no stated value (8)................................................... 173,370 229,283
Common stock subscribed (80,000 shares)............................................. 40 40
Common stock subscription receivable................................................ (40) (40)
Additional paid-in capital.......................................................... 390 390
Unrealized gains on marketable securities........................................... 42 42
Retained earnings................................................................... 44,566 40,169
----------- ------------
Total shareholders' equity........................................................ 218,368 269,884
----------- ------------
Total capitalization............................................................ $ 632,349 $ 644,982
----------- ------------
----------- ------------
</TABLE>
- --------------------------
(1) Without giving effect to the Equity Offering, amounts outstanding under the
Existing Paracelsus Credit Facility, total long-term debt, common stock and
total shareholders' equity would be $78,495, $431,011, $173,370 and
$213,971, respectively.
(2) As of May 31, 1996, combined historical cash and cash equivalents was
$3,100.
(3) Does not reflect an aggregate of $94,373 of net additional borrowings by the
Company between March 31, 1996 and May 31, 1996 under the Existing
Paracelsus Credit Facility, $86,750 of which was incurred to fund a portion
of the $22,356 in settlement costs and the acquisition of the PHC Salt Lake
Hospital assets for $70,000 in cash. There are no operating results relating
to the acquired PHC Salt Lake Hospital assets included in this Prospectus.
The remaining $7,623 of net additional borrowings included $6,685 to reduce
amounts outstanding under the accounts receivable financing program. Such
additional borrowings will be refinanced as part of the Credit Facility
Refinancing. See "Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations" and
"Business -- Recent Transactions."
(4) Does not reflect net repayments of $12,000 made through May 31, 1996.
(5) Does not reflect a $4,447 reduction in borrowings as a result of certain
warrant holders tendering Champion Series D Notes to exercise such warrants.
(6) Net of discount of approximately $629.
(7) As adjusted for the Merger, 25,000,000 shares authorized and 1,500,000
shares designated as "Participating Preferred Stock."
(8) As adjusted for the Merger, 150,000,000 shares authorized and 49,447,167
shares issued; and as further adjusted for the Equity Offering, 150,000,000
shares authorized and 54,647,167 shares issued.
20
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
The Company Unaudited Pro Forma Condensed Combining Financial Statements set
forth below have been derived from the Paracelsus and Champion Unaudited Pro
Forma Condensed Combining Financial Statements included elsewhere in this
Prospectus. The Company Unaudited Pro Forma Condensed Combining Financial
Statements reflect the effect of the consummation of each of the Offerings, in
each case as if such transactions had occurred at the beginning of each period
presented for purposes of the pro forma income statements and on March 31, 1996
for purposes of the pro forma balance sheet data. The Company Unaudited Pro
Forma Condensed Combining Financial Statements also give effect to the Merger
and the acquisitions and dispositions by each of Paracelsus and Champion
completed since the beginning of each of the periods presented.
The Company currently intends to adopt a December 31 year end. Paracelsus
currently reports its financial information on the basis of a September 30
fiscal year. Champion currently reports its financial information on the basis
of a December 31 year. The Company Unaudited Pro Forma Condensed Combining
Statement of Income for the fiscal year ended September 30, 1995 includes
Paracelsus' historical results of operations for the fiscal year ended September
30, 1995 and Champion's historical results of operations for the year ended
December 31, 1995. The Company Unaudited Pro Forma Condensed Combining Statement
of Income for the six months ended March 31, 1995 and 1996 includes Paracelsus'
and Champion's historical results of operations for the same six-month periods.
The Company Unaudited Pro Forma Condensed Combining Balance Sheet includes the
historical balance sheets of Paracelsus and Champion as of March 31, 1996.
The Company Unaudited Pro Forma Condensed Combining Financial Statements set
forth below and the Paracelsus and Champion Unaudited Pro Forma Condensed
Combining Financial Statements, the Paracelsus Unaudited Pro Forma Condensed
Combining Financial Statements and the Champion Unaudited Pro Forma Condensed
Combining Statements of Income included elsewhere herein do not purport to
present the financial position or results of operations of Paracelsus and
Champion had the transactions and events assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future. The Company Unaudited Pro Forma Condensed
Combining Financial Statements set forth below are qualified in their entirety
by reference to, and should be read in conjunction with, the Paracelsus and
Champion Unaudited Pro Forma Condensed Combining Financial Statements, the
Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the
Champion Unaudited Pro Forma Condensed Combining Statements of Income and
Unaudited Historical Condensed Balance Sheet included elsewhere in this
Prospectus. See "Risk Factors -- Significant Leverage," "The Merger and
Financing," "Paracelsus Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Champion Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Recent Transactions."
21
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE FOR THE
PRO FORMA ADJUSTMENTS MERGER ADJUSTMENTS MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues....................... $ 696,899 $ 696,899 $ 696,899
Costs and expenses:
Salaries and benefits........................ 288,075 288,075 288,075
Supplies..................................... 70,828 70,828 70,828
Purchased services........................... 85,990 85,990 85,990
Provision for bad debts...................... 55,616 55,616 55,616
Other operating expenses..................... 117,911 117,911 117,911
Depreciation and amortization................ 31,635 $ 875(1) 32,510 32,510
Interest..................................... 36,803 1,631(2) 38,434 $ (539)(5) 37,895
Equity in earnings of DHHS................... (8,881) (8,881) (8,881)
Restructuring and unusual charges............ 4,177 4,177 4,177
----------- ------------- ------------- ------ -------------
Total costs and expenses....................... 682,154 2,506 684,660 (539) 684,121
----------- ------------- ------------- ------ -------------
Income before minority interests and income
taxes......................................... 14,745 (2,506) 12,239 539 12,778
Minority interests............................. (1,927) (1,927) (1,927)
----------- ------------- ------------- ------ -------------
Income before income taxes..................... 12,818 (2,506) 10,312 539 10,851
Income taxes................................... 5,346 (1,027)(3) 4,319 221(3) 4,540
----------- ------------- ------------- ------ -------------
Net income..................................... $ 7,472 $ (1,479) $ 5,993 $ 318 $ 6,311
----------- ------------- ------------- ------ -------------
----------- ------------- ------------- ------ -------------
Income per share............................... $ 0.15 $ 0.12 $ 0.11
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding................. 50,324 50,324 5,200(5) 55,524
----------- ------------- ------ -------------
----------- ------------- ------ -------------
Ratio of earnings to fixed charges (4)......... 1.3x 1.3x 1.3x
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
22
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE FOR THE
PRO FORMA ADJUSTMENTS MERGER ADJUSTMENTS MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues....................... $ 347,240 $ 347,240 $ 347,240
Costs and expenses:
Salaries and benefits........................ 148,207 148,207 148,207
Supplies..................................... 35,785 35,785 35,785
Purchased services........................... 39,615 39,615 39,615
Provision for bad debts...................... 27,004 27,004 27,004
Other operating expenses..................... 57,419 57,419 57,419
Depreciation and amortization................ 15,338 $ 438(1) 15,776 15,776
Interest..................................... 17,099 2,164(2) 19,263 19,263
Equity in earnings of DHHS................... (2,363) (2,363) (2,363)
----------- ------------- ------------- -------------
Total costs and expenses....................... 338,104 2,602 340,706 340,706
----------- ------------- ------------- -------------
Income before minority interests
and income taxes.............................. 9,136 (2,602) 6,534 6,534
Minority interests............................. (1,204) (1,204) (1,204)
----------- ------------- ------------- -------------
Income before income taxes..................... 7,932 (2,602) 5,330 5,330
Income taxes................................... 4,237 (1,067)(3) 3,170 3,170
----------- ------------- ------------- -------------
Net income..................................... $ 3,695 $ (1,535) $ 2,160 $ 2,160
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Income per share............................... $ 0.07 $ 0.04 $ 0.04
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding................. 50,327 50,327 5,200(5) 55,527
----------- ------------- ------ -------------
----------- ------------- ------ -------------
Ratio of earnings to fixed charges (4)......... 1.4x 1.3x 1.3x
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
23
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE ADJUSTMENTS FOR THE
PRO FORMA ADJUSTMENTS MERGER FOR THE MERGER
FOR THE FOR THE NOTES AND THE NOTES EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues............................. $ 368,555 $ 368,555 $ 368,555
Costs and expenses:
Salaries and benefits.............................. 155,927 155,927 155,927
Supplies........................................... 34,717 34,717 34,717
Purchased services................................. 47,543 47,543 47,543
Provision for bad debts............................ 27,845 27,845 27,845
Other operating expenses........................... 59,328 59,328 59,328
Depreciation and amortization...................... 17,137 $ 438(1) 17,575 17,575
Interest........................................... 19,686 1,378(2) 21,064 $ (1,845)(5) 19,219
Equity in earnings of DHHS......................... (6,609) (6,609) (6,609)
Settlement costs................................... 22,356 22,356 22,356
----------- ------------- ------------- ------------- -------------
Total costs and expenses............................. 377,930 1,816 379,746 (1,845) 377,901
----------- ------------- ------------- ------------- -------------
Loss before minority interests
and income taxes.................................... (9,375) (1,816) (11,191) 1,845 (9,346)
Minority interests................................... (1,072) (1,072) (1,072)
----------- ------------- ------------- ------------- -------------
Loss before income taxes............................. (10,447) (1,816) (12,263) 1,845 (10,418)
Income tax benefit................................... (3,741) (745)(3) (4,486) 756(3) (3,730)
----------- ------------- ------------- ------------- -------------
Net loss............................................. $ (6,706) $ (1,071) $ (7,777) $ 1,089 $ (6,688)
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Loss per share....................................... $ (0.14) $ (0.17) $ (0.13)
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding....................... 47,001 47,001 5,200(5) 52,201
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Ratio of earnings to fixed charges (4)............... -- -- --
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
24
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS FOR THE MERGER ADJUSTMENTS FOR THE MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 8,819 $ 250,000(6) $ 8,819 $ 55,913(5) $ 8,819
(250,000)(6) (55,913)(5)
Marketable securities...................... 10,051 10,051 10,051
Accounts receivable, less allowance for
uncollectibles............................ 136,422 136,422 136,422
Supplies................................... 13,524 13,524 13,524
Deferred income taxes...................... 47,630 3,055(7) 50,685 50,685
Other current assets....................... 7,687 7,687 7,687
----------- ----------------- -------------- -------------- --------------
Total current assets..................... 224,133 3,055 227,188 -- 227,188
Property and equipment, net of accumulated
depreciation................................ 400,828 400,828 400,828
Investment in DHHS........................... 52,118 52,118 52,118
Other assets................................. 151,737 8,750(1) 160,487 160,487
----------- ----------------- -------------- -------------- --------------
Total assets............................. $ 828,816 $ 11,805 $ 840,621 $ -- $ 840,621
----------- ----------------- -------------- -------------- --------------
----------- ----------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities............................... $ 115,066 $ 115,066 $ 115,066
Current maturities of long-term debt....... 3,292 $ (828)(6) 2,464 2,464
----------- ----------------- -------------- --------------
Total current liabilities................ 118,358 (828) 117,530 117,530
Long-term debt and capital lease
obligations................................. 413,981 17,030(6) 431,011 $ (55,913)(5) 375,098
Deferred income taxes........................ 47,590 47,590 47,590
Other long-term liabilities.................. 30,519 30,519 30,519
Shareholders' equity......................... 218,368 (4,397)(7) 213,971 55,913(5) 269,884
----------- ----------------- -------------- -------------- --------------
Total liabilities and shareholders'
equity.................................. $ 828,816 $ 11,805 $ 840,621 $ -- $ 840,621
----------- ----------------- -------------- -------------- --------------
----------- ----------------- -------------- -------------- --------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
25
<PAGE>
NOTES TO COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
(1) To record the pro forma increase in amortization of deferred financing
costs as a result of the $250,000,000 Notes Offering. The Notes are assumed
to have a term of 10 years, with deferred financing costs equal to
approximately 3.5% of the principal amount, or $8,750,000. Deferred
financing costs are assumed capitalized in long-term assets and amortized
over the term of the Notes. See "Risk Factors -- Significant Leverage" and
"The Merger and Financing."
(2) To record a pro forma net increase in interest expense in connection with
the Notes Offering. The Unaudited Pro Forma Condensed Combining Statements
of Income assume that the Notes have an annual interest rate of 10% and
that net proceeds from the Notes Offering are used to pay the following:
(i) the Champion Notes, including prepayment premiums equal to 6% of the
face value of the Champion Notes; (ii) amounts outstanding under the
Champion Credit Facility; (iii) the pro forma increases in the Champion
Credit Facility as reflected in Champion Unaudited Pro Forma Condensed
Combining Statements of Income included elsewhere herein; (iv) amounts
outstanding under certain other Champion indebtedness; and (v) to the
extent funds are available, actual and pro forma amounts outstanding under
the Existing Paracelsus Credit Facility as reflected in the Paracelsus
Unaudited Pro Forma Condensed Combining Statements of Income and the
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statements
of Income included elsewhere herein (items (i) through (v), the "Old Debt
Amounts"). The Old Debt Amounts averaged approximately $248,074,000 for the
fiscal year ended September 30, 1995, and approximately $229,428,000 and
$303,144,000 for the six months ended March 31, 1995 and 1996,
respectively. If the assumed interest rates increased by 0.25%, interest
expense would increase by $625,000 for the fiscal year ended September 30,
1995 and $312,500 for the six months ended March 31, 1995 and 1996.
(3) To reflect the pro forma provision for income taxes at the effective rate
of 41%.
(4) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of financing costs and the interest component of
capitalized leases and that portion of operating lease expense which the
Company believes is representative of the interest component of rental
expense. For the six months ended March 31, 1996, after giving effect to
the Merger, the Notes Offering and the Equity Offering, combined pro forma
earnings were inadequate to cover fixed charges by $9,375,000, $11,191,000
and $9,346,000, respectively.
(5) To reflect the consummation of the Equity Offering and the application of
the estimated net proceeds of $55,913,000 therefrom to reduce outstanding
indebtedness under the Existing Paracelsus Credit Facility. On a pro forma
basis, after application of estimated net proceeds of $241,250,000 from the
issuance of the Notes, amounts outstanding under the Existing Paracelsus
Credit Facility averaged approximately $6,824,000 and $61,894,000 for the
fiscal year ended September 30, 1995 and the six months ended March 31,
1996, respectively. No amounts were assumed outstanding for the six months
ended March 31, 1995 on a pro forma basis.
26
<PAGE>
NOTES TO COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(6) To reflect the pro forma sources and uses of cash in connection with the
Notes Offering as of March 31, 1996, summarized as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
TO CASH TO DEBT
<S> <C> <C>
Notes offered hereby.............................................. $ 250,000 $ 250,000
----------- ------------
-----------
Uses:
Existing Paracelsus Credit Facility, including pro forma
amounts........................................................ $ 58,614 $ (58,614)
Champion Credit Facility........................................ 66,200 (66,200)
Champion Series D Notes......................................... 63,705 (63,705)
Champion Series E Notes......................................... 35,000 (35,000)
Certain other Champion indebtedness............................. 10,908 (10,908)
Financing cost -- Notes......................................... 8,750
Prepayment premiums on Champion Notes and other Champion
indebtedness................................................... 6,823
Unamortized discount on Champion Notes.......................... 629
----------- ------------
Pro forma adjustment -- total uses.............................. $ 250,000 (233,798)
----------- ------------
-----------
Net pro forma adjustment to long-term debt, ($(828) - Current;
$17,030 - Long-term)........................................... $ 16,202
------------
------------
</TABLE>
(7) To record the effect on shareholders' equity for the extraordinary loss
from early extinguishment of debt and the related deferred tax assets at
the effective rate (41%) resulting from the following Notes
Offering-related events (in thousands):
<TABLE>
<S> <C> <C>
Prepayment premiums on Champion Notes and other
Champion debt....................................... $ 6,823
Unamortized discount on Champion Notes............... 629
-----------
Total.............................................. 7,452 $ 7,452
Income tax benefit at the effective rate............. 41%
-----------
Pro forma adjustment to current deferred tax
assets.............................................. $ 3,055 (3,055)
----------- -----------
-----------
Pro forma adjustment to shareholders' equity for
the extraordinary loss from early extinguishment
of debt (a)......................................... $ 4,397
-----------
-----------
</TABLE>
- ------------------------
(a) Extraordinary loss from early extinguishment of debt has not been reflected
in the Unaudited Pro Forma Condensed Statements of Income for the periods
presented. After giving effect to the Merger and the Offerings, pro forma
income (loss) per share would have been as follows if such loss had been
reflected in the Unaudited Pro Forma Condensed Combining Statements of
Income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Income (loss) per share............................... $ 0.03 $ (0.04) $ (0.21)
----- --------- ---------
----- --------- ---------
</TABLE>
27
<PAGE>
PARACELSUS SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical financial data and other
operating information for Paracelsus for the five fiscal years ended September
30, 1995 and for the six months ended March 31, 1995 and 1996. The selected
historical financial data for the five fiscal years ended September 30, 1995 has
been derived from the audited consolidated financial statements of Paracelsus
and from the underlying accounting records of Paracelsus. The selected
historical financial information for the six months ended March 31, 1995 and
1996 has been derived from the unaudited condensed consolidated financial
statements of Paracelsus and reflects all adjustments (consisting of normal
recurring adjustments) that, in the opinion of the management of Paracelsus, are
necessary for a fair presentation of such information. Operating results for the
six months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for fiscal 1996. All information set forth below should be
read in conjunction with "Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the consolidated
financial statements and related notes of Paracelsus included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues (1)..................... $ 366,959 $ 411,211 $ 435,102 $ 507,864 $ 509,729 $ 252,356 $ 260,590
Costs and expenses:
Salaries and benefits.......................... 150,053 163,970 174,849 209,772 209,672 108,575 113,162
Supplies....................................... 26,229 31,110 34,245 42,890 40,780 21,432 19,363
Purchased services............................. 43,657 50,801 48,951 55,078 58,113 28,118 34,174
Provision for bad debts........................ 19,493 25,784 26,629 33,110 39,277 19,283 20,191
Other operating expenses....................... 83,088 95,438 100,287 114,096 99,777 46,730 46,906
Depreciation and amortization.................. 11,808 12,833 14,587 16,565 17,276 8,734 7,972
Interest....................................... 12,043 10,496 10,213 12,966 15,746 7,652 7,685
Restructuring and unusual charges (2).......... -- -- -- -- 5,150 -- --
Settlement costs (3)........................... -- -- -- -- -- -- 22,356
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses......................... 346,371 390,432 409,761 484,477 485,791 240,524 271,809
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interests, income
taxes, cumulative effect of accounting change
and extraordinary loss.......................... 20,588 20,779 25,341 23,387 23,938 11,832 (11,219)
Minority interests (4)........................... (2,697) (3,393) (2,683) (2,517) (1,927) (1,204) (1,072)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative
effect of accounting change and extraordinary
loss............................................ 17,891 17,386 22,658 20,870 22,011 10,628 (12,291)
Income taxes (benefit)........................... 7,337 7,128 10,196 8,567 9,024 4,357 (5,040)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change and extraordinary loss........ 10,554 10,258 12,462 12,303 12,987 6,271 (7,251)
Cumulative effect of accounting change (5)....... 4,377 -- -- -- -- -- --
Extraordinary loss (6)........................... -- -- -- (497) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ 14,931 $ 10,258 $ 12,462 $ 11,806 $ 12,987 $ 6,271 $ (7,251)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges (7)........... 2.4x 2.5x 2.8x 2.2x 2.1x 2.1x --
OPERATING DATA:
Adjusted EBITDA (8).............................. $ 41,205 $ 42,025 $ 47,458 $ 50,401 $ 51,157 $ 27,014 $ 25,722
Adjusted EBITDA margin........................... 11.2% 10.2% 10.9% 9.9% 10.0% 10.7% 9.9%
Capital expenditures............................. $ 12,398 $ 15,695 $ 14,676 $ 14,342 $ 15,835 $ 5,322 $ 7,123
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,972 $ 773 $ 1,204 $ 1,452 $ 2,949 $ 2,107 $ 3,149
Working capital............................ 30,040 67,381 41,355 62,860 60,381 67,649 73,415
Total assets............................... 267,785 288,924 296,097 330,001 344,632 342,113 368,216
Total debt................................. 122,306 120,004 104,548 117,718 121,728 125,940 144,661
Shareholder's equity....................... 68,039 77,466 88,714 97,515 104,949 102,149 96,365
</TABLE>
28
<PAGE>
(1) Total operating revenues were comprised of patient revenue (net of
contractual adjustments) and other revenue, including gains (losses) from
disposal of facilities of $537, $(1,310) and $9,026 for the fiscal years
ended September 30, 1991, 1992 and 1995, respectively.
(2) Restructuring and unusual charges in 1995 consisted of (i) a $973 charge for
employee severance benefits and contract termination costs related to the
closure of Bellwood Health Center psychiatric facility and (ii) special
bonuses of $4,177 paid to certain executive officers for services provided.
(3) Settlement costs of $22,356 in the six months ended March 31, 1996 consisted
of settlement payments, legal fees and the write-off of certain accounts
receivable in connection with the settlement of two lawsuits.
(4) Represents the participation of physicians or physician groups in the
profits of Paracelsus' majority-owned joint venture arrangements.
(5) Paracelsus adopted the liability method of accounting for income taxes in
its financial statements for the fiscal year ended September 30, 1991. The
cumulative effect of adopting the liability method for periods prior to
October 1, 1991 resulted in a benefit of $4,377.
(6) Represents an extraordinary loss of $497 (net of income tax benefit) as a
result of the early extinguishment of debt.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes, minority interests, extraordinary loss and cumulative effect of
accounting change. Fixed charges consist of interest expense, including
amortization of financing costs and the interest component of capitalized
leases and that portion of operating lease expense which Paracelsus
management believes is representative of the interest component of rental
expense. Earnings were inadequate to cover fixed charges by $11,219 for the
six months ended March 31, 1996.
(8) Adjusted EBITDA represents income before income taxes, depreciation and
amortization, interest, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
29
<PAGE>
PARACELSUS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THIS CAPTION "PARACELSUS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS --
FORWARD-LOOKING STATEMENTS."
The following should be read in conjunction with the Consolidated Financial
Statements of Paracelsus and the related notes thereto included elsewhere in
this Prospectus.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
The results of operations discussed below compare the operating results for
the six months ended March 31, 1996 to the operating results for the six months
ended March 31, 1995. Paracelsus closed Bellwood Health Center on April 24, 1995
(the "Closed Facility"). All Paracelsus healthcare facilities outside California
are referred to as the "Eastern Region Facilities."
Operating revenues increased 3.3% to $260,590,000 for the six months ended
March 31, 1996 from $252,356,000 for the comparable period in the prior year.
After excluding operating revenues of the Closed Facility, operating revenues on
a same-hospital basis increased $13,574,000, or 5.5%. This increase was
principally due to an increase of $7,856,000 in the home health agency operating
revenues generated by the Eastern Region Facilities, resulting from an increase
of 125,953, or 52.2%, in home health agency visits. The remaining increase in
operating revenues is attributed to the increase in outpatient visits,
principally in the Eastern Region Facilities.
Salaries and benefits increased 4.2% to $113,162,000 for the six months
ended March 31, 1996 from $108,575,000 for the comparable period in the prior
year. After excluding salaries and benefits of the Closed Facility, salaries and
benefits increased $6,289,000, or 5.9%, offset by decreased salaries and
benefits relating to the subcontracting of pharmacy purchases and management
activities described below. This increase was principally due to an 11.1%
increase in the employee workforce at the Eastern Region Facilities to service
the expansion of the home health agency programs. In addition, the employee
workforce was increased at the Eastern Region Facilities to service the
increased volume of outpatient services. As a percentage of operating revenues,
salaries and benefits increased to 43.4% for the six months ended March 31, 1996
from 43.0% for the comparable period in the prior year.
Supplies decreased 9.7% to $19,363,000 for the six months ended March 31,
1996 from $21,432,000 for the comparable period in the prior year. The decrease
was principally due to a reduction in pharmacy supplies expense for the six
months ended March 31, 1996 of $2,835,000 as a result of the subcontracting in
June 1995 of Paracelsus' pharmacy purchases and management activities to a
pharmacy management company. Paracelsus also reduced its non-pharmacy supplies
expense due to improved purchasing terms and price reductions received under its
group purchasing contract. As a percentage of operating revenues, supplies
decreased to 7.4% for the six months ended March 31, 1996 from 8.5% for the
comparable period in the prior year.
Purchased services increased 21.5% to $34,174,000 for the six months ended
March 31, 1996 from $28,118,000 for the comparable period in the prior year due
to the pharmacy management company contract, which increased purchased services
by $3,665,000, and an increase in the home health agency programs' purchased
services of $927,000 in the Eastern Region Facilities. As a percentage of
operating revenues, purchased services increased to 13.1% for the six months
ended March 31, 1996 from 11.1% for the comparable period in the prior year.
Provision for bad debts increased 4.7% to $20,191,000 for the six months
ended March 31, 1996 from $19,283,000 for the comparable period in the prior
year, due primarily to an increase in provision for bad debts at two of the
psychiatric facilities as a result of reductions in payments received for
psychiatric services. As a percentage of operating revenues, provision for bad
debts increased to 7.7% for the six months ended March 31, 1996 from 7.6% for
the comparable period in the prior year.
30
<PAGE>
During March 1996, Paracelsus recognized a charge for the settlement of two
lawsuits totaling $22,356,000. The charge included the settlement payments, the
payment of legal fees associated with the lawsuits and the write-off of certain
psychiatric accounts receivable.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
The results of operations discussed below compare the operating results for
the fiscal year ended September 30, 1995 to the operating results for the fiscal
year ended September 30, 1994. Paracelsus sold Womans Hospital on September 30,
1995 and Advanced Healthcare Diagnostics Services, a mobile diagnostics
business, in August 1995 (collectively, the "Sold Facilities"), and acquired
Jackson County Hospital on September 5, 1995 and Keith Medical Group on August
1, 1995 (collectively, the "Acquired Facilities").
Operating revenues increased to $509,729,000 in 1995 from $507,864,000 in
1994, an increase of $1,865,000, or 0.4%. Included in the $509,729,000 operating
revenues in 1995 is a net gain from the sale of the Sold Facilities of
$9,026,000. After excluding the operating revenues of the Acquired Facilities,
the Closed Facility and the Sold Facilities, and the net gain from the sale of
the Sold Facilities, operating revenues on a same-hospital basis increased to
$478,659,000 in 1995 from $471,808,000 in 1994, an increase of $6,851,000 or
1.5%. This increase in operating revenues was caused by growth in same-hospital
outpatient volume. On a same-hospital basis, outpatient visits increased by 7.6%
in 1995, while inpatient admissions decreased by 1.0% in 1995. The significant
increase in outpatient visits in 1995 was primarily a result of Paracelsus'
expansion into the home health services business, especially in its Eastern
Region Facilities, and also the further introduction of additional outpatient
services at several of Paracelsus' facilities. The decrease in admissions was
primarily a result of the effect of managed care contracts and the shifting of
inpatient care to outpatient services, especially at the California hospitals,
where admissions, on a same-hospital basis, decreased by 4.9%.
Total costs and expenses as a percentage of operating revenues, after
excluding the net gain from the sale of the Sold Facilities from operating
revenues, increased to 97.0% in 1995 from 95.4% in 1994. The primary reasons for
this increase were the effect of the 1995 restructuring and an unusual charge of
$5,150,000, which included severance benefits and contract termination costs of
$973,000 for the closure of the Closed Facility and certain executives' special
bonuses of $4,177,000 for services provided to Paracelsus. The closure costs and
special bonuses increased operating costs and expenses as a percentage of
operating revenues by 1.0%.
Salaries and benefits decreased to $209,672,000 in 1995 from $209,772,000 in
1994, a decrease of $100,000. As a percentage of operating revenues, after
excluding the net gain from the sale of the Sold Facilities, salaries and
benefits increased to 41.9% in 1995 from 41.3% in 1994. This increase was mainly
a result of annual merit pay increases, offset in part by reductions in staffing
at several of the facilities.
Supplies decreased to $40,780,000 in 1995 from $42,890,000 in 1994, a
decrease of $2,110,000, or 4.9%. The decrease in supplies is mainly a result of
Paracelsus' emphasis on reducing inventory levels, more favorable terms
resulting from Paracelsus' group purchasing contract and price reductions
negotiated directly with vendors.
Purchased services increased to $58,113,000 in 1995 from $55,078,000 in
1994, an increase of $3,035,000, or 5.5%, and as a percentage of operating
revenues, after excluding the net gain from the sale of the Sold Facilities,
increased to 11.6% in 1995 from 10.9% in 1994. Of the $3,035,000 increase,
$2,349,000, or 77.4%, was caused by increases in purchased medical services
mainly resulting from the increase in outpatient volume.
The provision for bad debts increased to $39,277,000 in 1995 from
$33,110,000 in 1994, an increase of $6,167,000, or 18.6%, and increased as a
percentage of operating revenues, after excluding the net gain from the sale of
the Sold Facilities, to 7.8% in 1995 from 6.5% in 1994. Of the $6,167,000
31
<PAGE>
increase in 1995, $5,037,000, or 81.7%, was attributed to the three psychiatric
facilities. The increase in the provision for bad debts at the three psychiatric
facilities is attributed to the reductions in payments received for psychiatric
services.
Other operating expenses as a percentage of operating revenues decreased to
19.9% in 1995 from 22.5% in 1994. This reduction is mainly a result of lower
medical malpractice liability costs and reductions in non-medical supplies,
property insurance, rental/lease expense and consulting expenses.
Depreciation and amortization increased to $17,276,000 in 1995 from
$16,565,000 in 1994, an increase of $711,000, or 4.3%. This increase is mainly
the result of capital expenditures made during 1995. Interest expense increased
to $15,746,000 in 1995 from $12,966,000 in 1994, an increase of $2,780,000, or
21.4%. This increase was mainly caused by an increase in Paracelsus' average
outstanding borrowings under the then existing credit facility and an increase
in interest rates on the then existing credit facility and the commercial paper
program.
Minority interests decreased to $1,927,000 in 1995 from $2,517,000 in 1994,
a decrease of $590,000, or 23.4%. This decrease was caused mainly by a decrease
in the volume of business at two of Paracelsus' podiatry joint ventures, one of
which was terminated during 1995, and an obesity surgery joint venture that was
also terminated during 1995.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
The results of operations discussed below compare the operating results for
the fiscal year ended September 30, 1994 to the operating results for the fiscal
year ended September 30, 1993. Paracelsus acquired Desert Palms Community
Hospital on August 31, 1993, Halstead Hospital on June 30, 1993 and Elmwood
Medical Center on March 1, 1993 (collectively, the "1993 Acquisitions").
Operating revenues increased to $507,864,000 in 1994 from $435,102,000 in
1993, an increase of $72,762,000, or 16.7%. Of this increase, $57,694,000 or
79.3% was attributable to the 1993 Acquisitions for which there was a full 12
months of operations in 1994. Excluding the 1993 Acquisitions, operating
revenues on a same-hospital basis increased $15,068,000, or 3.7%. This increase
in operating revenues was due primarily to an increase in gross outpatient
revenues to $209,849,000 in 1994 from $187,646,000 in 1993, an increase of
$22,203,000, or 11.8%. The growth in outpatient services continues to result in
part from the introduction of additional outpatient services at several of
Paracelsus' facilities. Paracelsus' management believes the decline in inpatient
occupancy rates to 42.6% in 1994 from 42.9% in 1993 resulted primarily from
increased efforts by payors to reduce inpatient hospitalization, and to shift
medical services to lower cost outpatient settings whenever possible. However,
the reduction in occupancy rates between 1994 and 1993 is not as significant as
was experienced between 1993 and 1992.
Total costs and expenses as a percentage of operating revenues increased to
95.4% in 1994 from 94.2% in 1993. Through a continued effort to reduce other
operating expenses, Paracelsus made reductions during 1994 in its insurance
costs, including malpractice and workers' compensation. As a percentage of
operating revenues, other operating expenses decreased to 22.5% in 1994 from
23.1% in 1993. Purchased services increased to $55,078,000 in 1994 from
$48,951,000 in 1993, an increase of $6,127,000, or 12.5%. However, as a
percentage of operating revenues, purchased services decreased to 10.9% in 1994
from 11.3% in 1993. The provision for bad debts increased to $33,110,000 in 1994
from $26,629,000 in 1993, an increase of $6,481,000, or 24.3%. After excluding
the 1993 Acquisitions, the provision for bad debts increased by $2,574,000, or
10.1%. The increase was due primarily to higher provisions for bad debts at the
three psychiatric facilities. As a percentage of operating revenues, the
provision for bad debts increased to 6.5% in 1994 from 6.1% in 1993.
Salaries and benefits increased to $209,772,000 in 1994 from $174,849,000 in
1993, an increase of $34,923,000, or 20.0%. Salaries and benefits as a
percentage of operating revenues increased to 41.3% in 1994 from 40.2% in 1993.
This increase was due primarily to additional staffing requirements at
32
<PAGE>
certain existing facilities and increases in Paracelsus' self-insured health
insurance program. Effective October 1, 1994, Paracelsus replaced the
self-insurance program at its California facilities, where health insurance
costs are the highest, with an outside HMO/PPO program.
Depreciation and amortization increased to $16,565,000 in 1994 from
$14,587,000 in 1993, an increase of $1,978,000, or 13.6%. This increase is due
primarily to having a full year of depreciation in 1994 for the 1993
Acquisitions and capital expenditures Paracelsus made in 1994. Interest expense
increased to $12,966,000 in 1994 from $10,213,000 in 1993, an increase of
$2,753,000, or 27.0%. This increase was attributable to interest on the Existing
Senior Subordinated Notes issued in October 1993, and increases in interest
rates applicable to Paracelsus' borrowings under its then existing credit
facility and the commercial paper program.
LIQUIDITY AND CAPITAL RESOURCES
Paracelsus' working capital as of March 31, 1996 was $73,415,000, an
increase of $13,034,000 from September 30, 1995. The increase in working capital
is primarily attributable to decreases in current maturities of long-term debt
obligations and capital lease obligations, and an increase in accounts
receivable. The increase in accounts receivable is attributable mainly to an
increase in psychiatric and home healthcare services, which take longer to
collect than Paracelsus' acute care receivables. The decrease in current
maturities of long-term debt and capital lease obligations is attributable to
the refinancing of mortgage debt on one of Paracelsus' partnerships. Other
significant changes in working capital included an increase in deferred tax
assets and accrued expenses related to the settlement of two lawsuits.
On December 8, 1995, Paracelsus entered into the Existing Paracelsus Credit
Facility, which provides up to $230,000,000 of revolving credit. The Existing
Paracelsus Credit Facility has been used to finance acquisitions, to refinance
existing credit facility borrowings and for general corporate purposes,
including working capital and capital expenditures. Credit facility borrowings
were increased from $27,500,000 at September 30, 1995 to $51,000,000 at March
31, 1996. The additional borrowings were used to refinance mortgage debt on one
of Paracelsus' partnerships, to finance acquisitions of property and equipment
and for working capital purposes. Paracelsus anticipates that existing capital
resources and internally generated cash flows will be sufficient to fund capital
expenditures, debt service and working capital requirements.
The accounts receivable financing program (the "Accounts Receivable
Program") implemented in 1993 provides Paracelsus with up to $65,000,000 in
accounts receivable financing. Pursuant to the Accounts Receivable Program,
Paracelsus' hospitals sell accounts receivable that meet certain requirements
specified under the Accounts Receivable Program ("Eligible Receivables") to a
special purpose subsidiary of Paracelsus, which in turn resells the Eligible
Receivables to an unaffiliated trust (the "Trust") at a discount to reflect
reserves for uncollectible receivables and interest expense. A special purpose
subsidiary of a major lending institution provides the Trust with up to
$65,000,000 in commercial paper financing to purchase the Eligible Receivables,
secured by an interest in certain of the Eligible Receivables held by the Trust.
Interest expense related to commercial paper and investment participations
issued under the Accounts Receivable Program is passed through to Paracelsus and
included as interest expense on Paracelsus' consolidated financial statements.
At March 31, 1996, the maximum financing of $65,000,000 available under the
program was outstanding.
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,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Paracelsus will adopt SFAS 121 on October
1, 1996, and, based on current circumstances, does not believe the effect of the
adoption will be material.
33
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
A significant portion of Paracelsus' operating expenses is subject to
inflationary increases, the impact of which Paracelsus has historically been
able to substantially offset through price increases, by expanding services and
by increasing operating efficiencies. However, price increases alone have not
kept up with increases in costs. To the extent that inflation occurs in the
future, Paracelsus may not be able to pass on the increased costs associated
with providing healthcare services to patients with government or managed care
payors unless such payors correspondingly increase reimbursement rates.
EFFECT OF PROPOSED LEGISLATION
Federal and state legislators continue to consider legislation that could
significantly impact Medicare, Medicaid and other government funding of
healthcare costs. Initiatives currently before Congress, if enacted, would
significantly reduce payments under various government programs, including,
among others, payments to teaching hospitals and hospitals providing a
disproportionate amount of care to indigent patients. A reduction in these
payments would adversely affect operating revenues and operating margins at
certain of Paracelsus' hospitals. Paracelsus is unable to predict what
legislation, if any, will be enacted at the Federal and state level in the
future or what effect such legislation might have on Paracelsus' financial
position, results of operations or liquidity.
34
<PAGE>
CHAMPION SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical financial data and other
operating information for Champion for the five years ended December 31, 1995
and for the three months ended March 31, 1995 and 1996. The selected historical
financial data for the five years ended December 31, 1995 has been derived from
the audited consolidated financial statements of Champion and from the
underlying accounting records of Champion. The selected historical financial
information for the three months ended March 31, 1995 and 1996 has been derived
from the unaudited condensed consolidated financial statements of Champion and
reflects all adjustments (consisting of normal recurring adjustments) that, in
the opinion of the management of Champion, are necessary for a fair presentation
of such information. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for 1996. All
information set forth below should be read in conjunction with "Champion
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and related notes of
Champion included elsewhere in this Prospectus. Certain amounts derived from the
consolidated statements of operations have been reclassified to conform with the
presentation below.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue (1)................................. $24,307 $45,073 $ 89,832 $104,193 $167,520 $28,727 $50,681
Expenses:
Salaries and benefits......................... 9,875 19,642 36,698 41,042 72,188 12,762 22,006
Supplies...................................... 2,884 6,022 11,641 12,744 21,113 3,237 6,368
Purchased services............................ 3,092 5,671 9,606 15,190 23,595 3,897 6,534
Provision for bad debts....................... 2,489 3,520 5,669 7,812 12,016 2,073 3,670
Other operating expenses...................... 3,687 7,682 14,427 14,277 20,999 3,779 6,330
Depreciation and amortization................. 725 1,361 3,524 4,010 9,290 1,532 3,016
Interest...................................... 723 1,404 2,725 6,375 13,618 2,630 4,587
Equity in earnings of DHHS.................... -- -- -- -- (8,881) (1,478) (3,973)
Restructuring and unusual charges............. -- 1,300(2) 15,456(3) 300(4) -- -- --
------- ---------- ----------- ----------- -------- ------- -------
Total expenses.................................. 23,475 46,602 99,746 101,750 163,938 28,432 48,538
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) before income taxes............... 832 (1,529) (9,914) 2,443 3,582 295 2,143
Income tax expense.............................. 326 63 1,009 200 150 118 750
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) before extraordinary items........ 506 (1,592) (10,923) 2,243 3,432 177 1,393
Extraordinary items (5)......................... 200 -- (1,230) -- (1,118) -- --
------- ---------- ----------- ----------- -------- ------- -------
Net income (loss)............................... $ 706 $(1,592) $(12,153) $ 2,243 $ 2,314 $ 177 $ 1,393
------- ---------- ----------- ----------- -------- ------- -------
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) applicable to common stock........ $ 343 $(2,451) $(13,805) $ (2,467) $ (9,017) $(1,312) $ 1,344
------- ---------- ----------- ----------- -------- ------- -------
------- ---------- ----------- ----------- -------- ------- -------
OPERATING DATA:
Adjusted EBITDA (6)............................. $ 2,280 $ 2,536 $ 11,791 $ 13,128 $ 26,490 $ 4,457 $ 9,746
Adjusted EBITDA margin.......................... 9.4% 5.6% 13.1% 12.6% 15.8% 15.5% 19.2%
Capital expenditures............................ $ 1,422 $ 1,637 $ 4,726 $ 12,561 $ 42,822 $ 7,060 $ 2,697
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 919 $ 6,204 $ 66,686 $ 48,424 $ 7,583 $ 32,908 $ 5,670
Working capital....................... 1,665 9,420 69,138 51,275 9,841 40,772 15,750
Total assets.......................... 15,444 57,574 118,947 216,553 291,260 212,839 308,022
Total debt............................ 7,431 26,246 62,084 110,065 164,914 108,807 184,046
Redeemable preferred stock............ 3,726 21,746 56,861 76,294 46,029(7) 77,918 46,078
Stockholders' equity (deficit)........ 293 (2,352) (16,157) (2,167) 31,869(7) (3,450) 33,798
</TABLE>
35
<PAGE>
(1) Net revenue was comprised of patient revenue (net of contractual
adjustments) and other revenue.
(2) In 1992, Champion expensed approximately $1,300 in fees and other costs
related to its unsuccessful attempt to acquire twelve hospitals from Humana,
Inc.
(3) On September 1, 1992, Champion acquired Gulf Coast Hospital ("GCH"), a
competing hospital located approximately three miles from Champion's
Baytown, Texas facility. Subsequent to the purchase, Champion consolidated
the operations of GCH onto the campus of its existing Baytown hospital and,
in June 1994, sold the former GCH property with restrictions limiting its
use to non-competitive activities without Champion's permission. As a result
of the consolidation, Champion incurred a charge of approximately $15,456
against earnings in 1993.
(4) In 1994, Champion incurred approximately $300 in fees and other costs
related to its efforts to acquire Methodist Medical Center ("MMC") in
Jacksonville, Florida. On March 6, 1995, Champion notified MMC's management
that it would cease all actions related to this transaction; accordingly,
such amounts were expensed in the fourth quarter of 1994.
(5) The extraordinary gain in 1991 relates to the utilization of net income tax
benefits arising from the carryforward of net operating losses. Champion
recognized extraordinary losses of $1,230 and $1,118 in 1993 and 1995,
respectively, on early extinguishment of debt. The extraordinary loss for
1993 was net of a tax benefit of $634, and no tax benefit was allocated to
the extraordinary losses in 1995.
(6) Adjusted EBITDA represents income before income taxes, depreciation and
amortization, interest, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
(7) Effective December 31, 1995, Champion entered into a recapitalization
agreement which provided for the conversion of certain redeemable preferred
stock to Champion Common Stock and eliminated the accrual of future
dividends on its remaining Champion Preferred Stock.
36
<PAGE>
CHAMPION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THIS CAPTION "CHAMPION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS --
FORWARD-LOOKING STATEMENTS."
The following should be read in conjunction with the Consolidated Financial
Statements of Champion and the related notes thereto included elsewhere in this
Prospectus.
IMPACT OF ACQUISITIONS
Champion was formed to acquire and operate acute care and specialty
hospitals. At March 31, 1996, Champion owned seven hospitals and a 50% interest
in DHHS, a partnership that is operated by Champion and that owns and operates
two acute care hospitals with a total of 341 beds in North Dakota under the name
"Dakota Heartland Health System."
Because of the financial impact of Champion's recent acquisitions and the
formation of DHHS, it is difficult to make meaningful comparisons between
Champion's financial statements for the fiscal periods presented. Furthermore,
each additional hospital acquisition can have a significant impact on Champion's
overall financial performance. After acquiring a hospital, Champion attempts to
implement various operating efficiencies and cost-cutting strategies, including
staffing adjustments. Champion may also incur significant additional costs to
expand the hospital's services and improve its market position. Champion can
give no assurance that these investments and other activities will result in
increases in net revenue or reductions in costs at the acquired facility.
Consequently, an acquired hospital may adversely affect Champion's operating
results in the near term. Champion believes this effect will be mitigated as
more hospitals are acquired.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1995
Champion had net revenue of $50,681,000 for the quarter ended March 31,
1996, compared to $28,727,000 for same period in 1995, an increase of
$21,954,000, or 76.4%. The increase was due primarily to Champion's acquisition
of the 200-bed Salt Lake Regional Medical Center ("SLRMC") in April 1995, the
acquisition of home healthcare operations in June 1995 and in January 1996, and
the commencement of operations at the 101-bed Westwood Medical Center ("WMC") in
October 1995. WMC replaced the 60-bed Physicians and Surgeons Hospital located
in Midland, Texas ("P&S"), which Champion had acquired in 1993.
Champion's operations are labor intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and benefits
increased 72.4% to $22,006,000 for the quarter ended March 31, 1996, compared to
$12,762,000 in 1995, primarily as a result of Champion's acquisition of SLRMC
and the acquisition of home healthcare operations. As a percentage of net
revenue, salaries and benefits were 43.4% and 44.4% for the quarters ended March
31, 1996 and 1995, respectively. The decline in salaries and benefits as a
percentage of net revenue reflects Champion's ongoing efforts to implement
various operating efficiencies and cost-cutting measures at its hospitals.
The major components of other operating and administrative expenses were
professional fees, taxes (other than income), insurance, utilities and other
services. In absolute terms, other operating and administrative expenses
increased by 76.2% to $19,232,000 for the quarter ended March 31, 1996, compared
to $10,913,000 in 1995, due to Champion's acquisition of SLRMC and the start-up
of WMC. However, overall other operating and administrative expenses were
substantially unchanged at 37.9% and 38.0% of net revenue for the quarters ended
March 31, 1996 and 1995, respectively.
Provision for bad debts was $3,670,000 for the quarter ended March 31, 1996,
or 7.4% of net patient service revenue, compared to $2,073,000, or 7.5%, for the
same period in 1995.
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<PAGE>
Interest expense increased to $4,587,000 in the first quarter of 1996,
compared to $2,630,000 for the comparable period in 1995, due principally to (i)
the increase in amounts outstanding under the Champion Credit Facility as a
result of its acquisition of SLRMC and Jordan Valley Hospital ("Jordan Valley")
and (ii) the issuance of the Champion Series E Notes on June 12, 1995. The
increase in interest expense was offset, in part, by a decline in the interest
rate applicable to the Champion Credit Facility (a weighted average of
approximately 8.71% and 9.12% for the quarters ended March 31, 1996 and 1995,
respectively).
Depreciation and amortization expense was $3,016,000 in 1996, compared to
$1,532,000 in 1995, an increase of $1,484,000, or 96.9%. This increase is due
primarily to Champion's acquisition of SLRMC and the completion of construction
at WMC as well as Champion's ongoing capital improvement programs at its
existing hospitals.
Income before income taxes for the quarter ended March 31, 1996 includes
approximately $3,973,000 attributable to Champion's equity in the earnings of
DHHS, compared to approximately $1,478,000 for the same period a year earlier,
or an increase of 168.8%. The increase was due to (i) a $1,535,000, or 5.9%,
increase in DHHS net revenue for the quarter ended March 31, 1996, compared to
the same period a year earlier, primarily as a result of an expanded and
improved service mix, and (ii) a $3,175,000, or 14.1%, decrease in current
period operating expenses, compared to the prior period. The reduction in
operating expenses is due primarily to the elimination of duplicative services
and overhead costs and reflects Champion's ongoing efforts to integrate the
operations of the two hospitals that comprise DHHS.
1995 COMPARED TO 1994
Champion's net revenue was $167,520,000 for the year ended December 31,
1995, compared to $104,193,000 for 1994, an increase of $63,327,000, or 60.8%.
The increase was due primarily to hospital acquisitions in the fourth quarter of
1994 and the second quarter of 1995 (collectively, the "Champion Acquisitions"),
and was offset, in part, by the contribution of Heartland Medical Center
("Heartland") to DHHS. Net revenue for 1994 included approximately $40,061,000
attributable to Heartland.
The occupancy rate of Champion's consolidated hospitals was substantially
unchanged at 38% in 1995 and 1994, due primarily to the acquisition of two
psychiatric hospitals in the fourth quarter of 1994. In general, psychiatric
hospitals derive a greater percentage of their revenue from inpatient services
than do acute care hospitals. The occupancy rate at Champion's general acute
care hospitals declined to 33% in 1995 compared to 35% in 1994, due primarily to
Champion's contribution of Heartland to DHHS effective December 31, 1994, and
due to an industry-wide trend of decreased inpatient utilization at acute care
hospitals. Champion expects this trend to continue as Medicare, Medicaid, HMOs,
PPOs and other third-party payors continue to exert pressure on healthcare
providers to reduce hospital stays and to provide services, when appropriate, on
a less expensive outpatient basis. Heartland had an occupancy rate of 41% in
1994.
Gross outpatient revenue increased 45.8% from $63,387,000 in 1994 to
$92,392,000 in 1995. Outpatient revenue as a percentage of gross patient service
revenue declined from 38.1% in 1994 to 33.9% in 1995, due to Champion's
acquisition of two psychiatric hospitals in the fourth quarter of 1994.
Excluding these two facilities, outpatient revenue comprised 39.5% of gross
patient revenue in 1995.
Gross patient revenue attributable to Medicare increased to 42% in 1995,
compared to 39% in 1994, due to the inclusion of certain of Champion's
acquisitions for the full 12-month period ended December 31, 1995. These
facilities generally derived a greater portion of their gross patient revenue
from the Medicare program than did the hospitals owned and consolidated by
Champion for the 12 months ended December 31, 1994. Gross revenue attributable
to Medicaid increased to 19% in 1995
38
<PAGE>
compared to 18% in 1994, due primarily to Champion's acquisition of two
psychiatric hospitals in the fourth quarter of 1994. Approximately 50% of gross
patient revenue at these facilities is attributable to the Medicaid program.
Net patient service revenue is presented in the Consolidated Statement of
Operations net of the provision for contractual allowances. Such provision was
40% in 1995 and 1994. The provision for contractual allowances as a percentage
of gross patient service revenue is likely to increase in the future (i) as rate
increases at Champion's hospitals exceed increases, if any, in fixed
reimbursement rates, (ii) from increased discounts on standard rates due to
pressure from third-party payors, such as HMOs, PPOs and private insurance
companies and (iii) from increased inpatient utilization by Medicare and
Medicaid patients. Payments received under these programs are generally less
than established billing rates. The trend toward managed care may affect
hospitals' ability to maintain their current rate of net revenue growth and
operating margins.
Net revenue for 1995 and 1994 included approximately $744,000 and
$2,196,000, respectively, in interest income earned on cash balances during the
year.
Champion's operations are labor intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and benefits
increased 75.9% to $72,188,000 in 1995, compared to $41,042,000 in 1994, as a
result primarily of the Champion Acquisitions. In addition, corporate salaries
increased due to the increase in hospitals, new public reporting requirements
and preparation for additional acquisitions. As a percentage of net revenue,
salary and benefits increased to 43.1% in 1995, compared to 39.4% in 1994. This
trend is largely a result of Champion's strategy of acquiring underperforming
hospitals that often incur labor and other operating costs in excess of what
Champion believes is necessary for the efficient operation of a facility.
Champion attempts to reduce these costs over time by implementing various
operating efficiencies and cost-cutting strategies. However, Champion can give
no assurance that its efforts will ultimately result in significant cost
reductions at these facilities.
The major components of other operating expenses were professional fees,
taxes (other than income), insurance, utilities and other services. In absolute
terms, other operating and supplies expense increased by 54.6% to $65,707,000 in
1995, compared to $42,511,000 in 1994, as a result of the Champion Acquisitions.
However, overall other operating and supplies expense declined to 39.2% of net
revenue in 1995, compared to 40.8% in 1994.
Provision for bad debts was $12,016,000 in 1995, or 7.3% of net patient
service revenue, compared to $7,812,000, or 7.8%, in 1994. The prior year
included approximately $700,000 in charges due to problems resulting from the
installation of an information management system at one facility. Excluding this
charge, provision for bad debts was approximately 7.1% of net patient service
revenue in 1994.
Interest expense increased from $6,375,000 in 1994 to $13,618,000 in 1995,
due principally to (i) the increase in amounts outstanding under the Champion
Credit Facility as a result of its acquisition of SLRMC and funding of ongoing
construction projects; (ii) the issuance of the Champion Series D Notes on
December 30, 1994 and the Champion Series E Notes on June 12, 1995 and (iii)
debt assumed and/or issued in connection with Champion's acquisition of
AmeriHealth, Inc. ("AmeriHealth") on December 6, 1994, through a merger (the
"AmeriHealth Merger") and the acquisition of Psychiatric Healthcare Corporation
("Psychiatric Healthcare") in the fourth quarter of 1994. Interest expense also
increased due to an increase in the interest rate applicable to its senior bank
credit facility (a weighted average of approximately 9.3% and 7.7% for the years
ended December 31, 1995 and 1994, respectively).
Depreciation and amortization expense was $9,290,000 in 1995, compared to
$4,010,000 in 1994, an increase of $5,280,000, or 131.7%. This increase is due
primarily to the Champion Acquisitions, the completion of a hospital and medical
office building in Midland, Texas and an ambulatory care center in Baytown,
Texas, as well as Champion's ongoing capital improvement programs at its
existing hospitals.
39
<PAGE>
Champion capitalized approximately $1,462,000 and $294,000 in interest costs
associated with the construction of a hospital and other medical-related
facilities at December 31, 1995 and 1994, respectively. With the completion of
the hospital and medical office building in Midland, Texas and the ambulatory
care center in Baytown, Texas, Champion expects capitalized interest to be
minimal in 1996.
Operating income for 1995 included approximately $8,881,000 attributable to
Champion's equity in the earnings of DHHS. Champion contributed Heartland to
DHHS effective December 31, 1994 and accounts for its investment in DHHS under
the equity method. Previously, Champion had consolidated Heartland for financial
reporting purposes. Operating income for 1994 included approximately $6,201,000
attributable to Heartland.
1994 COMPARED TO 1993
Champion'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 P&S was acquired) and Champion's
acquisition of Psychiatric Healthcare and the AmeriHealth Merger 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
Baycoast Medical Center ("BMC") and a decline in outpatient surgery cases due to
capacity constraints following the consolidation of the operations of GCH onto
the BMC campus in December 1993.
The average occupancy rates at Champion'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 Champion's acquisition of Psychiatric Healthcare 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.
Provision for contractual allowances was 40.2% of gross patient service
revenue for 1994, compared to 39.2% in 1993. This increase is consistent with
industry expectations as discussed above.
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 Champion's acquisition of Psychiatric
Healthcare, which derives approximately 53% of its gross patient revenue from
the Medicaid program, and due to a decline in revenue attributable to private
and other payor sources at hospitals owned by Champion for the year ended
December 31, 1994.
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 Champion's acquisition of Psychiatric Healthcare and the AmeriHealth
Merger in the fourth quarter of 1994. As a percentage of net revenue, salary and
benefits decreased to 39.4% in 1994, compared to 40.9% in 1993, as a result of
Champion's ongoing efforts to improve staffing efficiencies in its acquired
hospitals. For hospitals owned for the year 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 supplies expense increased by 19.2% to $42,511,000 in 1994,
compared to $35,674,000 in 1993. Other operating and supplies expense
40
<PAGE>
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 Champion'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 Champion'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 Champion's
acquisitions in 1994, Champion's ongoing capital improvement programs at its
existing hospitals and the amortization of costs associated with Champion's
issuance of the Champion Series D Notes.
Interest expense increased from $2,725,000 in 1993 to $6,375,000 in 1994,
due principally to Champion's issuance of $37,833,000 of the Champion Series D
Notes effective December 31, 1993 and its establishment of a $20,000,000 senior
bank credit facility on November 3, 1993, as well as interest expense associated
with debt assumed and/or issued in the AmeriHealth Merger and the Psychiatric
Healthcare acquisition. Interest expense also increased due to an increase in
the interest rate applicable to its senior bank credit facility (a weighted
average of approximately 7.7% and 6.5% at December 31, 1994 and 1993,
respectively).
RECENT ACQUISITIONS AND OTHER INVESTMENTS
On March 1, 1996, Champion acquired Jordan Valley from Columbia. Jordan
Valley is a 50-bed acute care hospital located in West Jordan, Utah, a suburb of
Salt Lake City. Jordan Valley was acquired 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 preliminary cash consideration paid to Columbia of approximately
$10,750,000. Cash consideration included approximately $3,750,000 for certain
net working capital components, which are subject to further adjustment and
final agreement by the parties, and reimbursement for certain capital
expenditures made previously by Columbia. The transaction did not result in a
gain or loss. The Alabama facilities were acquired as a part of the AmeriHealth
Merger on December 6, 1994.
On April 13, 1995, Champion acquired SLRMC from Columbia for approximately
$61,042,000, which included approximately $11,783,000 for certain working
capital components, resulting in a net purchase price of approximately
$49,259,000. Champion funded the asset purchase from available cash and
approximately $30,000,000 in borrowings under its senior bank credit facility.
SLRMC is comprised of a 200-bed tertiary care hospital and five clinics and is
located in Salt Lake City, Utah.
On December 21, 1994, a wholly owned subsidiary of Champion that owned
Heartland entered into the DHHS partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199-bed acute care hospital, in Fargo,
North Dakota. Champion and Dakota contributed their respective hospitals debt
and lien free (except for capitalized lease obligations), including certain
working capital components, and Champion contributed an additional $20,000,000
in cash, each in exchange for 50% ownership in the partnership. 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. Because
the partners through the partnership agreement and an operating agreement have
delegated substantially all management of DHHS to Champion, the authority of the
partnership's governing board is limited. Under the terms of the partnership
agreement, Champion is obligated to advance funds to the partnership to cover
any and all operating deficits of the partnership. Beginning July 1996, Dakota
has the right to require Champion to purchase its partnership interest free of
debt or liens for a cash
41
<PAGE>
purchase price equal to 5.5 times Dakota's pro rata share of earnings before
depreciation, interest, income taxes and amortization, as defined in the
partnership agreement, less Dakota's pro rata share of the partnership's
long-term debt. DHHS had earnings before depreciation, interest, income taxes
and amortization of approximately $19,000,000 for the year ended December 31,
1995. Beginning January 1998, the purchase price for Dakota's partnership
interest shall not be less than $50,000,000. Should Dakota elect to exercise its
option, Champion would likely finance the purchase through bank or other
borrowings. Under the terms of the option, Champion has 12 months to consummate
its obligations thereunder. As of December 31, 1995, Champion has received
$825,000 in cash distributions from DHHS.
INFLATION
The healthcare 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 Champion higher prices. In general,
Champion's revenue increases through price increases or changes in reimbursement
levels have not kept up with cost increases. However, by expanding services and
by increasing operating efficiencies, Champion has historically been able to
substantially offset increases in such costs. In light of cost-containment
measures imposed by government agencies, private insurance companies and
managed-care plans, Champion is likely to experience continued pressure on
operating margins in the future.
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BUSINESS
CERTAIN STATEMENTS UNDER THIS CAPTION "BUSINESS" CONSTITUTE "FORWARD-LOOKING
STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS -- FORWARD-LOOKING
STATEMENTS."
GENERAL
Paracelsus is a leading healthcare company that owns and operates acute care
and specialty hospitals and related healthcare businesses serving selected
markets in the United States. Paracelsus currently owns and operates 18 acute
care hospitals with a total of 1,685 licensed beds in California, Utah,
Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care
hospitals provide a broad array of general medical and surgical services on an
inpatient, outpatient and emergency basis. In addition, certain hospitals and
their related facilities offer rehabilitative medicine, substance abuse
treatment, psychiatric care and AIDS care. In California, Paracelsus also owns
and operates three psychiatric hospitals with 218 licensed beds, four skilled
nursing facilities with 232 licensed beds and a 60-bed rehabilitative hospital.
In addition, Paracelsus owns and operates 11 home healthcare agencies and 16
medical office buildings adjacent to certain of its hospitals. For the 12 months
ended March 31, 1996 on a pro forma basis after giving effect to acquisitions
and dispositions, Paracelsus would have had total operating revenues of $516.9
million, Adjusted EBITDA of $55.8 million and a net loss of $3.1 million. The
net loss includes an unusual charge recorded in March 1996 of $22.4 million (or
$13.2 million, net of taxes) related to the settlement of two lawsuits.
As a result of the Merger, Champion will become a wholly owned subsidiary of
the Company. Champion currently owns and operates five acute care hospitals with
a total of 722 licensed beds in Utah, Texas and Virginia and owns a 50% interest
in, and operates, DHHS, a partnership that owns two additional acute care
hospitals with a total of 341 licensed beds in North Dakota. Champion's acute
care hospitals generally offer the same types of services provided by
Paracelsus' acute care hospitals. Champion also owns and operates two
psychiatric hospitals with a total of 219 licensed beds in Missouri and
Louisiana. For the 12 months ended March 31, 1996 on a pro forma basis giving
effect to acquisitions and dispositions, Champion would have had net revenue of
$198.2 million, Adjusted EBITDA of $32.2 million and net income of $3.9 million.
Following the Merger, the Company will operate 31 hospitals in 11 states
including 25 acute care hospitals with 2,748 licensed beds, five psychiatric
hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed
beds. On a pro forma combined basis for the 12 months ended March 31, 1996,
after giving effect to the Offerings, the Company would have had total operating
revenues of $714.8 million, Adjusted EBITDA of $88.1 million and a net loss of
$6.7 million. The net loss includes the unusual charge related to the settlement
of two lawsuits. These pro forma combined results do not give effect to any cost
savings that management believes will be realized as a result of the Merger due
to the combination of the corporate operations of Paracelsus and Champion and
the elimination of certain corporate consulting contracts of Paracelsus. In
addition, the combined entity should benefit from economies of scale in such
areas as purchasing, marketing, information systems, risk management,
acquisitions and development, accounting, reimbursement, corporate finance and
quality assurance.
The Company believes that the Merger represents a unique opportunity to
integrate the operations of two companies that have a complementary portfolio of
hospitals. Upon completion of the Merger, 22 of the 31 hospitals owned or
operated by the Company will be located in markets where a hospital or hospital
network operated by the Company is a preeminent provider. On a pro forma
combined basis (excluding the PHC Salt Lake Hospital and the two hospitals owned
by DHHS), the remaining 19 hospitals would have accounted for approximately 71%
and 89% of the 28 remaining hospitals' operating revenues and Adjusted EBITDA,
respectively, for the 12 months ended March 31, 1996.
Following the Merger, the Company believes that it will be better positioned
to implement its business strategy due to its greater scale and diversity of
operations, expanded geographic presence and enhanced access to the public
capital markets and other financing sources. The Company also
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believes that it will benefit from the addition to Paracelsus' management team
of three key Champion executives who, following the Merger, will have primary
responsibility for day to day management of the Company. These Champion
executives have an average of 29 years of hospital industry experience and a
proven track record in operating and growing publicly held hospital companies.
Over the past five years, these executives grew Champion's net revenue at an
annual growth rate of 62.0% from $24.3 million in 1991 to $167.5 million in 1995
while improving its Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995
and 19.2% for the three months ended March 31, 1996.
BUSINESS STRATEGY
The Company's strategic objective is to establish each of its hospitals or
hospital networks as the provider of choice in its market. To accomplish this,
the Company first seeks to establish a presence in geographic locations that are
best suited to developing a preeminent market position. These locations
primarily include small to mid-sized markets with more favorable demographics
and lower levels of penetration by managed care plans and alternative niche
competitors than larger metropolitan areas. Moreover, the competing hospitals in
the Company's target markets frequently will be not-for-profit facilities which
the Company believes have higher cost structures than its hospitals. Second, the
Company focuses on implementing operating strategies developed by the Company
for positioning each of its hospitals or hospital networks as providers of
measurably higher quality and lower cost healthcare services than competing
providers. The key elements of the Company's operating strategies are as
follows:
EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS
The Company plans to continue to pursue expansion opportunities through the
strategic acquisition of hospitals and complementary healthcare businesses in
existing or new markets. The Company has demonstrated this strategy most
recently by successfully acquiring four hospitals and a home health agency in
the Salt Lake City market. The Company's primary criteria for its target markets
include: (i) a service area population of between 30,000 and 500,000; (ii)
favorable demographics in terms of population growth, age profile, employment
rates, business climate, economic activity and family income levels; (iii) low
levels of managed care penetration; and (iv) limited competition from other
hospitals and alternative healthcare providers. The Company targets for
acquisition those hospitals that have the following characteristics: (a) a
stable market position with potential for improvement; (b) an appropriate range
and depth of medical services or the capacity to add needed services; (c) a
favorable reputation in the community; (d) current financial underperformance
due to an excessive cost structure; (e) a sufficient base of capable, high
quality physicians; and (f) no required extraordinary capital investment. The
Company believes that its primary sources of acquisitions will be unaffiliated
not-for-profit hospitals and facilities being divested by hospital systems for
strategic, regulatory or performance reasons.
INCREASE MARKET PENETRATION
The Company seeks to increase the market penetration of its hospitals by
offering a full range of hospital and related healthcare services and by gaining
market share from local competitors by providing measurably higher quality and
lower cost services. The Company will selectively add new services such as
obstetrics, open-heart surgery and skilled nursing beds at its hospitals and,
when appropriate, invest in new technologies. For example, this strategy has
been sucessfully demonstrated by the addition of obstetrics programs at each of
The Medical Center of Mesquite and WMC during the past 12 months. The Company
will also develop complementary healthcare businesses such as primary care
clinics, home health agencies and rehabilitative clinics to augment the service
capabilities of its existing hospitals and enable the delivery of care in the
most cost effective and medically appropriate setting. In addition, over the
past 24 months, the Company has acquired or established five home health
agencies that cover 26 counties in Tennessee, providing a large referral base
for the Company's four hospitals in that market. In some cases, the Company may
also acquire or merge with other providers or establish alliances with such
providers through affiliation agreements, joint venture arrangements or
partnerships. Furthermore, since physicians still direct the majority of
hospital admissions, the Company focuses on supporting and retaining existing
physicians and attracting
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other qualified physicians in existing or underserved medical specialties. The
Company may either affiliate, joint venture or partner with physician practices
or, in selected cases, manage or acquire such physician practices.
ESTABLISH A COMPETITIVE COST ADVANTAGE
The Company seeks to position each of its hospitals as the low cost provider
in its market by monitoring and controlling fixed and variable operating
expenses. Champion's executives have demonstrated an ability to reduce costs as
indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in
1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. The
Company believes that a low cost provider is better able to succeed in the
current healthcare environment by aggressively pricing its managed care
contracts and direct employer arrangements and by maintaining profitability
under fixed payment arrangements. The Company focuses on the following major
areas for cost control:
LABOR COSTS. Salaries and benefits represent the single largest
component of hospital operating expenses. The Company seeks to reduce
labor costs by (i) implementing staffing standards and adjusting
staffing according to changes in volume and patient needs; (ii)
eliminating unnecessary levels of management; and (iii) increasing the
productivity of skilled employees by shifting certain lower skill tasks
to lower paid personnel. Champion's executives have reduced salaries,
wages and benefits as a percentage of net revenue at Champion's
hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and 35.4%
for the three months ended March 31, 1996.
SUPPLY COSTS. The Company seeks to realize savings on medical supplies,
the second largest component of hospital operating expenses, by (i)
standardizing high volume products; (ii) participating in purchasing
groups; (iii) monitoring supply usage; and (iv) otherwise taking
advantage of volume purchasing to achieve better pricing.
CONTRACTUAL ARRANGEMENTS. The Company evaluates whether savings can be
realized by renegotiating or eliminating existing third-party
management, physician, maintenance, supply and other contracts.
MARGINAL SERVICES. The Company regularly reviews all programs and
services at its hospitals to determine whether any such programs or
services should be discontinued or reduced because they are
underutilized or unprofitable and have no strategic benefit.
UTILIZATION MANAGEMENT. The Company has developed a proprietary
utilization management program designed to help monitor and manage
clinical resources by reviewing both patient lengths of stay and
physician treatment protocols in order to decrease the overall cost of
care. The program, which includes the use of clinical pathways developed
in conjunction with the medical staffs of the Company's hospitals, helps
assure that physicians consistently render the most medically
appropriate and cost effective regimen of care. The program has been
implemented in six of the Company's hospitals and is expected to be
implemented in its remaining hospitals over the next year.
IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE
The Company believes that preventing errors in the treatment process can
improve quality and lower the cost of care by reducing the risk of adverse
events to patients and the consequential costs of such events. For the past two
years, the Company has piloted a proprietary program in four of its hospitals
designed to identify and measure the incidence of patient treatment errors in
225 separate clinical categories. The Company also believes that the majority of
treatment errors are preventable and often result from systemic problems such as
a lack of standardized policies, procedures and training. The Company believes
that its pilot program in four hospitals has demonstrated that reductions in the
incidence of treatment errors can occur as a result of focusing hospital
employees on monitoring errors, training employees in standardized systems and
procedures and otherwise taking corrective steps to reduce and eliminate
deficiencies in the care process. The Company believes the capability to
quantify data regarding the quality of care in its hospitals will enable the
Company to
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<PAGE>
reduce the cost of care and will enhance the ability of its hospitals to win and
profit from managed care contracts. The Company intends to introduce its
proprietary program in all of its hospitals as soon as possible following the
consummation of the Merger.
DEVELOP A COMPETITIVE SERVICE ADVANTAGE
The Company believes that bureaucratic and impersonalized customer service
is a historical structural deficiency within the hospital industry caused by
service systems, policies and procedures that are designed for the convenience
of physicians and hospitals rather than patients, payors and employers. For the
past year, the Company has assembled a task force of hospital and corporate
personnel who have been devoted to developing a proprietary customer service
system that will become a prototype for all the Company's hospitals. The Company
believes this customer service system will differentiate its hospitals and
facilities from those of its competitors and provide a competitive advantage.
The objectives of this initiative are to (i) identify those aspects of customer
service most in need of streamlining and revamping to create "user-friendly"
systems in areas such as billing information and admission and emergency room
registration and processing; (ii) review existing hospital policies, procedures
and practices that serve as barriers to personalized customer service; (iii)
establish quantitative performance targets and develop monitoring systems for
measuring and reporting results and progress toward targets; (iv) develop a
customer service questionnaire to quantify levels of customer satisfaction and
areas of dissatisfaction; and (v) conduct training of hospital personnel in the
customer service system. The Company currently expects that it will begin
introducing its customer service system on a pilot basis in several of its
hospitals during the first quarter of 1997.
REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY
The provision of high quality healthcare services is primarily a local
business, and the Company's business strategy and operating programs emphasize
local management initiative, responsibility and accountability combined with
corporate support and oversight. The Company establishes targets for various
categories of operating expenses for each hospital and tracks operating
efficiency on a daily basis. The Company also requires each of its hospitals to
provide forecasts on financial and operating performance for the month and
conducts in-depth monthly operating reviews with each local management team to
establish and ensure management discipline and accountability. In addition,
bonuses for key operating executives of the Company are in part based upon
margin improvement and performance. These actions are intended to focus
operating management on optimizing operating efficiencies.
OPERATIONS
The Company seeks to create a local healthcare system in each of its markets
that offers a continuum of inpatient, outpatient, emergency and alternative care
options. In many such markets, the Company will establish its acute care
hospitals as the hub of a local provider system that can include skilled nursing
facilities, home health agencies, clinics, physician practices and medical
office buildings. These operations are described below.
ACUTE CARE HOSPITALS
The Company owns and operates 25 acute care hospitals (including those owned
by DHHS) with a total of 2,748 licensed beds in nine states. Each of the
Company's acute care hospitals provides a broad array of general medical and
surgical services on an inpatient, outpatient and emergency basis, including
some or all of the following: intensive and cardiac care, diagnostic services,
radiological services and obstetrics on an inpatient basis and ambulatory
surgery, laboratory and radiology services on an outpatient basis. Certain
hospitals also provide comprehensive psychiatric services. The Company owns a
50% interest in and is responsible for the operations of DHHS, which owns two
acute care hospitals in Fargo, North Dakota.
SPECIALTY HOSPITALS
The Company owns and operates five psychiatric hospitals with 437 licensed
beds and one rehabilitative hospital with 60 licensed beds in three states.
Three of the psychiatric hospitals and the
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rehabilitative hospital are located in California markets where the Company has
acute care hospitals. The psychiatric hospitals provide child, adolescent and
adult comprehensive psychiatric and chemical dependency treatment programs on an
inpatient and outpatient basis.
SKILLED NURSING FACILITIES
The Company owns and operates four skilled nursing facilities with a total
of 232 licensed beds in California that provide 24-hour nursing care,
principally for the elderly, by registered or licensed nurses and related
medical services prescribed by the patient's physician.
HOME HEALTH AGENCIES
The Company provides home health services through 15 of its hospitals
(including the two DHHS hospitals) in five states. These services include home
nursing, infusion therapy, physical therapy, respiratory services and other
rehabilitative services.
CLINICS
The Company owns and operates a number of stand-alone clinics, particularly
in rural areas. Most of these clinics are primary care clinics that operate as
physician offices where the physicians are employed by or are under contract
with one of the Company's hospitals in that market. The clinics serve to
complement the Company's acute care hospitals in their respective markets by
allowing the Company to provide a wider range of services in optimal settings
and providing an opportunity to attract patients to the Company's hospitals.
PHYSICIAN ARRANGEMENTS
The Company owns a majority interest in and operates five physician joint
ventures. Three of the joint ventures have nonexclusive use of office space and
equipment in certain hospitals which they use to provide specialized medical and
surgical services to patients. In all cases, the minority interests in the joint
ventures are held directly or indirectly by a physician or a group of
physicians. Additionally, several of the Company's hospitals have assisted with
the formation of and participate in physician hospital organizations or
management services organizations.
MEDICAL OFFICE BUILDINGS
The Company owns, leases or manages 22 medical office buildings located
adjacent to certain of its hospitals.
SELECTED MARKET STRATEGIES
Key to the success of the Company is its ability to adjust the
implementation of its various operating strategies to the unique features of
each market it enters. The following are four examples of how the Company is
currently implementing its strategies under diverse market conditions.
CONTRACTING WITH MANAGED CARE PROVIDERS IN A MAJOR URBAN MARKET
The broad market in Utah encompasses a population of 1,800,000 across the
90-mile corridor known as the Wasatch Front. The Company has focused it efforts
around Salt Lake County, which has a population base of approximately 800,000,
or 43% of the state's population, where four of the Company's five Utah
hospitals are located. This area has favorable demographics in terms of
employment, age and family income levels. Managed care plans have achieved one
of the highest levels of penetration in the United States in providing
healthcare coverage to the target population base. To be successful in this
market requires that providers be able to demonstrate to managed care payors the
ability to deliver a continuum of healthcare services on a cost competitive
basis that is geographically accessible to the covered lives.
Through its network of five hospitals, a home health agency, a skilled
nursing facility and a number of outpatient and physician clinics, the Company
is creating an integrated provider system that provides both extensive
geographic coverage and a full range of healthcare services. In order to
increase its profitability under its managed care contracts, the Company is
implementing several cost saving strategies. The Company has already achieved
cost savings at its SLRMC hospital through implementing staffing standards and
renegotiating existing contractual arrangements with a variety
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of service providers. These same procedures will be rapidly implemented in the
four recently acquired hospitals in this market. Furthermore, because the four
hospitals and related clinics are in the same county (with the fifth hospital
located in an adjacent county but within the total market area), the Company
will have the opportunity to gain operational efficiencies by sharing and
combining services to reduce operating costs. In the Utah market, the Company
currently has contracts with FHP International Corp. ("FHP") that cover
approximately 102,000 capitated lives and 13,000 PPO lives and contracts with
CIGNA, United Health and Blue Cross of Utah that cover a total of approximately
220,000 non-capitated lives.
CONSOLIDATING A MID-SIZE MARKET
The combined Fargo, North Dakota and Moorehead, Minnesota market has a
population of approximately 160,000 and an annual population growth rate of
approximately 4%. This market also has favorable demographics in terms of
employment, age and family income levels. This market is characterized by a low
level of managed care penetration with most of the healthcare payors being
traditional health insurance companies.
Historically, four not-for-profit hospitals had competed for patients in
this market. In 1992, the Company acquired two of the hospitals that were
underperforming financially. The Company immediately consolidated the facilities
into one hospital, eliminated duplicative services, reduced labor costs by
implementing productivity standards and eliminating excess levels of employees,
discontinued marginal services and sold the physical plant of the other
hospital. In addition to these actions, the Company funded needed capital
expenditures and strengthened relationships with physicians in order to enhance
its competitiveness within the market.
In 1994, the Company determined that it could extend its presence as well as
realize additional cost savings by forging a partnership with another hospital
in the market. The resulting DHHS partnership, which the Company manages, is now
a preeminent provider and has strengthened its competitive position against the
remaining hospital, which is the largest provider in the market. Through this
partnership, the Company has been able to achieve further cost savings by
eliminating burdensome contracts, consolidating certain services and eliminating
duplicative or otherwise marginal services. In order to further develop an
integrated healthcare delivery system in this market, the Company has acquired a
home health agency and opened a skilled nursing facility.
CONSTRUCTING A NEW FACILITY TO ENTER A LESS COMPETITIVE MARKET
The Midland, Texas market includes a population of approximately 120,000
with favorable demographics and a very low level of managed care penetration.
The Company viewed the Midland market as an opportunity to compete against a
large not-for-profit hospital that was not responsive to changing market forces
and generally had not been faced with significant competition from other
providers. Although Midland had been served by two hospitals for several years,
the not-for-profit hospital was by far the dominant provider.
In 1992, the Company acquired the other, smaller 60-bed facility, which had
an outdated and deteriorating physical plant and offered a limited range of
services, with the intention of closing the smaller facility and building a new
state of the art replacement hospital that could more effectively compete with
the not-for-profit hospital. The Company's newly constructed 101-bed WMC, which
includes a physician office building and a modern ambulatory diagnostic and
surgery center, opened in October 1995, and it continues to gain market share by
capitalizing on the advantages of having new facilities and technology,
providing a broad array of high quality healthcare services, focusing on patient
service and cultivating physician relationships. The Company believes WMC has
inherent cost efficiencies that have resulted from it being a newly constructed
facility.
BUILDING A REFERRAL BASE ACROSS A LARGE RURAL REGION
In Tennessee, the Company has built an integrated network providing a broad
array of healthcare services that covers 26 counties with a combined population
of approximately 900,000. The network is comprised of five home health agencies
with 20 satellite offices, which, in total, perform approximately
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500,000 home health visits annually, and seven rural health clinics. This
network has the effect of creating a large referral base for the Company's four
hospitals in this market and has allowed the Company to become one of the more
significant providers of healthcare in rural Tennessee.
RECENT TRANSACTIONS
ACQUISITION OF PHC SALT LAKE HOSPITAL
On May 17, 1996, Paracelsus acquired the PHC Salt Lake Hospital, a 125-bed
acute care hospital, including its surrounding campus, in Salt Lake City, Utah
from FHP for $70.0 million in cash. Paracelsus financed the acquisition of the
PHC Salt Lake Hospital with borrowings under the Existing Paracelsus Credit
Facility. Prior to the acquisition, the PHC Salt Lake Hospital was operated by
FHP, an HMO, principally to provide care to its HMO members. Accordingly, FHP
operated the PHC Salt Lake Hospital as a captive cost center for the sole
benefit of FHP and not as a business managed separately for profit. In
connection with the acquisition of the PHC Salt Lake Hospital, Paracelsus
entered into a 15-year exclusive provider agreement (the "FHP Exclusive Provider
Agreement") under which FHP will pay Paracelsus stated percentages of its
monthly HMO member premiums to guarantee FHP HMO members access to inpatient
care at all Paracelsus-operated hospitals in Salt Lake City, Utah, including the
PHC Salt Lake Hospital. Based upon information provided to Paracelsus by FHP, as
of March 31, 1996, FHP had approximately 102,000 covered lives who would be
subject to the FHP Exclusive Provider Agreement. In addition, the PHC Salt Lake
Hospital will continue to provide access to approximately 13,000 additional
covered lives under an FHP PPO contract under which FHP will make a
fee-for-service payment to Paracelsus.
The Company intends to change significantly the patient base of the PHC Salt
Lake Hospital. In addition to the FHP HMO and PPO members, the PHC Salt Lake
Hospital will enter into contracts with other insurance carriers and managed
care organizations and otherwise seek to serve the patients in its market. In
addition, the PHC Salt Lake Hospital will provide reference lab services and
emergency room services which are anticipated to generate additional revenues.
To date, Paracelsus has entered into non-capitated provider contracts to provide
services at the PHC Salt Lake Hospital with CIGNA, United Health and Blue Cross
("other payors"). Under those contracts, based on public disclosures made by
such other payors as of March 31, 1996, the Company believes that the PHC Salt
Lake Hospital will provide services to approximately 220,000 additional covered
lives. As a result of the expansion and diversification of the patient base, the
Company anticipates that over time a substantially reduced portion of the PHC
Salt Lake Hospital's total inpatient care will be comprised of services provided
to FHP members, with additional revenues generated through admissions by
independent practicing physicians and patients covered by other insurance
carriers, managed care organizations and the Medicare and Medicaid program.
The Company believes that the PHC Salt Lake Hospital acquisition and the
revenues anticipated to be received under the FHP Exclusive Provider Agreement
will complement the hospitals owned by Champion and the Columbia Hospitals (as
defined below) recently acquired by Paracelsus from Columbia. The Company does
not believe that the historical financial statements of the PHC Salt Lake
Hospital are relevant because the future operations will include services
provided to the general public as compared to its previous operations as a
captive cost center, which served only FHP members. As a result, the PHC Salt
Lake Hospital acquisition has been accounted for as an acquisition of assets.
ACQUISITION OF COLUMBIA HOSPITALS
On May 17, 1996, Paracelsus acquired Pioneer Valley Hospital ("Pioneer"), a
139-bed hospital in West Valley City, Utah; Davis Hospital and Medical Center
("Davis") a 120-bed hospital in Layton, Utah; and Santa Rosa Medical Center
("Santa Rosa"), a 129-bed hospital in Milton, Florida (Pioneer, Davis and Santa
Rosa, collectively, the "Columbia Hospitals") from Columbia. The consideration
for the Columbia Hospitals consisted of $38.5 million in cash and the exchange
of Paracelsus' Peninsula Medical Center, a 119-bed hospital located in Ormond
Beach, Florida ("Peninsula"); Elmwood Medical Center ("Elmwood"), a 135-bed
hospital located in Jefferson, Louisiana; and Halstead Hospital
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("Halstead"), a 190-bed hospital located in Halstead, Kansas (Peninsula, Elmwood
and Halstead collectively, the "Exchanged Hospitals"). Paracelsus also purchased
the real property of Elmwood and Halstead from a real estate investment trust
("REIT"), exchanged the Elmwood and Halstead real property for Pioneer's real
property and sold the Pioneer real property to the REIT (the "Real Property
Purchase and Sale Transaction"). The acquisition of the Columbia Hospitals was
accounted for as a purchase transaction. Paracelsus financed the cash portion of
the acquisition of the Columbia Hospitals from borrowings under the Existing
Paracelsus Credit Facility.
OTHER TRANSACTIONS
On March 1, 1996, Champion acquired from Columbia, Jordan Valley, a 50-bed
acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City.
Champion acquired Jordan Valley in exchange for Autauga, an 85-bed acute care
hospital and a 72-bed skilled nursing facility, plus preliminary cash
consideration paid to Columbia of $10.8 million. The cash consideration included
$3.8 million for certain net working capital components, which are subject to
adjustment and final settlement by the parties, and reimbursement of certain
capital expenditures made previously by the seller. The transaction did not
result in a gain or loss. The Autauga facilities were acquired as part of
Champion's acquisition of AmeriHealth on December 6, 1994, through the
AmeriHealth Merger.
HOSPITAL PROPERTIES
The following table sets forth the name, location, type of facility, date of
acquisition and number of licensed beds for each of the hospitals operated by
the Company. Unless otherwise indicated, all hospitals are owned by the Company.
<TABLE>
<CAPTION>
DATE OF LICENSED
LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS
<S> <C> <C> <C> <C>
CALIFORNIA
Bellwood General Hospital Bellflower Acute Care 2/08/82 85
Chico Community Hospital Chico Acute Care 4/28/85 123
Chico Community Rehabilitation Hospital(2) Chico Rehabilitative 6/30/94 60
Hollywood Community Hospital of Hollywood Los Angeles Acute Care 12/22/82 100
Hollywood Community Hospital of Van Nuys Van Nuys Psychiatric 11/01/82 59
Lancaster Community Hospital Lancaster Acute Care 2/01/81 131
Los Angeles Community Hospital Los Angeles Acute Care 8/08/83 136
Monrovia Community Hospital(3) Monrovia Acute Care 2/01/81 49
Norwalk Community Hospital Norwalk Acute Care 2/01/81 50
Orange County Community Hospital of Orange Orange Psychiatric 11/01/91 104
Orange County Hospital of Buena Park(4) Buena Park Psychiatric 2/01/81 55
UTAH
Davis Hospital and Medical Center Layton Acute Care 5/17/96 120
Jordan Valley Hospital West Jordan Acute Care 3/01/96 50
PHC Salt Lake Hospital Salt Lake City Acute Care 5/17/96 125
Pioneer Valley Hospital(2) West Valley City Acute Care 5/17/96 139
Salt Lake Regional Medical Center Salt Lake City Acute Care 4/13/95 200
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
DATE OF LICENSED
LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS
<S> <C> <C> <C> <C>
TEXAS
BayCoast Medical Center Baytown Acute Care 1/01/91 191
The Medical Center of Mesquite Mesquite Acute Care 10/01/90 176
Westwood Medical Center(5) Midland Acute Care 10/25/95 101
NORTH DAKOTA
Heartland Medical Center(6) Fargo Acute Care 9/01/93 141
Dakota Hospital(6) Fargo Acute Care 12/31/94 200
TENNESSEE
Cumberland River Hospital North(2) Celina Acute Care 10/01/85 36
Cumberland River Hospital South Gainesboro Acute Care 9/05/95 44
Fentress County General Hospital Jamestown Acute Care 10/01/85 84
Bledsoe County Hospital(2) Pikeville Acute Care 10/01/85 32
VIRGINIA
Metropolitan Hospital(7) Richmond Acute Care 12/06/94 180
MISSOURI
Lakeland Regional Hospital Springfield Psychiatric 10/01/94 149
FLORIDA
Santa Rosa Medical Center(2) Milton Acute Care 5/17/96 129
MISSISSIPPI
Senatobia Community Hospital(2) Senatobia Acute Care 1/01/86 76
LOUISIANA
Crossroads Regional Hospital Alexandria Psychiatric 10/01/94 70
GEORGIA
Flint River Community Hospital(2) Montezuma Acute Care 1/01/86 50
--------
Total licensed beds 3,245
--------
--------
</TABLE>
- ------------------------
(1) Reflects date facility was initially acquired by Paracelsus or Champion, as
applicable.
(2) Hospital facility is leased.
(3) Monrovia Community Hospital is operated as a joint venture with a physician
investor. Paracelsus owns a 51.0% interest in this joint venture.
(4) Orange County Hospital of Buena Park is owned subject to a mortgage securing
borrowings in the amount of $283,473 as of March 31, 1996.
(5) Constructed by Champion and placed in service October 25, 1995.
(6) Champion owns a 50.0% interest in and operates DHHS, a partnership that owns
the hospital.
(7) Champion owns an 89.0% general partnership interest in a limited partnership
that owns the hospital.
51
<PAGE>
SELECTED OPERATING STATISTICS
The table below sets forth selected operating statistics of the Company's
acute care, psychiatric and rehabilitative hospitals during the periods
presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995 (1) MARCH 31, 1996
----------------------- -----------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Number of hospitals at period end.............................. 29 2 28 2
Licensed beds at period end.................................... 2,964 341 2,845 341
Admissions..................................................... 67,154 10,096 35,822 4,676
Adjusted admissions(2)......................................... 97,553 15,628 52,811 7,358
Average length of stay (days):
All beds..................................................... 6.2 5.5 5.9 5.7
Medical-surgical............................................. 5.2 4.4 5.1 4.5
Psychiatric.................................................. 11.7 9.6 11.3 8.5
Patient days................................................... 415,882 55,476 212,851 26,618
Adjusted patient days(3)....................................... 604,141 85,876 313,797 41,884
Occupancy rate(4).............................................. 40% 45% 41% 43%
Deliveries..................................................... 4,642 1,449 2,777 630
Total surgeries................................................ 39,272 9,769 19,688 4,569
Outpatient visits(5)........................................... 1,189,797 126,211 741,378 59,721
Gross outpatient revenues as a percent of gross operating
revenues...................................................... 31% 35% 32% 36%
</TABLE>
- ------------------------------
(1) Includes Champion data for its year ended December 31, 1995.
(2) Total admissions for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(3) Total patient days for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(4) Average daily census for the period divided by licensed beds.
(5) Includes emergency room and home health agency visits.
COMPETITION
The competition for patients among hospitals and other healthcare providers
has intensified in recent years as hospital occupancy rates have declined. This
decline is attributable to several factors, including cost containment
pressures, changing medical technology, changing government regulations and
utilization management. Such factors have prompted new competitive strategies by
hospitals and other healthcare providers. Among these strategies is an
increasing emphasis on outpatient healthcare delivery procedures (E.G.,
outpatient surgery, diagnostic centers and home healthcare), which tend to
eliminate or reduce the length of hospital stays.
The Company believes that one of the most significant factors in the
competitive position of a hospital is the number and quality of the physicians
affiliated with such hospital, because physicians determine the majority of
hospital admissions. Although physicians may at any time terminate their
affiliation with a hospital operated by the Company, the Company seeks to retain
physicians of varied specialties on its hospitals' medical staffs and to attract
other qualified physicians. The Company believes that physicians refer patients
to a hospital primarily on the basis of the quality of services it renders to
patients and physicians, the quality of other physicians on the medical staff,
the location of the hospital and the quality of the hospital's facilities,
equipment and employees. However, physicians affiliated with certain managed
care providers may be precluded from utilizing the Company's facilities for
their patients, or referring patients to doctors using the Company's facilities,
if the facility or referred doctors are not currently contracting with such
managed care providers.
52
<PAGE>
The competitive position of a hospital is also affected by its management's
ability to negotiate service contracts with purchasers of group healthcare
services, including employers, PPOs and HMOs. PPOs and HMOs attempt to direct
and control the use of hospital services through "managed care" programs and to
obtain discounts from hospitals' established charges, and, in return, hospitals
acquire access to a large number of potential patients. In addition, employers
and traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. Of importance to a hospital's competitive position is its
ability to obtain contracts with PPOs and HMOs and other organizations that
finance healthcare. Managed care providers are increasingly contracting with
hospitals or networks of hospitals that can provide a full range of services in
a particular market. Accordingly, the Company is attempting to join or establish
hospital networks and to increase services to compete for contracts in such
markets.
MEDICARE, MEDICAID AND OTHER REVENUE
GENERAL
The Company receives payment for services rendered to patients from private
insurers, managed care providers, the Federal government under the Medicare
program, state governments under their respective Medicaid programs and directly
from patients. The table below sets forth the approximate percentages of the
historical gross operating revenues derived by the facilities of the Company and
of DHHS from Medicare, Medicaid and private insurance and all other payors for
the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995(1) MARCH 31, 1996
--------------------- ---------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Medicare.................................................... 45% 46% 46% 46%
Medicaid.................................................... 13% 9% 14% 9%
Private insurance and all other payors...................... 42% 45% 40% 45%
</TABLE>
- ------------------------
(1) Includes Champion data for its year ended December 31, 1995.
In addition, the Company's revenues depend on the level of inpatient census
at its hospitals, the volume of outpatient services at its hospitals and
outpatient facilities, the acuity of patients' conditions and charges for
services. The approximate percentages of historical gross patient revenue for
inpatient and outpatient services for the Company and for DHHS for the periods
indicated were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995(1) MARCH 31, 1996
--------------------- ---------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Inpatient services.......................................... 69% 65% 68% 64%
Outpatient services......................................... 31% 35% 32% 36%
</TABLE>
- ------------------------
(1) Includes Champion data for its year ended December 31, 1995.
MEDICARE
The Medicare program is a Federal healthcare program created by the Social
Security Act Amendments of 1965. Each of the Company's hospitals is certified as
a provider of services under the Medicare program. Revenues attributable to
Medicare patients represented 45% and 46% of the Company's historical gross
operating revenues in fiscal 1995 and in the six months ended March 31, 1996,
respectively. The Medicare program has changed significantly during the past
several years, and these changes have had and will continue to have a
significant effect on the Company's hospitals. In addition, the requirements for
certification in the Medicare program are subject to change, and, in order to
remain qualified for the program, it may be necessary for the Company to make
changes from
53
<PAGE>
time to time in its facilities, equipment, personnel and services. Although the
Company intends to continue its participation in the Medicare program, there is
no assurance that it will continue to qualify for participation.
Pursuant to the Social Security Act Amendments of 1983 and subsequent budget
reconciliations and modifications, Congress adopted a prospective payment system
("PPS") under which a hospital is paid a predetermined amount for each Medicare
inpatient discharge depending on the patient's diagnosis and related procedures.
Generally, under the PPS, if the costs of meeting the health needs of the
patient are greater than the predetermined payment rate, the hospital must
absorb the loss. Conversely, if the cost of the services provided is less than
the predetermined payment, the hospital retains the difference.
Prior to 1988, Medicare reimbursed hospitals for 100% of their share of
capital related costs, which included depreciation, interest, taxes and
insurance related to plant and equipment for inpatient hospital services. The
reimbursed rate was reduced thereafter to 85% of costs. Federal regulations
effective October 1, 1991 created a PPS for inpatient capital costs to be phased
in over a 10-year transition period from a hospital-based rate to a fully
Federal payment rate or a per-case rate. Such a method of capital cost payment
could have a material adverse effect on the operating revenues of the Company.
Recent legislation has reduced projected increases for Medicare payments to
providers for hospital outpatient services. The payment rate for hospital
outpatient surgery and hospital radiology services is limited to a blend of 42%
of reasonable costs and 58% of Medicare's prospective rates. The payment rate
for other outpatient diagnostic services is limited to a blend of 50% of
reasonable costs and 50% of the prospective rates. Furthermore, studies are
currently in process at the Health Care Financing Administration (the "HCFA")
that propose converting payment for all outpatient services (including home
health services), inpatient psychiatric services and skilled nursing care to a
prospective payment system. Congress is presently considering further
significant reductions in projected increases in Medicare payments to providers.
The financial effect of these changes may have a negative impact on the Company,
although the exact method of implementing these reductions and whether a
prospective payment system for outpatient services or inpatient psychiatric and
home health services and skilled nursing care will be adopted are not yet known.
Pursuant to the Omnibus Budget Reconciliation Act of 1990, Congress revised
the Gramm-Rudman budget and sequestration process and established a
"pay-as-you-go" system for entitlement programs, including Medicare. Legislation
increasing entitlements and/or reducing revenues must be deficit-neutral (i.e.,
it must pay for itself by a reduction in entitlement spending elsewhere or
additional revenues). Legislation violating the pay-as-you-go principle would
trigger a sequestration of entitlement program funds in the same amount that
such legislation added to the deficit. Up to a maximum of 4% of Medicare program
funds would be included among those sequestered. Medicaid program funds,
however, continue to be exempt from sequestration. Payment reductions under the
revised sequestration process were not implemented in fiscal years 1993, 1994 or
1995. If implemented in future years, these reductions could have a material
adverse effect on the Company's operating revenues. However, because the actual
amount of the reduction for any fiscal year may vary according to the Federal
deficit, the financial impact of the revised process on the Company cannot be
predicted.
The Medicare program makes additional payments to those healthcare providers
that serve a disproportionate share of low income patients. The qualification
and funding for disproportionate share payments can vary by fiscal year.
Disproportionate share payments for future years could vary significantly from
historical payments.
Within the statutory framework of the Medicare program, there are
substantial areas subject to administrative rulings, interpretations and
discretion that may affect payments made under the program. In addition, the
Federal government might, in the future, reduce the funds available for, or
require more stringent utilization of, hospital facilities, either of which
could have a material adverse effect on the Company's future income.
54
<PAGE>
MEDICAID PROGRAM
Medicaid (Title XIX of the Social Security Act) is a program of medical
assistance that is administered by each state. Each of the Company's hospitals
is certified for participation in the various state Medicaid programs, although
not all of the Company's hospitals have chosen to participate. In fiscal 1995
and for the six months ended March 31, 1996 on a combined historical basis the
Company's facilities derived approximately 13% and 14%, respectively, of their
gross operating revenues from Medicaid programs. Payment for inpatient services
varies by state, but a majority of states pays either a fixed, pre-determined
daily rate or a fixed payment for each type of service.
The Medicaid program also makes additional payments to those healthcare
providers that serve a disproportionate share of low income patients. The
methodology used to determine qualification and funding will vary by state. The
qualification and funding for disproportionate share payments can vary by fiscal
year. Disproportionate share payments for future years could vary significantly
from historical payments.
REGULATION AND OTHER FACTORS
GENERAL
All hospitals are subject to compliance with various Federal, state and
local statutes, regulations and ordinances, and receive periodic inspection by
state and local licensing agencies, as well as by nongovernmental organizations
acting under contract or pursuant to Federal law, to review compliance with
standards of medical care and requirements concerning facilities, equipment,
staffing, cleanliness and related matters. The Company's hospitals must comply
with the licensing requirements of state and local health agencies, as well as
the requirements of municipal building codes, health codes and local fire
departments. All of the Company's hospitals have obtained the licenses that the
Company believes are necessary under applicable law for the operation of the
hospitals. In addition, all of the Company's hospitals are presently accredited
by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO")
except for one rural hospital in Georgia, which is surveyed annually by state
regulatory authorities.
CERTIFICATE OF NEED REQUIREMENTS
In recent years, many states have enacted legislation regulating the
establishment or expansion of hospital facilities and services. In certain
states, prior to the construction of new hospitals, the expansion of old
hospitals or the introduction of certain new services in existing hospitals, one
must obtain a CON by demonstrating to either state or local authorities, or
both, that it is in compliance with plans adopted by such authorities, or
receive an exemption from CON requirements by demonstrating that the project is
covered by statutory and regulatory exemption provisions. This requirement can
increase the cost (in time and money) of a project, and may affect the
feasibility of some projects. Of the 11 states in which the Company operates, a
CON is required in Florida, Georgia, Louisiana, Mississippi, Missouri, Tennessee
and Virginia.
HOSPITAL INSPECTIONS AND REVIEWS
JCAHO regularly conducts an on-site review and inspection of every hospital
seeking to obtain or maintain its accreditation. Hospitals accredited by JCAHO
are deemed to be in compliance with the standards for participation in the
Medicare program, although Medicare can conduct its own compliance reviews.
During fiscal 1995, three Paracelsus facilities had full JCAHO reviews. All
such facilities maintained full three-year accreditation. In addition to JCAHO
inspections and inspections conducted by certain state and local regulatory
authorities, the HCFA, generally in response to specific complaints from
patients but also occasionally on a random basis, causes hospitals participating
in the Medicare program to be inspected. Since fiscal 1995, three facilities had
state regulatory surveys, some of which may have been done on behalf of the
HCFA, and all of those facilities remained eligible to participate in
55
<PAGE>
the Medicare program. In addition, all of Champion's hospitals are accredited by
JCAHO, including Champion's newly constructed hospital in Midland, Texas, which
received its provisional accreditation in the first quarter of 1996.
REGULATORY COMPLIANCE
The operation of healthcare facilities is subject to Federal, state and
local regulations. Facilities are subject to periodic inspection by state
licensing agencies to determine whether the standards of medical care provided
therein comply with licensing standards. The Company believes that all of its
healthcare facilities are in substantial compliance with such Federal, state and
local regulations and licensing requirements.
OTHER FEDERAL STATUTES AND REGULATIONS
Effective January 1, 1995, the so-called Stark II law bars physicians from
referring Medicare and Medicaid patients to 11 designated health services in
which the physicians have an investment or compensation arrangement. The HCFA
has not set a target date for proposing the Stark II regulations, but it finally
issued the so-called Stark I regulations on August 14, 1995. (Stark I bans
physicians from referring Medicare and Medicaid patients to clinical
laboratories in which they have a financial interest.) The HCFA has stated that
the Stark I regulations will also be applicable to Stark II.
The HCFA plans to require healthcare entities, including hospitals, to sign
a declaration form in which they promise not to bill Medicare for patients
referred by a physician who has a prohibited financial relationship with the
entity. The HCFA will keep those forms on file. Physicians who own an interest
in a designated health service will also be asked to sign a declaration form
saying they will not refer Medicare patients to that service. The entity will
keep the physician forms on file, and the HCFA will check to see that entities
are keeping the forms.
In addition, the Antifraud Amendments provide criminal penalties for
individuals or entities participating in the Medicare or Medicaid programs who
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce referrals for items or services reimbursed under such programs. In
addition to felony criminal penalties, the Social Security Act also establishes
the intermediate sanction of excluding violators from Medicare or Medicaid
participation. The HHS has promulgated regulations that define certain Safe
Harbors for arrangements that would not violate the Antifraud Amendments. Any
venture that meets all the conditions of an applicable Safe Harbor will be
exempt both from prosecution and exclusion under the Antifraud Amendments.
None of the Company's joint ventures with physician investors falls within
any of the defined Safe Harbors. The fact that the terms of a venture do not
satisfy applicable Safe Harbor criteria, however, does not mean that the venture
is illegal but does mean that the venture may be subject to review. Under the
Company's joint venture arrangements, physician investors are not and will not
be under any obligation to refer or admit their patients, including Medicare or
Medicaid beneficiaries, to receive services at the Company's facilities, nor are
distributions to those physician investors contingent upon or calculated with
reference to referral by the physician investors. On the basis thereof, the
Company does not believe the ownership of interests in or receipt of
distributions from its joint ventures would be construed to be knowing and
willful payments to the physician investors to induce them to refer patients in
violation of the Antifraud Amendments. There can be no assurance, however, that
government officials charged with responsibility for enforcing the prohibitions
of the Antifraud Amendments will not assert that one or more of the Company's
joint ventures are in violation of the Antifraud Amendments. To date, none of
the Company's current joint ventures has been reviewed by any governmental
authority for compliance with the Antifraud Amendments.
STATE STATUTES AND REGULATIONS
Each of the states in which the Company does business has a state medical
practice act that prohibits unprofessional conduct of physicians, including
failure to conform to the ethical standards of the profession. A physician who
is found to have violated a state medical practice act may be subject to
disciplinary action up to and including loss of the physician's license to
practice medicine. Certain
56
<PAGE>
states as well as Federal regulations require disclosure by physicians of an
investment interest in a facility to which the physician refers, and most state
medical associations require such disclosure to meet ethical standards.
Moreover, the American Medical Association's ethical opinions generally
proscribe as unprofessional any conduct or transaction by a physician that
places the physician's own financial interest above the welfare of the
physician's patients or results in the provision of unnecessary services or
overutilization of services or facilities. The ethical opinions also require
that a physician disclose any ownership interest to his or her patient prior to
referral.
Certain states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals. These statutes may involve
criminal as well as civil penalties which may impact the operations at the
Company's facilities. The scope of these laws is broad, and little precedent
exists for their interpretation or enforcement. The Company monitors
developments in this area of law and will from time to time determine what steps
are necessary to ensure that patients at its facilities receive required
disclosures, and it will, accordingly, revise disclosure requirements for its
facilities and for physician limited partners as necessary.
Some states have also enacted their own version of Stark II prohibiting
physician ownership in designated health services. Although the Company believes
that its joint ventures have been structured to comply with all applicable
Federal and state laws, no assurance can be given that the ventures will not be
reviewed and challenged by enforcement authorities empowered to do so or that
the ventures, if challenged, would prevail. No documents or agreements have been
challenged by any regulatory authorities alleging that distributions to any
joint venture's partners violate any governmental or ethical prohibitions
against illegal remuneration arrangements, kickbacks, commissions, bonuses or
rebates.
HEALTHCARE REFORM LEGISLATION
Federal and state legislators continue to consider legislation that could
significantly impact Medicare, Medicaid and other government funding of
healthcare 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. The Company is unable to predict
what legislation, if any, will be enacted at the Federal and state level in the
future or what effect such legislation might have on the Company's financial
position, results of operations or liquidity.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company's management does not believe that the Company will be required to
expend any material amounts in order to comply with these laws and regulations
or that compliance will materially affect its capital expenditures, earnings or
competitive position.
MEDICAL STAFF AND EMPLOYEES
At March 31, 1996, approximately 3,100 licensed physicians were members of
the medical staffs of the Company's hospitals. Many of these professionals also
serve on the staffs of other nearby competing hospitals. Approximately 270
physicians were under contract with the Company's hospitals at March 31, 1996,
primarily to staff emergency rooms, to provide ancillary services and to serve
in other support capacities. As of March 31, 1996, the Company had approximately
9,300 employees, of which approximately 1,300 were covered by collective
bargaining agreements.
Hollywood Community Hospital, Lancaster Community Hospital, Chico Community
Hospital and University Convalescent Hospital are the Company's only facilities
with employees represented by unions. The Company believes that its relationship
with its employees is satisfactory.
As of March 31, 1996, DHHS had approximately 1,400 employees. Approximately
170 physicians were active members of the medical staff, many of whom also serve
on the staffs of competing
57
<PAGE>
hospitals, and approximately 25 physicians were under contract to staff the
emergency room and serve in support capacities. None of DHHS' employees is
covered by a collective bargaining agreement.
LIABILITY INSURANCE
Paracelsus is self-insured for the first $500,000 per occurrence of general
and professional liability risks occurring after October 1, 1987 and the first
$250,000 per occurrence of workers' compensation liability risks occurring after
October 1, 1992. Paracelsus formed Hospital Assurance Company, Ltd., a wholly
owned subsidiary ("HAC"), in order to insure the general and professional and
workers' compensation risks beginning October 1, 1992. In addition, Paracelsus
owns approximately 10% of Hospital Underwriters Group ("HUG"), which insures the
first $2.5 million per occurrence of claims in excess of $500,000, and reinsures
amounts over $3.0 million per occurrence with unrelated third-party commercial
insurance carriers, up to $100.0 million per occurrence. Upon consummation of
the Merger, the Company intends for Champion and its subsidiaries to be insured
by HAC and HUG in the same manner and to the same extent as the current
subsidiaries of the Company. Prior to the Merger, Champion and its subsidiaries
maintained a program of insurance that Champion believed was adequate to cover
the claims and legal actions to which it and its subsidiaries were subject in
the ordinary course of business.
LITIGATION RELATING TO THE MERGER
Certain holders of Champion Common Stock have filed a purported class action
lawsuit in the Chancery Court of the State of Delaware, naming as defendants
certain members and a former member of the Champion Board of Directors, Messrs.
Charles R. Miller, James G. VanDevender, James A. Conroy, Manuel M. Ferris,
David S. Spencer, Nolan Lehmann, Paul B. Queally, Scott F. Meadow, William G.
White and Richard D. Sage (collectively, the "Individual Defendants"), and
Champion and Paracelsus. The plaintiffs claim, among other things, that the
Merger and the exchange ratio for the Champion Common Stock pursuant thereto are
unfair and inadequate, that the Individual Defendants violated their fiduciary
duties to Champion and its public stockholders by failing to actively pursue the
acquisition of Champion by other companies or conduct an adequate market check,
and that Paracelsus knowingly aided and abetted the breaches of fiduciary duty
committed by the Individual Defendants. Plaintiffs seek preliminary and
permanent injunctions against the proposed Merger. In addition, plaintiffs seek
an accounting of all profits realized by the defendants, as well as monetary
damages for an unspecified amount, and costs and attorneys' and experts' fees.
CERTAIN OTHER LEGAL PROCEEDINGS
During March 1996, Paracelsus settled two lawsuits in connection with the
operation of its psychiatric programs. Paracelsus recognized an unusual charge
for settlement costs totaling $22.4 million in the six months ended March 31,
1996 which consisted of settlement payments, legal fees and the write off of
certain psychiatric accounts receivables in connection with the settlement of
the two lawsuits. Paracelsus did not admit liability in either case but resolved
the disputes through the settlements in order to reestablish a business
relationship and/or avoid further legal costs in connection with the disputes.
Paracelsus and the plaintiff insurance company have reestablished their business
relationship. See "Paracelsus Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Paracelsus Selected Historical
Consolidated Financial and Operating Data."
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's acute care, psychiatric and rehabilitative hospitals and skilled
nursing facilities, and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. The Company
believes that the ultimate resolution of the proceedings presently pending
against Paracelsus or Champion (or any of the Company's other subsidiaries) will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
At the Effective Time, the authorized number of directors on the Board will
be nine. After the Effective Time, the Board will be divided into three classes,
as nearly equal in number as possible, with the initial term of office of Class
I directors to expire at the 1997 annual meeting of shareholders, the initial
term of office of Class II directors to expire at the 1998 annual meeting of
shareholders and the initial term of office of Class III directors to expire at
the 1999 annual meeting of shareholders, with each class of directors to hold
office until their successors have been duly elected and qualified.
The Class III directors will be Dr. Krukemeyer and Messrs. Messenger and
Miller. The Class II directors will be Messrs. VanDevender and Lange and Mr.
Angelo R. Mozilo. The Class I directors will be Messrs. Conroy and Hofmann and
Mr. Daryl J. White. As contemplated by the shareholder agreement between the
Paracelsus Shareholder and the Company to be entered into upon the consummation
of the Merger (the "Shareholder Agreement"), Dr. Krukemeyer and Messrs.
Messenger, Lange and Hofmann will each be the initial representative of the
Paracelsus Shareholder and Messrs. Conroy, Mozilo and White will each be an
Independent Director (as defined below). After the Effective Time, the
Shareholder Agreement, the Company's Amended and Restated Articles of
Incorporation (the "Articles") and the Company's Amended and Restated Bylaws
(the "Bylaws") will provide that the Board may be enlarged by up to three
additional Independent Directors if the beneficial ownership of Common Stock of
the Paracelsus Shareholder falls below certain levels. For these purposes, an
"Independent Director" is a director of the Board who is not a Shareholder
Director (as defined below), a "Transferee Director" (as defined in the
Shareholder Agreement) or an officer of the Company or any of its subsidiaries.
The following table sets forth certain information with respect to those
individuals who will serve as directors and executive officers of the Company
immediately following the Effective Time:
<TABLE>
<CAPTION>
NAME AGE PROJECTED POSITION WITH THE COMPANY
<S> <C> <C>
Dr. Manfred G. Krukemeyer 34 Chairman of the Board
R.J. Messenger 51 Vice Chairman of the Board and Chief Executive Officer
Charles R. Miller 57 President, Chief Operating Officer and Director
James G. VanDevender 48 Executive Vice President, Chief Financial Officer and Director
Ronald R. Patterson 54 Executive Vice President and President, Healthcare Operations
Robert C. Joyner 49 Senior Vice President, Secretary and General Counsel
David R. Topper 48 Senior Vice President, Development
George Asbell 47 Senior Vice President, Operations
W. Warren Wilkey 51 Senior Vice President, Operations
Michael M. Brooks 47 Senior Vice President, Acquisitions
James T. Rush 49 Senior Vice President
Lawrence A. Humphrey 40 Senior Vice President, Corporate Finance
Michael D. Hofmann 56 Director
Christian A. Lange 57 Director
James A. Conroy 35 Director
Angelo R. Mozilo 57 Director
Daryl J. White 48 Director
</TABLE>
Dr. Krukemeyer, a German medical doctor, has been a director of the Company
since its inception in January 1981, and Chairman of the Paracelsus Board since
the death of his father, Dr. Hartmut
59
<PAGE>
Krukemeyer, the Company's founder and previous Chairman of the Board, in May
1994. Dr. Krukemeyer was Vice Chairman of the Board from November 1983 until May
1994. Dr. Krukemeyer is also the Chief Executive Officer and sole shareholder of
Paracelsus Klinik Osnabruck, which owns and operates 37 hospitals ranging in
size from 100 to 400 beds in Germany, England and Switzerland. Dr. Krukemeyer is
a graduate of the University of Vienna School of Medicine and practiced medicine
in Europe before assuming full time business responsibilities in 1992.
Mr. Messenger joined the Company in March 1984, as President, Chief
Operating Officer and Secretary of the Company. He was promoted to Chief
Executive Officer in 1992. Mr. Messenger has been a director since joining the
Company in 1984. Prior to joining the Company, Mr. Messenger was the Regional
Vice President of the National Medical Enterprises, Inc. ("NME") (now Tenet
Healthcare) Southwestern and Eastern regions, and the Senior Vice President,
Acquisitions and Development/Hospital Group, where he was responsible for all
acquisitions and development projects on a national basis. Mr. Messenger has
over 27 years of experience in the hospital industry. Mr. Messenger serves on
the Board of Directors of the Federation of American Health Systems, the
California Hospital Association and the Health Resources Institute, Inc. Mr.
Messenger also serves as an advisory member on the Board of Directors of Liberty
Mutual Insurance Company and on the Board of Councilors of the University of
Southern California ("USC"). Mr. Messenger received a BS degree in Industrial
Engineering in 1967 and a Masters degree in Healthcare Administration in 1969,
both from USC.
Mr. Miller has been the Chairman, President and Chief Executive Officer of
Champion since its founding in February 1990. Mr. Miller has over 37 years of
experience in the hospital industry. In 1981, he co-founded Republic Health
Corporation ("Republic"), serving as President and a director of the company. In
less than three years, Republic had revenues of $540 million and was the fifth
largest publicly-held hospital management company, owning 23 acute care
hospitals, 20 psychiatric and substance abuse facilities and managing 18
hospitals and 3 specialty units. In 1986, Republic was acquired in a leveraged
buy-out for $800 million. Mr. Miller, who declined to participate in the
leveraged buyout of Republic, resigned as an officer and director of Republic in
1986. After leaving Republic, Mr. Miller and Mr. Brooks acquired in 1987 a
general acute care hospital in El Paso, Texas and subsequently sold that
facility in late 1988. During 1989, Mr. Miller did limited healthcare consulting
and developed the business plan for Champion. Prior to co-founding Republic, Mr.
Miller was employed for seven years by Hospital Affiliates International
("HAI"). Mr. Miller received a BBA in Personnel Management from Texas Tech
University in 1968 and a Masters degree in Public Health Administration from the
University of Texas in 1974.
Mr. VanDevender has been the Executive Vice President, Chief Financial
Officer, Secretary and Director of Champion since its formation in February
1990. Mr. VanDevender has approximately 24 years of experience in the hospital
industry, including management positions in accounting and finance at the
hospital level, and senior executive positions in accounting, finance,
acquisitions and development and operations at the corporate level of
multi-hospital companies. Mr. VanDevender was employed with Republic from 1981
until 1987 and was a Senior Vice President primarily responsible for Republic's
acquisition and development function. Before joining Republic, Mr. VanDevender
was employed for four years by HAI. From 1987 until 1990, Mr. VanDevender
pursued private investments. He received his undergraduate degree in Accounting
from Mississippi State University in 1970.
Mr. Patterson has been Executive Vice President and Chief Operating Officer
of Champion since 1994 after joining Champion in 1992 as Senior Vice President
- -- Operations. Mr. Patterson has 26 years of experience in the healthcare
industry. His operational responsibilities have included community hospitals,
large university teaching hospitals, psychiatric hospitals, contract management
of hospitals and specialty units and mobile diagnostic services. Prior to
joining Champion, he was a Senior Vice President with Harris Methodist Health
System, a Fort Worth, Texas not-for-profit healthcare system from 1990 until
1991. From 1988 until 1990, Mr. Patterson did private turnaround
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<PAGE>
management consulting in the healthcare industry. From 1982 to 1988, Mr.
Patterson was employed by Republic, serving initially as an Operations Vice
President and subsequently as Senior Vice President with responsibility for a
major operating division. From 1975 to 1981, Mr. Patterson was employed in
various management positions by HAI. Mr. Patterson is a Fellow in the American
College of Health Care Executives. He received his undergraduate degree from the
University of Houston in 1965 and a Masters degree in Health Care Administration
from Trinity University in 1973.
Mr. Joyner joined the Company as Vice President, Corporate Counsel and
Assistant Secretary in 1986. Prior to joining the Company, Mr. Joyner served as
Senior Vice President and Assistant General Counsel for NME. Mr. Joyner is a
member of the California and Florida Bars, has practiced law since 1972 and has
approximately 20 years of experience in the healthcare industry. In addition to
his responsibilities as General Counsel, he is responsible for the Paracelsus
departments of Human Resources and Insurance and Risk Management. Mr. Joyner
graduated with a BSBA degree in 1969 and a JD in 1972, both from the University
of Florida.
Mr. Topper joined the Company in February 1981, and in January 1985 became
its Vice President, Development. He was promoted to Senior Vice President in
1993. Prior to joining the Company, Mr. Topper was with Community Psychiatric
Centers in various senior management positions.
Mr. Asbell joined the Company in September 1985 as Senior Financial Officer
for the Eastern Region. He was promoted to Regional Vice President, Operations
and Development in 1988 and served in that capacity until 1995 when he was
promoted to Senior Vice President, Operations. He is responsible for all
hospital operations of the Company. Prior to joining the Company, Mr. Asbell
served for five years in various capacities with American Medical International.
Mr. Wilkey joined Champion in 1995 and has served as Senior Vice President
- -- Market Operations of Champion since February 1996. From January 1995 to
January 1996, Mr. Wilkey served as Vice President, Operations. Mr. Wilkey has
approximately 26 years of experience in the healthcare industry, including group
hospital operations, hospital administration and ancillary service management.
For the six years prior to joining Champion, Mr. Wilkey was a Vice President and
Director of Group Operations for Epic Healthcare Group, a publicly-held hospital
ownership and management company.
Mr. Brooks has served as Senior Vice President -- Development since February
1996, and Senior Vice President -- Operations Controller/Administration of
Champion since January 1992. From 1989 until 1992, Mr. Brooks did private
consulting within the healthcare industry and was associated with Champion in
this capacity from February 1991 to December 1991.
Mr. Rush joined the Company as Vice President, Finance and Chief Financial
Officer in February 1985. Prior to joining the Company, Mr. Rush was the Senior
Vice President and Chief Financial Officer for over eight years at Summit Health
Ltd., a healthcare company similar in size and operations to the Company. Mr.
Rush is a Certified Public Accountant.
Mr. Humphrey has served as Senior Vice President -- Corporate Finance of
Champion since February 1996 and prior to that as Vice President of Operations
- -- Finance of Champion. Prior to joining Champion in September 1993, Mr.
Humphrey worked for NME from 1981. Mr. Humphrey has over 15 years of experience
in healthcare finance and operations. Mr. Humphrey is a Certified Public
Accountant.
Mr. Hofmann has been a director of the Company since 1983. He has been an
international consultant in finance and banking, with his own consulting
practices in London, England and Fribourg, Switzerland for more than the last
five years. In addition, between 1990 and 1992 Mr. Hofmann was Chief Executive
Officer of Swiss Bank Corporation in Germany.
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<PAGE>
Mr. Lange has been a director of the Company since 1983. He has been
President of European Investors, Inc. since 1983, and has served as Chairman of
the Board of European Investors Corporate Finance, Inc. Prior to 1983, he was a
senior executive with Friedrich Flick Industrieverwaltung KgaA of Dusseldorf,
Germany.
Mr. Conroy has been a general partner of OGP Partners, L.P., the general
partner of The Olympus Private Placement Fund, L.P. ("Olympus"), since 1990. Mr.
Conroy is also a general partner of OGP II, L.P., the general partner of Olympus
Growth Fund II, L.P. Olympus invests in growth companies, acquisitions and
restructurings through the purchase of private equity and equity-linked
securities.
Mr. Mozilo has been President of Countrywide Mortgage Inc. since its
inception in 1985 and a director since October 1987. He is co-founder of
Countrywide Credit Industries, Inc. and has been Vice Chairman of the Board of
Directors and Executive Vice President since its formation in March 1969. Mr.
Mozilo has served since 1978 as President of Countrywide Home Loans, Inc.
Mr. White has been Chairman of Pinnacle Micro, Inc. since May 1996. He was
Senior Vice President, Finance and Chief Financial Officer for Compaq Computer
Corp. ("Compaq") from May 1989 to May 1996. He joined Compaq in January 1983 as
Director of Information Management and was named Corporate Controller in May
1984, Vice President and Corporate Controller in January 1986 and Vice
President, Finance and Chief Financial Officer in October 1988.
COMMITTEES OF THE BOARD
EXECUTIVE COMMITTEE
Under the Articles and the Bylaws, the Board may, by resolution passed by
the affirmative vote of at least 75% of the Board, appoint from its membership,
annually, an executive committee of two or more directors, which shall include
the Chief Executive Officer and the President of the Company. The Board may
designate in such resolution one or more directors as alternate members of the
Executive Committee, who may replace any absent or disqualified member at any
meeting of the committee. The Executive Committee, during the intervals between
meetings of the Board, will have authority and power to act on behalf of the
Board as provided in the Bylaws. After the Merger, the initial members of the
Executive Committee will be Messrs. Messenger, Miller and VanDevender.
OTHER COMMITTEES OF THE BOARD
The Board may, by resolution adopted by a majority of the authorized number
of directors, designate one or more other committees, each consisting of two or
more directors, to serve at the pleasure of the Board. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent member at any meeting of the committee. The appointment of members or
alternate members of a committee requires the vote of a majority of the
authorized number of directors. Any such committee shall have authority to act
in the manner and to the extent provided in the resolution of the Board and may
have all the authority of the Board, except with respect to the limitations as
set forth in the Bylaws.
After the Merger, the Board will have the following committees, in addition
to the Executive Committee, and the following respective initial members: (i)
the Audit Committee (Messrs. Conroy, Mozilo and White), (ii) the Finance and
Strategic Planning Committee (Messrs. Hofmann and Lange and one Independent
Director to be named) and (iii) the Compensation Committee (Dr. Krukemeyer and
two Independent Directors to be named).
MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committees permitted by the provisions of the
Articles will be governed by, and held and taken in accordance with each of the
provisions of the Bylaws, with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the Board and its
members; PROVIDED, HOWEVER, that the time of regular meetings of committees may
be determined either by resolution of the Board or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the Board, and that notice of special meetings of
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<PAGE>
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board may adopt rules for the
governance of any committee not inconsistent with the provisions of the Bylaws
and the Articles.
AGREEMENT REGARDING COMPOSITION OF COMMITTEES
The Shareholder Agreement provides that, for so long as such agreement
remains in effect, each committee of the Board (other than the Audit Committee
and the Compensation Committee) will contain such numbers of Shareholder
Directors or Transferee Directors so that the number of Shareholder Directors or
Transferee Directors, when taken together, on each such committee shall be as
nearly as possible proportional to the total number of Shareholder Directors and
Transferee Directors on the Board. The Shareholder Agreement and Bylaws provide
that the Audit Committee will be comprised solely of Independent Directors and,
for so long as the Paracelsus Shareholder is entitled to nominate any
Shareholder Directors, the Compensation Committee will be comprised of one
non-employee Shareholder Director, one Independent Director and one additional
non-employee director. The parties have agreed to the initial composition of the
Executive Committee as described under "-- Executive Committee" and the initial
composition of the Finance and Strategic Planning Committee and have waived such
composition requirements with respect to the initial composition of the Finance
and Strategic Planning Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Paracelsus to its
then Chief Executive Officer and its then four other most highly compensated
executive officers (the "Named Executive Officers") during the fiscal years
ended September 30, 1995, 1994 and 1993. It is expected that Messrs. Messenger,
Miller, VanDevender, Patterson and Joyner will serve, respectively, as the
Company's Chief Executive Officer and four other most highly compensated
executive officers following the Merger. See "Management." Information regarding
the compensation paid by Champion to Messrs. Miller, VanDevender and Patterson
in the fiscal years ended December 31, 1995, 1994 and 1993 is provided in
footnotes to the following tables. Historical information regarding Dr.
Krukemeyer, Mr. Harold E. Buck, who served as the Chief Operating Officer of
Paracelsus until his retirement in April 1995, and Mr. Topper is provided
pursuant to requirements of the Securities and Exchange Commission (the
"Commission").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS
ANNUAL COMPENSATION ------------- PAYOUTS
------------------------------------------------- SECURITIES ---------
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(2) COMPENSATION OPTIONS(3)(4) PAYOUTS COMPENSATION(5)(6)
POSITION YEAR ($) ($) ($) (#) ($) ($)
- ---------------------- --------- ----------- --------- -------------- ------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Manfred George 1995 999,996 900,000 -- -- -- --
Krukemeyer, 1994 333,332 810,000 -- -- -- --
Chairman of the Board 1993 -- -- -- -- -- --
R.J. Messenger 1995 686,433 3,970,041 88,370(7) -- 895,134 10,860
President, Chief 1994 588,726 518,218 94,684(7) -- 457,246 7,288
Executive Officer and 1993 585,717 471,107 59,550(7) -- 407,140 6,913
Secretary
Harold E. Buck 1995 392,221 -- -- -- 1,511,014 22,890
Chief Operating 1994 280,316 240,000 -- -- 18,704 13,933
Officer (8) 1993 255,000 212,000 -- -- 16,654 11,330
David R. Topper 1995 217,630 181,360 -- -- 486,074 7,466
Senior Vice 1994 212,831 172,696 -- -- 206,579 5,722
President, 1993 216,106 164,160 -- -- 351,229 5,361
Development
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS
ANNUAL COMPENSATION ------------- PAYOUTS
------------------------------------------------- SECURITIES ---------
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(2) COMPENSATION OPTIONS(3)(4) PAYOUTS COMPENSATION(5)(6)
POSITION YEAR ($) ($) ($) (#) ($) ($)
- ---------------------- --------- ----------- --------- -------------- ------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert C. Joyner 1995 200,810 171,360 -- -- 142,240 7,332
Vice President and 1994 191,111 163,200 -- -- 91,683 6,386
General Counsel 1993 190,806 155,520 -- -- 7,286 5,905
</TABLE>
- ------------------------------
(1) For the fiscal years ended December 31, 1995, 1994 and 1993, Champion paid a
salary to Mr. Miller of $437,500, $295,000 and $234,167, respectively; to
Mr. VanDevender, of $295,000, $235,417 and $181,667, respectively; and to
Mr. Patterson, of $295,000, $235,000 and $176,007, respectively.
(2) For the fiscal year ended December 31, 1995, Champion paid bonuses to Mr.
Miller and Mr. Patterson of $225,000 and $150,000, respectively. For the
fiscal years ended December 31, 1995 and 1993, Champion paid bonuses to Mr.
VanDevender of $162,500 and $100,000, respectively.
(3) For the fiscal year ended December 31, 1994, Champion awarded to Messrs.
Miller, VanDevender and Patterson options to purchase 13,876, 128,000 and
150,690 shares of Champion Common Stock, respectively.
(4) Messrs. Miller, VanDevender and Patterson held, as of June 21, 1996,
unexercised options representing the right to purchase 211,876, 350,000 and
270,690 shares of Champion Common Stock, respectively. As of such date, such
options were exercisable as to 207,250, 307,333 and 220,460 shares,
respectively, for an aggregate value of $1,582,594, $1,742,249 and $933,363,
respectively, based upon a closing stock price of $10.875 per share on June
21, 1996. As of such date, such options were unexercisable as to 4,626,
42,667 and 50,230 shares, respectively, for an aggregate value of $8,674,
$80,001 and $94,181, respectively, based upon a closing stock price of
$10.875 per share on June 21, 1996. None of such options were granted or
exercised in 1995.
(5) For the fiscal year ended September 30, 1995, represents matching
contributions by Paracelsus under its Employee Retirement Savings (401(k))
Plan and term life insurance premiums paid by Paracelsus.
(6) For the fiscal years ended December 31, 1995 and 1994, Champion paid other
compensation to Mr. Patterson of $2,310 and $2,250, respectively,
representing in each case matching contributions under its Marathon 401(k)
Plan. For the fiscal year ended December 31, 1993, Champion paid other
compensation of $76,782 to Mr. Patterson as reimbursement of relocation
expenses.
(7) Represents perquisites and personal benefits, including, among other things,
club dues in the amounts of $20,199, $43,767 and $31,449, respectively, in
1995, 1994 and 1993, and automobile-related expenses of $35,408 in 1995.
(8) Retired in April 1995.
The following table sets forth grants of phantom stock appreciation rights
("PSARs") in the fiscal year ended September 30, 1995 to the Named Executive
Officers under the Paracelsus Healthcare Corporation Phantom Equity Long-Term
Incentive Plan (the "Phantom Equity Plan").
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE BASED PLANS
NUMBER OF ----------------------------------------
NAME PSARS (1) PERIOD UNTIL PAYOUT THRESHOLD (2) TARGET (3) MAXIMUM (4)
- ----------------------------- ------------- ------------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Dr. Manfred George
Krukemeyer.................. -- -- -- -- --
R.J. Messenger............... 500 10/1/92 - 9/30/96 $ 286,500 -- $ 1,536,667
Harold E. Buck............... 250 10/1/92 - 9/30/96 143,250 -- 768,333
David R. Topper.............. 250 10/1/92 - 9/30/96 143,250 -- 768,333
Robert C. Joyner............. 100 10/1/92 - 9/30/96 57,300 -- 307,349
</TABLE>
- ------------------------------
(1) Under the Phantom Equity Plan, which is to be terminated in connection with
the Merger, each participant was eligible to be awarded a certain number of
PSARs effective as of the beginning of each fiscal year. The dollar value of
each PSAR was determinable based on the Company's performance over a period
of four fiscal years, beginning on the effective date of such PSAR award (a
"Cycle"). At the end of a Cycle, if the participant had remained in service
with Paracelsus throughout the Cycle, that participant's PSARs would vest
and could be exchanged for an amount equal to the increase in the actual
book value of the Company, if any, during that Cycle divided by 100,000. At
the end of each Cycle, the Board could award additional PSARs if certain
growth and income targets established at the beginning of the Cycle had been
achieved. Such
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<PAGE>
additional PSARs would be awarded effective as of the beginning of such
Cycle. No more than 5,000 PSARs could be granted with respect to any
particular Cycle. Upon consummation of the Merger, the Phantom Equity Plan
will be terminated. In exchange for cancellation of all awards under the
Phantom Equity Plan, participants will receive a lump sum in cash plus
immediately exercisable options to acquire Common Stock ("Options") with an
exercise price equal to $0.01 per share. For information regarding the
number of Options to be granted to the Named Executive Officers in
connection with the cancellation of awards under the Phantom Equity Plan,
see "-- 1996 Stock Incentive Plan." In addition, cash payments in the
aggregate amount of $20.5 million will be made to all participants in the
Phantom Equity Plan, including the Named Executive Officers, based on the
value of their terminated PSARs and/or Preferred Stock Units ("PSUs").
(2) The threshold amounts shown are calculated based on an assumed annual net
income growth rate of 0%. If the actual annual net income growth rate were
negative the threshold amount payable under the Phantom Equity Plan could
reach zero.
(3) The Phantom Equity Plan does not contemplate specific performance targets.
If the percentage increase in annual net income for fiscal year 1995 were
the same as that achieved in fiscal year 1994, the amounts payable would
equal the amounts shown under the maximum payout column.
(4) The maximum amounts shown are calculated based on an assumed annual net
income growth rate of 20%, the annual net income growth rate at which the
maximum number of PSARs become available to all participants under the
Phantom Equity Plan. The Phantom Equity Plan does not impose any limit on
the value of a PSAR, which would continue to increase with further increases
in the annual net income growth rate.
1996 STOCK INCENTIVE PLAN
The Company has adopted the Paracelsus Healthcare Corporation 1996 Stock
Incentive Plan (the "1996 Stock Incentive Plan"), which, following the Merger,
will be administered by the Board. All officers (including officers who are also
directors), employees, consultants and advisors of the Company are eligible for
discretionary stock-based incentive awards under the 1996 Stock Incentive Plan,
including incentive stock options, non-qualified stock options, restricted
stock, performance shares, stock appreciation rights ("SARs") and deferred
stock. The 1996 Stock Incentive Plan authorizes the Compensation Committee to
select eligible persons to receive awards and to determine certain terms and
conditions of such awards, including the vesting schedule and exercise price of
each award, and whether the vesting of such award will accelerate upon the
occurrence of a change in control of the Company. Under the 1996 Stock Incentive
Plan, non-qualified options may be granted with an option exercise price that is
less than the then current market value of the Common Stock. Under the 1996
Stock Incentive Plan, stock options, restricted stock, performance shares or
SARs covering no more than 80% of the shares reserved for issuance under the
1996 Stock Incentive Plan may be granted to any participant in any one year. A
total of 8,749,933 shares of Common Stock have been reserved for issuance under
the 1996 Stock Incentive Plan.
The 1996 Stock Incentive Plan may be amended, suspended or terminated at any
time. However, the maximum number of shares that may be sold or issued under the
1996 Stock Incentive Plan may not be increased, nor may the class of persons
eligible to participate in the 1996 Stock Incentive Plan be altered, without the
approval of Paracelsus' shareholders; PROVIDED, HOWEVER, that adjustments to the
number of shares subject to the 1996 Stock Incentive Plan and to individual
awards thereunder and/or to the exercise price of awards previously granted are
permitted without shareholder approval upon the occurrence of certain events
affecting the capital structure of the Company. With respect to any other
amendments to the 1996 Stock Incentive Plan, the Board may, in its discretion,
determine that such amendment will become effective only upon approval by the
shareholders of the Company if the Board determines that such shareholder
approval may be advisable, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under Federal or state securities laws, Federal
or state tax laws or any other laws or for the purpose of satisfying applicable
stock exchange listing requirements.
In connection with the termination of PSARs and/or PSUs previously granted
under the Phantom Equity Plan, the Company has granted options under the 1996
Stock Incentive Plan to the
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<PAGE>
Named Executive Officers. In addition, pursuant to their respective Employment
Agreements (as defined below), the Company has granted additional options under
the 1996 Stock Incentive Plan to Messrs. Messenger and Joyner, as described in
the table below.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE OR
UNDERLYING OPTIONS BASE
GRANTED (#)(1) PRICE ($/SH)
------------------- ---------------
<S> <C> <C>
R.J. Messenger 513,000(2) $ 0.01
487,000(3) 0.01
1,000,000(4) 12.00(5)
David R. Topper 200,000(2) 0.01
Robert C. Joyner 160,933(2) 0.01
</TABLE>
- ------------------------
(1) Pursuant to their respective Employment Agreements (as defined below), the
Company has granted to Messrs. Miller, VanDevender and Patterson under the
1996 Stock Incentive Plan Value Options (as defined below) representing the
right to purchase 336,000, 180,000 and 180,000 shares of Paracelsus Common
Stock, respectively, and Market Options (as defined below) representing the
right to purchase 1,000,000, 540,000 and 240,000 shares of Paracelsus Common
Stock, respectively.
(2) Indicates options granted in exchange for cancellation of PSARs and/or PSUs
under the Phantom Equity Plan. Options are vested and exercisable
immediately upon consummation of the Merger and have a term of ten years
from the date of grant.
(3) Options are vested and exercisable immediately upon consummation of the
Merger and have a term of ten years from the date of grant (the "Value
Options").
(4) Options vest and become exercisable in 25% installments on each of the first
four anniversaries of the consummation of the Merger and have a term of ten
years from the date of grant (the "Market Options").
(5) Based on an estimate of the fair market value of the Common Stock on the
date the Merger is consummated.
PERFORMANCE BONUS PLAN
The Board has adopted the Paracelsus Healthcare Corporation Executive
Officer Performance Bonus Plan (the "Performance Bonus Plan") covering eligible
officers of the Company. The Performance Bonus Plan will be administered by the
Compensation Committee, which each year, beginning on January 1, 1997, will
select the officers of the Company who will be eligible to receive awards under
the Performance Bonus Plan. Upon achievement by the Company of certain targeted
operating results or other performance goals, such as operating income, pre-tax
income or earnings per share, the Company will pay performance bonuses, the
aggregate amounts of which will be determined annually based upon an objective
formula. The Employment Agreements (as defined below) provide for the payment of
certain minimum bonuses upon the achievement of targeted performance criteria
under the Performance Bonus Plan. See "-- Employment Contracts and Termination
of Employment Agreements."
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The matrix below sets forth benefits payable to the Named Executive Officers
under the Paracelsus Healthcare Corporation Supplemental Executive Retirement
Plan (the "SERP").
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<PAGE>
Amounts shown represent the annual benefits to which the Named Executive
Officers would be entitled under the SERP (assuming payment in the form of a
single life annuity), but do not reflect an offset with respect to certain
Social Security benefits.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL -------------------------------------
COMPENSATION 5 10 15
----------- ----------- -----------
<S> <C> <C> <C>
$ 100,000 $ 18,350 $ 36,700 $ 55,050
125,000 22,938 45,875 68,813
150,000 27,525 55,050 82,575
175,000 32,113 64,225 96,338
200,000 36,700 73,400 110,100
225,000 41,228 85,575 123,863
250,000 45,875 91,750 137,625
300,000 55,050 110,100 165,150
400,000 73,400 146,800 220,200
500,000 91,750 183,500 275,250
600,000 110,100 220,200 330,300
700,000 128,450 256,900 385,350
800,000 146,800 293,600 440,400
</TABLE>
SERP benefits for the Named Executive Officers are determined, subject to
certain vesting requirements, as (i) the product of (x) number of years of
service with the Company, (y) 3.67% for officer participants (2.33% for
non-officer participants) and (z) average earnings for the final 36 months of
employment, less (ii) a percentage of the participating officer's Social
Security benefits. SERP benefits for the Named Executive Officers generally
accrue and vest ratably over a 15-year period. However, upon a change in control
of the Company, each Named Executive Officer will immediately become fully
vested and entitled to full benefits under the SERP, regardless of his actual
number of years of service with the Company, in the event of a termination by
such person of his employment or a termination of such person by the Company
without cause after such change in control. Prior to the Merger, the term
"change in control" was defined under the SERP to include, among other things,
certain offerings of equity securities pursuant to a registration statement,
including the registration statement filed in connection with the Merger.
Accordingly, consummation of the Merger constituted a change in control for the
Named Executive Officers. Following the Merger, with respect to new participants
in the SERP, the term "change in control" is defined as described in "--
Employment Contracts and Termination of Employment Agreements." Pursuant to
their Employment Agreements, Messrs. Miller, VanDevender and Patterson will each
receive credit for eligibility, vesting and benefit accrual purposes under the
SERP for their prior service with Champion. Immediately following the Effective
Time of the Merger, Messrs. Messenger, Topper, Joyner, Miller, VanDevender and
Patterson will each have, respectively, 15, 15, 15, 6, 6 and 4 years of credited
service under the SERP. Mr. Buck retired in April 1995 with 11 years of service
and is currently receiving benefits under the SERP. Dr. Krukemeyer does not
participate in the SERP.
COMPENSATION OF DIRECTORS
Following the Merger, it is anticipated that non-employee directors of the
Company will each receive an annual fee of $30,000 and a fee of $2,500 for each
meeting of the Board or any committee thereof attended, up to a maximum of
$50,000 per year. Directors of the Company who are also employees of the Company
will not receive any additional compensation for their service as directors. All
directors will be reimbursed for expenses incurred in the performance of their
duties. For information regarding a services agreement pursuant to which Dr.
Krukemeyer will provide consulting services to the Company (other than in his
capacity as Chairman of the Board), see "Certain Relationships and Related
Transactions -- Services Agreement."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
In connection with the consummation of the Merger, Messrs. Messenger and
Joyner's existing employment agreements with Paracelsus and Messrs. Miller,
VanDevender and Patterson's existing employment agreements with Champion will be
terminated and replaced with new employment agreements (the "Employment
Agreements") as described below.
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Such officers' respective Employment Agreements provide that they will serve
in the following capacities: Mr. Messenger as Chief Executive Officer and, for
so long as he is a Shareholder Director, Vice Chairman of the Board and Chairman
of the Executive Committee; Mr. Miller as President and Chief Operating Officer,
a director on the Board and, for so long as he is a director, a member of the
Executive Committee; Mr. VanDevender as Executive Vice President and Chief
Financial Officer, a director on the Board and, for so long as he is a director,
a member of the Executive Committee; Mr. Patterson as Executive Vice President
and President, Healthcare Operations; and Mr. Joyner as Senior Vice President,
Secretary and General Counsel. Each of such officers is required to devote
substantially all of his business time to the affairs of the Company, provided,
that to the extent such activities do not materially interfere with the
performance of his duties with the Company, Mr. Messenger is permitted to devote
some portion of his time to other business and charitable endeavors.
Each of the Employment Agreements of Messrs. Messenger, Miller and
VanDevender will have an initial term of five years, and each of the Employment
Agreements of Messrs. Patterson and Joyner will have an initial term of three
years. Each of the Employment Agreements of Messrs. Messenger, Miller and
VanDevender will be renewed automatically upon expiration of its initial term
and any subsequent five-year term unless the Company or any of Messrs.
Messenger, Miller or VanDevender, as applicable, gives 12 months prior notice
that such agreement will not be renewed. Upon expiration of their initial terms,
each of the Employment Agreements of Messrs. Patterson and Joyner will be
renewed automatically one time only for three and two additional years,
respectively, unless the Company or either of Messrs. Patterson or Joyner, as
applicable, gives 12 months prior notice that such agreement will not be
renewed.
Under the Employment Agreements, each such officer will be entitled to
receive a base salary and an annual bonus and will be entitled to participate in
the compensation and employee benefits plans of the Company that are generally
available to the executives of the Company. In addition, each such officer will
be entitled to receive certain fringe benefits as provided for in his Employment
Agreement. The initial base salary of each such officer under his respective
Employment Agreement is as follows: Mr. Messenger: $750,000; Mr. Miller:
$500,000; Mr. VanDevender: $350,000; Mr. Patterson: $350,000; and Mr. Joyner:
$240,000. The maximum bonuses payable upon the achievement of targeted
performance criteria under the Performance Bonus Plan, expressed as a percentage
of base salary, will be as follows: Mr. Messenger: 100%; Mr. Miller: 85%; Mr.
VanDevender: 70%; Mr. Patterson: 70%; and Mr. Joyner: 60%. Messrs. Messenger,
Miller, VanDevender, Patterson and Joyner will each be granted Paracelsus
Options as described in "-- 1996 Stock Incentive Plan." Messrs. Miller,
VanDevender and Patterson each will also receive credit for eligibility, vesting
and benefit accrual purposes under the SERP with respect to their respective
years of prior service with Champion. See "-- Supplemental Executive Retirement
Plan." In addition, Messrs. Miller, VanDevender and Patterson will receive
bonuses in the respective amounts of $1,200,000, $750,000 and $500,000 in
connection with the termination of their prior employment agreements with
Champion.
The Employment Agreements provide that Messrs. Messenger, Miller,
VanDevender, Patterson and Joyner are generally prohibited from competing with
the Company while employed by the Company. The Employment Agreements also
provide that, in the event of termination of his employment by the Company for
"Cause" or by such officer other than for "Good Reason" (each as defined in his
Employment Agreement) during the initial term of his employment agreement,
Messrs. Miller, VanDevender and Patterson each will be prohibited from so
competing for a period of two years following such termination, and Messrs.
Messenger and Joyner each will be prohibited from so competing for a period of
one year following such termination. The Employment Agreements for all such
officers will also provide that each such officer will be prohibited from so
competing for a period of one year following such a termination of employment
during successive terms of his agreement.
The employment of Messrs. Messenger, Miller and VanDevender cannot be
terminated by the Company without the prior approval of 80% of the Board and 2/3
of the Independent Directors. If any of Messrs. Messenger, Miller or VanDevender
is terminated without Cause or resigns for Good Reason,
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such officer's outstanding options will immediately vest and become exercisable
and such officer will be entitled to receive a lump sum payment equal to the
greater of (x) his current base salary and annual target bonus payable over the
remaining term of employment or (y) three times his current base salary plus
annual target bonus.
If Mr. Patterson is terminated by the Company without Cause or resigns for
Good Reason, his outstanding options will immediately vest and become
exercisable and he will be entitled to receive a lump sum payment equal to the
greater of (x) his current base salary and annual target bonus payable over the
remainder of his contract term or (y) 2.5 times his current annual salary plus
annual target bonus. If Mr. Joyner is terminated by the Company without Cause or
resigns for Good Reason, his outstanding options will immediately vest and
become exercisable and he will be entitled to receive a lump sum payment equal
to the greater of (x) his current base salary and annual target bonus payable
over the remainder of his contract term or (y) two times his current annual
salary plus annual target bonus.
Upon termination of the employment of any of Messrs. Messenger, Miller,
VanDevender, Patterson or Joyner by the Company without Cause or by such officer
for Good Reason, such officer would be entitled to receive an additional lump
sum in an amount sufficient to offset the effect of any excise and other taxes
to which such officer may become subject by reason of 4999 of the Code.
The definition of Good Reason in the Employment Agreements generally
includes a reduction in compensation, titles, duties, authority and reporting
relationships, as well as notice by the Company that it does not wish to extend
the terms of the Employment Agreements for the periods described above. In
addition, for purposes of the Employment Agreements for Messrs. Messenger,
Miller and VanDevender, Good Reason includes their failure to be nominated and
elected to serve as members of the Board and the Executive Committee. The
definition of Good Reason for Messrs. Messenger and Miller further includes the
failure of either of them to abide by the managerial rights provisions as set
forth in their Employment Agreements. Mr. Miller's Employment Agreement also
provides that he will have Good Reason to terminate his employment if, in the
event Mr. Messenger shall at any time cease to serve as Chief Executive Officer,
Mr. Miller is not chosen to serve as his successor. In addition, the Employment
Agreements will provide each of the senior officers with the right, exercisable
within the 12-month period following a "change in control" of the Company, to
terminate their employment without Good Reason and receive the benefits
described above that are otherwise payable upon termination of their employment
with Good Reason.
The term "change in control" is defined in the Employment Agreements to
include, INTER ALIA, (i) the acquisition by any person of 25% or more of the
undiluted total voting power of Paracelsus' then outstanding voting securities
(the "Paracelsus Voting Securities"); (ii) certain changes in the majority of
the Board within any two-year period; (iii) a merger resulting in the holders of
Paracelsus Voting Securities immediately prior to such merger retaining less
than 60% of the voting securities of the surviving corporation or a
reorganization or reincorporation of the Company in which any person acquires
25% or more of the voting securities of the surviving corporation; and (iv) the
liquidation of the Company or the sale of all or substantially all of its
assets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to July 1996, the Company did not have a formal compensation
committee. Dr. Krukemeyer and Mr. Messenger each participated in deliberations
of the Board concerning executive officer compensation during fiscal 1995.
Following the Merger, the Compensation Committee is expected to consist of Dr.
Krukemeyer and two Independent Directors. See "Certain Relationships and Related
Transactions," immediately below, for information regarding certain agreements
involving the members of the Company's Compensation Committee.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Described below are certain related agreements to be entered into prior to
or in connection with the Merger. The following descriptions are qualified in
their entirety by reference to the complete text of the relevant agreements,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part and are incorporated by reference herein.
PARTICIPANTS AGREEMENT
Champion has entered into an Agreement in Contemplation of Merger, dated as
of April 12, 1996, with certain holders of Champion securities (the
"Participants Agreement") pursuant to which, among other things: (i) holders of
all of the outstanding Champion Notes have agreed to waive their rights to
require Champion to repurchase the Champion Notes as a result of the "change of
control" (as defined in the Participants Agreement) of Champion occurring as a
result of the Merger; (ii) at such time as the Company completes a "qualified
debt offering" of at least $100 million that also meets certain other
conditions, the Company or Champion will have the right to repay, and such
noteholders will have the right to demand repayment, of their Champion Notes at
specified prices; (iii) holders of warrants attached to certain of such Champion
Notes will agree to the assumption by the Company of Champion's obligations with
respect to such warrants; and (iv) a stockholders' agreement among certain of
Champion's stockholders will be terminated. The Notes Offering will be a
qualified debt offering under the Participants Agreement, and, upon completion
of the Notes Offering, the Company intends to loan all of the proceeds therefrom
to Champion to prepay all of the outstanding Champion Notes in accordance with
the terms thereof, as amended by the Participants Agreement. See "The Merger and
Financing."
SHAREHOLDER AGREEMENT
It is a condition to the Merger that prior to the Effective Time the Company
enter into a Shareholder Agreement with the Paracelsus Shareholder pursuant to
which such shareholder will agree, among other things; (i) to certain
"standstill" provisions; (ii) to certain transfer restrictions with respect to
the Company's voting securities; (iii) not to acquire additional voting
securities of the Company if, after giving effect to such acquisition, such
shareholder would beneficially own more than 66 2/3% of the total voting power
of the Company, except under certain circumstances; and (iv) to sell in, tender
into and vote in favor of, as the case may be, certain acquisition proposals
involving the Company. The Shareholder Agreement will also provide the
Paracelsus Shareholder with the right to designate the four Shareholder
Directors and a right of first refusal in connection with certain acquisition
proposals for Paracelsus. See "Management -- Directors and Executive Officers."
PARACELSUS SHAREHOLDER REGISTRATION RIGHTS AGREEMENT
Pursuant to the Merger Agreement, prior to the Effective Time, the Company
and the Paracelsus Shareholder will enter into a registration rights agreement
(the "Paracelsus Shareholder Registration Rights Agreement"). For a 10-year
period the Paracelsus Shareholder will generally have the right to require the
Company, on up to five separate occasions, to register for sale under the
Securities Act of 1933, as amended, (the "Securities Act") shares of Paracelsus
Common Stock owned beneficially or of record by the Paracelsus Shareholder (each
a "Demand Registration"). Subject to certain limitations, any Demand
Registration may be for a shelf registration under Rule 415 under the Securities
Act. The Paracelsus Shareholder Registration Rights Agreement will also grant
the Paracelsus Shareholder customary "piggyback" registration rights with
respect to registrations by the Company or pursuant to registration rights of
other parties. The Company will be required to pay all costs, fees and expenses
incident to its performance of the Paracelsus Shareholder Registration Rights
Agreement, other than any commissions, fees or discounts payable to brokers,
dealers or underwriters.
CHAMPION INVESTORS REGISTRATION RIGHTS AGREEMENTS
Pursuant to the Merger Agreement, as of the Effective Time, certain of the
existing holders of Champion Capital Stock and holders of warrants exercisable
for shares of Champion Common Stock ("Champion Warrants") who are issued shares
of Paracelsus Common Stock in the Merger or may be
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issued shares of Paracelsus Common Stock upon exercise of warrants exercisable
for shares of Paracelsus Common Stock ("Paracelsus Warrants") (the "Champion
Investors") will enter into registration rights agreements (the "Champion
Investors Registration Rights Agreements") with the Company as follows: (i) with
the holders of Series D Champion Warrants, an agreement to file one registration
statement at the request of holders of Series D Paracelsus Warrants exercisable
for more than 50% of the shares of Paracelsus Common Stock issuable upon the
exercise of all of such warrants; (ii) with the holders of the Series E Champion
Warrants, an agreement to file one registration statement at the request of
holders of Series E Paracelsus Warrants exercisable for more than 50% of the
shares of Paracelsus Common Stock issuable upon exercise of all of such
warrants; and (iii) with certain Champion Investors who will immediately
following the Effective Time own more than 1% of the outstanding shares of
Paracelsus Common Stock, an agreement (the "Champion Affiliates Registration
Rights Agreement") pursuant to which the Company will agree to file one
registration statement upon the request of such holders holding at least 25% of
shares of Paracelsus Common Stock held by such holders.
Pursuant to the terms of each Champion Investors Registration Rights
Agreement, for a two-year period the Champion Investors, as parties to the
respective Champion Investors Registration Rights Agreement, will generally have
the right to require the Company to register for sale under the Securities Act
the shares of Paracelsus Common Stock owned beneficially or of receipt by the
Champion Investors (a "Champion Investors Demand Registration") PROVIDED, that,
in the case of the Champion Affiliates Registration Rights Agreement, such
demand right will expire upon the occurrence of a public offering by the Company
equity securities that results in proceeds of at least $50.0 million, including
without limitation the Equity Offering. Subject to certain limitations, any
Champion Investors Demand Registration may be for a shelf registration under
Rule 415 of the Securities Act. The Champion Investors party to each such
Champion Investors Registration Rights Agreement will also have in the aggregate
one customary piggyback registration right with respect to registrations by the
Company, which "piggyback" right will expire upon consummation of the Equity
Offering, and PARI PASSU "piggyback" registrations with respect to registrations
by the Company and certain selling shareholders, subject to customary
underwriters' cutbacks. The Company will be required to pay all costs, fees and
expenses incident to its performance of each of the Champion Investors
Registration Rights Agreements, other than any commissions, fees or discounts
payable to brokers, dealers or underwriters.
SERVICES AGREEMENT
The consummation of the Merger is conditioned upon the Company entering into
an agreement (the "Services Agreement") with Dr. Krukemeyer, pursuant to which
Dr. Krukemeyer will provide management and strategic advisory services to the
Company following the Merger. The term of the Services Agreement is ten years,
and the Company will pay Dr. Krukemeyer a consulting fee of $1.0 million per
year, commencing upon the execution of the Services Agreement. The Services
Agreement may be terminated only by mutual consent of the parties.
INSURANCE AGREEMENT
The consummation of the Merger is conditioned upon the Company and Dr.
Krukemeyer entering into an insurance agreement (the "Insurance Agreement")
pursuant to which the Company will provide insurance benefits in the event of
Dr. Krukemeyer's death or permanent disability during the 10-year term of the
Insurance Agreement in an amount equal to $1.0 million per year from the date of
each permanent disability or death until the end of the term of the Insurance
Agreement.
NON-COMPETE AGREEMENT
The consummation of the Merger is conditioned upon Dr. Krukemeyer and the
Company entering into the Non-Compete Agreement.
The Non-Compete Agreement will provide that, from the date of the
Shareholder Agreement to the date of termination of the Shareholder Agreement
with respect to Dr. Krukemeyer or any affiliates or associates of Dr.
Krukemeyer, neither Dr. Krukemeyer nor any of his affiliates or associates
shall,
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without the prior written consent of the Company, (i) directly or indirectly,
compete with the Company and its subsidiaries in the Business (as hereinafter
defined) in the Restricted Area (as hereinafter defined) or (ii) have any
interest, directly or indirectly, in any entity engaged in the Business in the
Restricted Area. As used in the Non-Compete Agreement, the term "Business" is
defined as owning, leasing or managing hospitals and ambulatory care centers,
excluding any ancillary hospital service business related to such business,
including without limitation dietary, maintenance, security and other related
service businesses, and the term "Restricted Area" is defined as each and every
county or state of the United States of America.
Nothing in the Non-Compete Agreement will prohibit Dr. Krukemeyer from (x)
owning, directly or indirectly, control of a person (the "Subject Company") if
the Subject Company is not primarily engaged, directly or indirectly, in the
Business in the Restricted Area and, within 12 months after such acquisition, he
causes the Subject Company to divest any business or assets of the Subject
Company that engage in the Business in the Restricted Area or (y) owning,
directly or indirectly, not more than 5% of any class of voting securities of a
publicly traded person that is engaged, directly or indirectly, in the Business
in the Restricted Area.
The Non-Compete Agreement will also provide that if the length of time or
geographical area set forth in it is deemed too restrictive by a court, then
such time or area shall be reduced to a time or area that such court may deem
reasonable under the circumstances.
Under the Non-Compete Agreement, Dr. Krukemeyer will further agree that
following the Effective Time, neither he nor any of his affiliates will, without
the prior written consent of the Company, directly or indirectly, solicit for
employment any current key employee or officer of the Company or any of its
subsidiaries; PROVIDED, that the foregoing restriction shall not apply to
employees no longer employed by the Company or its subsidiaries or to employees
who respond to general solicitations of employment not specifically directed
toward such key employees or officers of the Company or its subsidiaries or, in
the case of certain international projects, to Mr. Messenger.
DIVIDEND; DIVIDEND AND NOTE AGREEMENT
The consummation of the Merger is conditioned upon the Company and the
Paracelsus Shareholder entering into the Dividend and Note Agreement. Pursuant
to the Dividend and Note Agreement, the Paracelsus Shareholder will agree to
purchase the Shareholder Subordinated Note from the Company for $7.2 million
promptly after receipt of the Dividend. The Shareholder Subordinated Note will
have a term of 10 years, will bear interest at the rate of 6.51% per year and
will provide for payments of principal and accrued interest in an aggregate
annual amount of $1.0 million. Prior to the Effective Time, Paracelsus will
declare the Dividend payable on a date not later than 60 days after the
Effective Time. See "The Merger and Financing -- Paracelsus Dividend Prior to
Effective Time."
VOTING AGREEMENT
At or prior to the Effective Time, the Paracelsus Shareholder and Messrs.
Miller and VanDevender will enter into a voting agreement (the "Voting
Agreement") pursuant to which Messrs. Miller and VanDevender will agree to vote,
or cause to be voted, the shares of Common Stock beneficially owned by each of
them and their respective affiliates (a) with the Paracelsus Shareholder to
approve any Shareholder Proposal (as defined in the Shareholder Agreement) and
any related actions (including voting against any action or agreement that may
impede, interfere with or adversely affect any such approved Shareholder
Proposal) and (b) as the Paracelsus Shareholder is required to vote with respect
to any such Shareholder Proposal pursuant to the Shareholder Agreement and any
Approved Acquisition Proposal (as defined in the Shareholder Agreement) under
the Shareholder Agreement. In addition, the Voting Agreement will provide that
Messrs. Miller and VanDevender agree to sell (including by tender or otherwise)
their shares of Paracelsus Common Stock in any transaction for which they are
required to vote under the terms of the Voting Agreement. The Voting Agreement
will also provide that, if any of the amendments to any of the stock option
agreements under the Champion Founders' Stock Option Plan is not approved at the
Special Meeting of Champion stockholders to be held in connection with the
Merger, Messrs. Miller and VanDevender
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and the Paracelsus Shareholder will vote for the approval of such amendments if
presented at the next meeting of the Company's shareholders and will use their
respective best efforts to cause such amendments to be presented as shareholder
proposals at such meeting. The Voting Agreement will remain in effect for so
long as the provisions of the Shareholder Agreement relating to Shareholder
Proposals or Approved Acquisition Proposals are in effect with respect to the
Paracelsus Shareholder.
RIGHT OF FIRST REFUSAL AGREEMENT
At or prior to the Effective Time, Dr. Krukemeyer and Messrs. Messenger,
Miller, VanDevender and Patterson will enter into an agreement (the "Right of
First Refusal Agreement") pursuant to which Dr. Krukemeyer will have certain
rights to purchase shares of Common Stock beneficially owned by each such person
that he may from time to time determine to sell.
OTHER TRANSACTIONS
A sole proprietorship doing business as Paracelsus Klinik, currently owned
by Dr. Krukemeyer, is a party to the Amended and Restated Know-how Contract,
dated as of October 1, 1988, as amended, with Paracelsus (the "Know-how
Contract"). The Know-how Contract provides for the transfer of specified
know-how to the Company. The Know-how Contract provides for an annual payment of
the lesser of $400,000 or 0.75% of Paracelsus' net operating revenue, as defined
in the Know-how Contract. The Know-how Contract will be terminated upon
consummation of the Merger. The Company's rights under the Know-how Contract
will be replaced with a royalty-free license from Paracelsus Klinik.
In November 1993, the Company lent Dr. Krukemeyer $3.2 million under a
promissory loan agreement. In April 1994, the Company lent Dr. Krukemeyer an
additional $1.8 million under a new $5.0 million promissory loan agreement that
replaced the existing $3.2 million promissory loan agreement. The note balance
and accrued interest are due in annual payments of $1.0 million each May 1,
commencing May 1, 1995 through May 1, 1999 with interest at 8% per annum. The
balance outstanding under the note at May 31, 1996 was $3.0 million. This loan
will be repaid in full contemporaneously with the payment by the Company of the
Dividend.
In August 1994, Dr. Krukemeyer and Internationale Nederlanden (U.S.) Capital
Corporation ("INCC") entered into certain arrangements relating to the extension
of credit by INCC to Dr. Krukemeyer. In connection with such extension of credit
to Dr. Krukemeyer, the Company entered into certain agreements with INCC
agreeing to pay to Dr. Krukemeyer, to the extent permitted by the provisions of
certain senior debt of the Company (i) transfer payments, such as dividends and
know-how payments in an amount equal of the consolidated net income of the
Company on a quarterly basis and (ii) salary and bonus payments equal to a
minimum of $2.0 million per year. The $10.5 million outstanding under this loan
will be repaid in full contemporaneously with the payment by Paracelsus of the
Dividend.
The Paracelsus Shareholder, which is wholly owned by Dr. Krukemeyer, and
certain Champion Investors, including an associated entity of Mr. Conroy, will
have rights to both require and participate in the filing of registration
statements by the Company with the Commission. See "-- Paracelsus Shareholder
Registration Rights Agreement" and "-- Champion Investors Registration Rights
Agreements."
Messrs. Hofmann and Lange serve as directors of the Company and also as
financial consultants under a contract entered into with the Company on July 4,
1983. The consulting services provided involve the coordination of the Company's
policies and strategies and, to a lesser extent, the financial affairs of the
Company. The consultants also advise the Company as to certain matters involving
the healthcare industry. These contracts provide for aggregate annual payments
of $250,000 each and reimbursement for certain out-of-pocket expenses. The
Company believes that the terms of the Company's arrangements with Messrs.
Hofmann and Lange are at least as favorable as could have been obtained from
unaffiliated third parties. These consulting arrangements will be terminated
upon consummation of the Merger.
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SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth as of July 15, 1996, the number of shares of
Common Stock expected to be beneficially owned upon consummation of the Merger,
prior to and after the Equity Offering, by (i) each person expected by the
Company to beneficially own more than 5% of the shares of Common Stock, (ii)
each of the Company's directors, (iii) the Named Executive Officers, (iv)
Messrs. Miller, VanDevender and Patterson who, along with Messrs. Messenger and
Joyner, will serve as the Company's Chief Executive Officer and four other most
highly compensated executive officers following the Merger and (v) all directors
and executive officers as a group. Unless otherwise indicated, the shareholders
have sole voting and investment power with respect to shares of Common Stock to
be beneficially owned by them after the Effective Time. In addition, unless
otherwise indicated each such person's business address is 515 West Greens Road,
Suite 800, Houston, Texas 77067.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE EQUITY OFFERING AFTER THE EQUITY OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT (1) NUMBER PERCENT
<S> <C> <C> <C> <C>
Park Hospital GmbH (2)..................................... 29,771,742 60.2 29,771,742 54.5
AM Natruper Holz 69
D-49076 Osnabruck
Federal Republic of Germany
Dr. Manfred George Krukemeyer (2).......................... 29,771,742 60.2 29,771,742 54.5
R.J. Messenger (3)......................................... 1,000,000 2.0 1,000,000 1.8
Charles R. Miller (4)...................................... 1,075,026 2.1 1,075,026 2.0
James G. Van Devender (5).................................. 630,000 1.3 630,000 1.2
Ronald R. Patterson (6).................................... 461,761 * 461,761 *
Robert C. Joyner (7)....................................... 160,933 * 160,933 *
Michael D. Hofmann (7)(8).................................. 56,000 * 56,000 *
Christian A. Lange (7)(8).................................. 56,000 * 56,000 *
Angelo R. Mozilo (8)....................................... -- -- -- --
Daryl J. White (8)......................................... -- -- -- --
James A. Conroy (9)........................................ 2,077,292 4.2 2,077,292 3.8
Harold E. Buck............................................. -- -- --
David R. Topper............................................ 200,000 * 200,000 *
First Interstate Bank of California, as Trustee (10)(11)... 2,681,972 5.4 2,681,972 4.9
707 Wilshire Boulevard, W-11-2
Los Angeles, CA 90017
Donaldson, Lufkin & Jenrette, Inc. (11)(12)................ 2,785,453 5.6 2,785,453 5.1
277 Park Avenue
New York, NY 10172
The Equitable Companies Incorporated (11)(12).............. 2,785,453 5.6 2,785,453 5.1
277 Park Avenue
New York, NY 10172
All directors and executive officers as a group (35
persons).................................................. 36,151,190 72.9 36,151,190 66.2
</TABLE>
- ------------------------
* Less than one percent.
(1) Based on 49,477,167 shares of Paracelsus Common Stock expected to be
outstanding immediately following the consummation of the Merger.
(2) Park Hospital GmbH, a German corporation wholly owned by Dr. Krukemeyer, is
the record owner of such shares.
(3) Shares issuable with respect to stock options exercisable within 60 days.
(4) Includes 543,250 shares issuable with respect to stock options exercisable
within 60 days.
(5) Includes 567,334 shares issuable with respect to stock options exercisable
within 60 days.
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(6) Includes 400,460 shares issuable with respect to stock options exercisable
within 60 days.
(7) Shares issuable with respect to stock options exercisable within 60 days.
(8) Director.
(9) Mr. Conroy is a general partner of Olympus Private Placement Fund, L.P.
("Olympus") and disclaims beneficial ownership of Champion's securities
owned by that fund. Olympus is the beneficial owner of 2,077,292 shares of
Champion Common Stock through its direct ownership of (i) 1,703,078 shares
of Champion Common Stock, (ii) 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 Champion Common Stock, and (iii) 83,334 shares of Champion Series
D Preferred Stock, which may be converted at any time at the option of the
holder into 166,668 shares of Champion Common Stock. OGP Partners, L.P.,
James A. Conroy, and Robert S. Morris may be deemed to beneficially own the
shares of Champion Common Stock beneficially owned by Olympus.
(10) Voting power only. Trustee under a ten-year voting trust agreement dated
August 31, 1995, granting it sole voting power of the securities it holds on
behalf of Sprout Growth, L.P. ("Growth"), Sprout Capital VI, L.P. ("Sprout
IV"), DLJ Venture Capital Fund II, L.P. ("DLJ II"), Sprout Growth II, L.P.
("Growth II"), and DLJ Capital Corporation ("DLJCC").
(11) DLJ II may be deemed to be the beneficial owner of 37,606 shares held by
First Interstate Bank of California ("First Interstate") as trustee (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.
Growth may be deemed to be the beneficial owner of 773,909 shares held by
First Interstate, as trustee (the "Growth Shares").
DLJ Growth Associates ("Associates"), as a general partner of Growth, may be
deemed to beneficially own indirectly the Growth Shares.
Sprout VI may be deemed to be the beneficial owner of 170,109 shares held by
First Interstate, as trustee (the "Sprout VI Shares").
Growth II may be deemed to be the beneficial owner of 635,652 shares by
First Interstate, as trustee (the "Growth II Shares").
DLJCC may be deemed to be the beneficial owner of 64,693 shares held by
First Interstate, as trustee. DLJCC, because of its relationships with DLJ
II, Associates II, Growth and Associates, and as the managing general
partner of each of Sprout VI and Growth II, also may be deemed to be
beneficially own indirectly the DLJ II Shares, the Growth Shares, the Sprout
VI Shares and the Growth II Shares, for an aggregate of 2,681,969 (the
"DLJCC Shares").
DLJ First ESC L.L.C. ("ESC") may be deemed to be the beneficial owner of
1,969 shares.
DLJ LBO Plans Management Corporation ("LBO"), as the manager of ESC, may be
deemed to beneficially own indirectly 1,266 of the ESC shares. DLJ may be
deemed to be the beneficial owner of 101,512 shares.
As the sole stockholder of DLJCC and DLJ, Donaldson, Lufkin & Jenrette, Inc.
("Donaldson, Lufkin") may be deemed to beneficial own indirectly the DLJCC
Shares and the DLJ Shares. In addition, as the sole stockholder of LBO,
Donaldson Lufkin may be deemed to beneficially own indirectly the shares
that are beneficially owned indirectly by LBO. Accordingly, Donaldson,
Lufkin may be deemed to beneficially own indirectly an aggregate of
2,785,450 shares of Common Stock (the "Donaldson, Lufkin Shares"). As the
sole stockholder of Donaldson, Lufkin, The Equitable Companies Incorporated
("Equitable") may be deemed to beneficially own indirectly the Donaldson,
Lufkin Shares. In addition, the following entities, by reason of their
relationship with Equitable or Donaldson, Lufkin may be deemed to
beneficially own indirectly the Donaldson, Lufkin Shares: AXA, FINAXA, AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe
Assurance Mutuelle, Alpha Assurances Vie Mutuellle, Alpha Assurances
I.A.R.D. Mutuelle, Claude Be Bear, as voting trustee, Patrice Garnier, as
Voting Trustee, Henri de Clermont-Tonnerre, as voting trustee.
(12) Not held of record, but may be deemed beneficially owned.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the Indenture to be dated as of
, 1996 between the Company and AmSouth Bank of Alabama, as trustee (the
"Trustee"), a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions." Capitalized terms not otherwise defined below or elsewhere in this
Prospectus have the meanings given to them in the Indenture. As used in this
"Description of the Notes," the term the "Company" refers to Paracelsus
Healthcare Corporation and not to any of its subsidiaries.
The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness of the
Company, including Indebtedness pursuant to the Existing Paracelsus Credit
Facility and, upon consummation of the Credit Facility Refinancing, the New
Credit Facility. See "-- Subordination." On a pro forma basis, after giving
effect to the Merger and the Offerings and the application of the net proceeds
therefrom, the Company would have had $112.1 million of Senior Indebtedness
outstanding at May 31, 1996 ($168.0 million without giving effect to the Equity
Offering), all of which would have been secured indebtedness. The Notes will
also be effectively subordinated to all existing and future indebtedness and
other liabilities of the Company's subsidiaries (including Champion), which
after giving effect to the Merger and the Offerings would have been
approximately $8.5 million at May 31, 1996. In addition, the Company will have
$75.0 million of Existing Senior Subordinated Notes that rank PARI PASSU with
the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited to $250,000,000 ($275,000,000 if the Underwriters'
over-allotment option is exercised in full) in aggregate principal amount and
will mature on , 2006. Interest on the Notes will accrue at the rate of
% per annum and will be payable semi-annually in arrears on and
of each year, commencing , 1997, to Holders of record on the
immediately preceding and , respectively. Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payments of interest may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
SUBORDINATION
The indebtedness evidenced by the Notes will, to the extent set forth in the
Indenture, be subordinate and junior in right of payment to the prior payment in
full of all Senior Indebtedness. Upon any payment or distribution of assets of
the Company to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets or
any bankruptcy, insolvency or similar proceedings of the Company, the holders of
Senior Indebtedness will first be entitled to receive payment in full of all
Obligations due in respect of Senior Indebtedness (including interest accruing
after the commencement of a bankruptcy or insolvency at the rate specified in
the applicable Senior Indebtedness and including, without limitation, in respect
of premiums, indemnities or otherwise, and all indebtedness under the Existing
Paracelsus Credit
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Facility and, upon consummation of the Credit Facility Refinancing, the New
Credit Facility which is disallowed, avoided or subordinated pursuant to Section
548 of Title 11, United States Code or any applicable state fraudulent
conveyance law), before the Holders of Notes will be entitled to receive any
payment of principal of premium, if any, or interest on the Notes, including any
amounts that become due as a result of a Change of Control Offer or an Asset
Sale Offer, and until all Obligations with respect to Senior Indebtedness are
paid in full, any distribution to which the holders of Notes would be entitled
shall be made to the holders of Senior Indebtedness (except that holders of
Notes may receive and retain securities ("Junior Securities") distributed or
paid in respect of the Notes that are subordinated at least to the same extent
as the Notes to Senior Indebtedness).
The Company also may not make any payment upon or in respect of the Notes
(except in Junior Securities) if (i) a default in the payment of the principal
of, premium, if any, or interest on Senior Indebtedness occurs and is continuing
beyond any applicable period of grace (whether by acceleration or otherwise) or
(ii) any other default shall have occurred and be continuing that would permit
holders of Designated Senior Indebtedness to accelerate the maturity of such
Designated Senior Indebtedness and the Trustee and the Company receive a written
notice (a "Payment Blockage Notice") of such default from the holders of such
Designated Senior Indebtedness. With respect to clause (ii) above, if such
Designated Senior Indebtedness is not declared due and payable within 180 days
after written notice of the event of default is given, promptly after the end of
the 180-day period the Company shall resume making any and all payments in
respect of the Notes, including any missed payments. In the case of a payment
default, the Company shall resume making any and all required payments in
respect of the Notes, including any missed payments, on the date on which such
payment default is cured or waived. During any 360-day consecutive period, only
one such period during which payment with respect to the Notes may not be made
may commence and the duration of such period may not exceed 180 days. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such nonpayment default shall have
been waived for a period of not less than 90 days.
Nothing in the Indenture or in the Notes affects the obligation of the
Company, which is absolute and unconditional, to pay principal of and premium,
if any, and interest on the Notes. The failure to make any payment on the Notes
by reason of the provisions of the Indenture described under this "--
Subordination" will not be construed as preventing the occurrence of an Event of
Default with respect to the Notes arising from any such failure to make payment.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Indebtedness or of the Notes may
recover less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Holders of the Notes.
The subordination provisions described above will cease to be applicable to
the Notes upon any defeasance or covenant defeasance of the Notes as described
under "-- Legal Defeasance and Covenant Defeasance."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to ,
2001 except as set forth under "-- Certain Covenants -- Change of Control,"
below. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, at the redemption prices (expressed as
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percentages of principal amount) set forth below, if redeemed during the
12-month period beginning on of the years indicated below, in each case
together with accrued and unpaid interest to the applicable redemption date.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001................................................................... %
2002................................................................... %
2003................................................................... %
2004................................................................... %
2005 and thereafter.................................................... 100.000%
</TABLE>
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot or
by such other method as the Trustee deems fair and appropriate provided that any
such method is not prohibited by the rules of any securities exchange on which
the Notes are at that time listed or quoted. Notes may be redeemed in part in
multiples of $1,000 only. Notice of redemption shall be mailed to each Holder of
Notes to be redeemed by first class mail at least 30 but not more than 60 days
before the redemption date at such Holder's last address as then shown upon the
Note Register. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Payment").
The Indenture will provide that, prior to complying with the provisions of
this covenant, but in any event within 30 days following a Change of Control,
the Company will to the extent required either (i) repay all outstanding Senior
Indebtedness or (ii) obtain the requisite consents, if any, under all agreements
governing outstanding Senior Indebtedness to permit the repurchase of Notes
required by this covenant. The failure to obtain any such consents will not
relieve the Company of its obligation to repurchase the Notes pursuant to a
Change of Control Offer.
Within 30 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Notes pursuant to the
procedures required by the Indenture and this covenant and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes
pursuant to the Change of Control Offer. On the Change of Control Payment Date,
the Company will, to the extent lawful, (i) accept for payment all Notes or
portions thereof properly tendered pursuant to the Change of Control Offer, (ii)
deposit with the Trustee an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so tendered and (iii) deliver or cause
to be delivered to the Trustee the Notes so accepted together with an Officer's
Certificate stating the aggregate principal amount of the Notes or portions
thereof being purchased by the Company. The Trustee will promptly make available
to each Holder of the Notes so tendered the Change of Control Payment for such
Notes, and the Trustee will promptly authenticate and deliver (or
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cause to be transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any;
PROVIDED that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof.
In the event that, pursuant to any Change of Control Offer, there are
properly tendered and accepted for payment by the Company Notes representing 80%
or more of the Notes outstanding at the commencement of such Change of Control
Offer, then the Company shall have the right, at its option, to redeem all, but
not less than all, of the outstanding Notes not tendered pursuant to such Change
of Control Offer at a redemption price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest to the redemption date. Any
such redemption shall be affected in the same manner as described under "--
Optional Redemption" above.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require the Company to
repurchase or redeem the Notes in the event of an acquisition or takeover.
Under the terms of the Existing Subordinated Notes, of which $75.0 million
is outstanding, the Company will also be required to offer to purchase all of
the outstanding Existing Subordinated Notes upon the occurrence of certain
events including events that would constitute a Change in Control. If a Change
in Control were to occur, there can be no assurance that the Company would have
sufficient funds available to repay all outstanding Senior Indebtedness then
required to be repaid (or otherwise obtain any consent under outstanding Senior
Indebtedness necessary to permit the repurchase of the Notes) and pay the
purchase price for all the Notes and the Existing Subordinated Notes tendered by
the holders thereof. See "Risk Factors -- Possible Inability to Repurchase Notes
Upon a Change of Control."
LIMITATIONS ON RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company or any Subsidiary of the Company (other than cash in lieu of
fractional shares)) on account of any Equity Interests of the Company or any of
its Subsidiaries (other than (x) dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company and (y) in the case of
a Subsidiary, dividends or distributions payable to the Company or any Wholly
Owned Subsidiary of the Company or pro rata dividends or distributions); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any Subsidiary or other Affiliate of the Company (other than
any such Equity Interests owned by the Company or any Wholly Owned Subsidiary of
the Company and joint venture interests evidencing ownership interests in
Permitted Joint Ventures); and (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
by its terms is subordinated in right of payment to the Notes, except in
accordance with the scheduled mandatory redemption or payment provisions set
forth in the original documentation governing such Indebtedness (but not
pursuant to any mandatory offer to repurchase upon the occurrence of any events)
(all such payments and other actions set forth in clauses (i) through (iii)
above being collectively referred to as "Restricted Payments"), unless:
(a) no Default or Event of Default shall have occurred under the Notes
or the Indenture and be continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Pro Forma
Coverage Ratio test set forth in the first paragraph of the covenant
entitled "Incurrence of Indebtedness"; and
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(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries or other
Affiliates after the date of the Indenture (excluding Restricted Payments
permitted by clauses (i), (ii), (iv), (v) and (vi) of the next succeeding
paragraph but including Restricted Payments permitted by clause (iii) of the
next succeeding paragraph), is less than the sum of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, minus 100% of such deficit), PLUS (ii) 100% of
the aggregate net cash proceeds, including the fair market value of property
other than cash (as determined in good faith by the Board), received by the
Company from the issuance or sale other than to a subsidiary of the Company
since the date of the Indenture of Equity Interests other than Disqualified
Capital Stock of the Company or of debt securities or Disqualified Stock of
the Company that have been converted into such Equity Interests (other than
Disqualified Stock) PLUS (iii) $5.0 million.
The foregoing provision will not be violated by the payment of any dividend
within 60 days after the date of declaration thereof, if at such date of
declaration such payment would have complied with the provisions of the
Indenture. In addition notwithstanding the foregoing, so long as no Event of
Default or Default shall have occurred or be continuing or would occur as a
consequence thereof, the Company and any Subsidiary may (i) purchase, redeem, or
otherwise acquire or retire for value any Equity Interests of the Company in
exchange for, or out of the net proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than Disqualified Stock); PROVIDED that the amount of any such
net cash proceeds that are utilized for any such purchase, redemption or other
acquisition or retirement shall be excluded from clause (c)(ii) of the preceding
paragraph; (ii) defease, redeem or repurchase subordinated Indebtedness with the
net proceeds from an incurrence of Permitted Refinancing Indebtedness or of or
in exchange for the substantially concurrent sale (other than to a Subsidiary of
the Company) of Equity Interests of the Company (other than Disqualified Stock);
PROVIDED that the amount of any such net cash proceeds that are utilized for any
such purchase, redemption, repurchase, retirement or other acquisitions shall be
excluded from clause (c)(ii) of the preceding paragraph; (iii) redeem or
repurchase any Equity Interests of the Company or any Subsidiary of the Company
held by any officers, directors or employees of the Company (or any of its
Subsidiaries) whose employment has been terminated or who have died or become
disabled, so long as the aggregate amount of payments for all such redemptions
or repurchases in any fiscal year do not exceed $5.0 million; (iv) pay scheduled
dividends on or redeem any preferred stock issued by a Subsidiary of the Company
permitted to be created or issued pursuant to the provisions of the Indenture
described under "-- Limitations on Incurrence of Indebtedness;" (v) pay the
Dividend declared on , 1996 to the Paracelsus Shareholder and (vi)
redeem or repurchase Paracelsus Common Stock from holders thereof who
beneficially own in the aggregate less than 1% of the outstanding Paracelsus
Common Stock (other than officers, directors or employees of the Company or any
of its Subsidiaries whose Equity Interests are redeemed or repurchased in
accordance with clause (iii) of this paragraph) within two years from the date
of the Indenture so long as the aggregate amount of payments for all such
redemptions or repurchases in such period do not exceed $1 million. Any payment
made pursuant to clause (iii) of this paragraph shall be a Restricted Payment
for purposes of calculating aggregate Restricted Payments pursuant to clause (c)
of the preceding paragraph.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitations on Restricted Payments" were computed,
which calculations shall be based upon the Company's latest available financial
statements.
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LIMITATIONS ON INCURRENCE OF INDEBTEDNESS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable with respect
to (collectively, "incur") any Indebtedness (including Acquired Debt) PROVIDED,
HOWEVER, that the Company may incur Indebtedness if, at the time such
Indebtedness is incurred and after giving effect thereto and the application of
the proceeds therefor, the Company's Pro Forma Coverage Ratio would not be less
than (x) 2.0 to 1 for Indebtedness incurred on or prior to December 31, 1997 and
(y) 2.25 to 1 for Indebtedness incurred thereafter.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness pursuant to the New
Credit Facility and any renewal, extension, refinancing or refunding thereof
and Indebtedness of the Company or any of its Subsidiaries incurred for
working capital purposes, together in an aggregate principal amount not to
exceed at any time outstanding $400.0 million LESS the aggregate amount of
all Net Proceeds of Asset Sales applied to permanently reduce Indebtedness
(and the commitments) thereunder pursuant to the covenant entitled "Asset
Sales";
(ii) Capital Lease Obligations in an aggregate principal amount not to
exceed 10% of the assets of the Company and its Subsidiaries taken as a
whole at any time outstanding (any excess to be considered Indebtedness
subject to the requirements described in the first paragraph under this "--
Limitations on Incurrence of Indebtedness.");
(iii) the incurrence by the Company and its Subsidiaries of Existing
Indebtedness;
(iv) Indebtedness evidenced by letters of credit issued in the ordinary
course of business of the Company to secure workers' compensation and other
insurance coverages;
(v) Guarantees by a Subsidiary of the Company of Indebtedness otherwise
permitted to be incurred under the Indenture;
(vi) Physician Support Obligations;
(vii) Indebtedness incurred to purchase or finance any person's purchase
of any person's ownership interest in a Permitted Joint Venture in
accordance with the terms of the agreement under which any such interest was
issued;
(viii) Purchase Money Indebtedness incurred in the ordinary course of
business;
(ix) Indebtedness (including letters of credit) incurred in respect of
performance bonds, standby letters of credit or surety or appeal bonds in
the ordinary course of business;
(x) the Shareholder Subordinated Note;
(xi) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund, (a)
the Notes, (b) Existing Indebtedness, (c) Indebtedness incurred pursuant to
clauses (vii) and (viii) of this paragraph, (d) the Shareholder Subordinated
Note or (e) any Indebtedness that was incurred in compliance with the Pro
Forma Coverage Ratio test contained in the preceding paragraph;
(xiii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries; PROVIDED, HOWEVER, that (a) such Indebtedness is expressly
subordinate to the payment in full of the Notes and (b)(1) any subsequent
issuance or transfer (other than for security purposes) of Equity Interests
that result in any such Indebtedness being held by a Person other than the
Company or a Subsidiary of the Company and (2) any sale or other transfer of
any such Indebtedness (including for security purposes) to a Person that is
neither the Company or a Subsidiary shall be deemed in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be; and
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(xiv) the incurrence by the Company of Indebtedness not otherwise
permitted to be incurred by any other clause of this paragraph in an
aggregate principal amount at any time outstanding not to exceed the greater
of (x) $30 million and (y) 10% of the Company's Consolidated Net Worth at
the time of incurrence.
LIMITATIONS ON LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien, other than Permitted Liens, on any property or asset
now owned or hereafter acquired, or on any income or profits therefrom or assign
or convey any right to receive income therefrom, to secure any Indebtedness that
is PARI PASSU with or subordinate in right of payment to the Notes, unless the
Notes are either (i) secured by a Lien on such property, assets, income or
profits that is senior in priority to the Lien securing such other Indebtedness,
if such other Indebtedness is subordinated in right of payment to the Notes or
(ii) equally and ratably secured by a Lien on such property, assets, income or
profits with the Lien securing such other Indebtedness, if such other
Indebtedness is PARI PASSU in right of payment to the Notes.
LIMITATIONS ON DISPOSITIONS OF ASSETS.
Subject to the "Limitation on Merger, Consolidation or Sale of Assets"
covenant discussed below, the Company may not, and may not permit any of its
Subsidiaries to, sell, transfer or otherwise dispose of any assets (including by
way of sale and leaseback), other than in the ordinary course of business, or
all or substantially all of the Capital Stock of any Subsidiary directly or
indirectly owned by the Company in each case whether in a single transaction or
a series of related transactions that have an aggregate fair market value in
excess of $15.0 million or for net proceeds in excess of $15 million (an "Asset
Sale") unless the Net Proceeds from such Asset Sale are applied in accordance
with the following provisions. Within 365 days after the receipt of any Net
Proceeds from an Asset Sale, the Company may apply such Net Proceeds, at its
option, (a) to permanently reduce Indebtedness (and, in the case of revolving
Indebtedness, to permanently reduce the commitments) under the New Credit
Facility or to reduce other Senior Indebtedness of the Company, (b) to an
investment in a Permitted Business or a controlling interest in a person that
owns a Permitted Business or the making of a capital expenditure or to acquire
other tangible assets, in each case, engaged or used in a Permitted Business or
any Permitted Joint Venture. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving Indebtedness under the
New Credit Facility (or any renewal, extension, refinancing or refunding
thereof) or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the preceding sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $15.0 million, the Company will be required to make an offer to
all Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes and, on a pro rata basis, any other Indebtedness requiring to be
so repurchased (including the Existing Senior Subordinated Notes) that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Notes (and, if
applicable Existing Senior Subordinated Notes) tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
Notwithstanding the foregoing (a) a transfer of assets by the Company or a
Subsidiary, (b) any issuance of Equity Interests by a Subsidiary to the Company
or another Subsidiary of the Company and (c) any Restricted Payment permitted by
the covenant described under "Restricted Payments" above, shall not be deemed to
be an Asset Sale.
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LIMITATIONS ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries; (ii) make loans or advances to the Company or any of its
Subsidiaries; (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries; or (iv) Guarantee any loans or advances to the Company
or any of its Subsidiaries, except for such encumbrances or restrictions
existing under or by reasons of:
(a) Existing Indebtedness, as in effect on the date of the Indenture;
(b) the New Credit Facility, as in effect on the date of the Indenture,
and any amendments, modifications, restatements, extensions, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
PROVIDED that such amendments, modifications, restatements, extensions,
renewals, increases, supplements, refundings, replacements or refinancings
are not materially more restrictive in the aggregate than those contained in
the New Credit Facility, as in effect on the date of the Indenture;
(c) the Indenture and the Notes;
(d) applicable law;
(e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Subsidiaries, as in effect at the time
of acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred;
(f) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices;
(g) restrictions contained in security agreements relating to Purchase
Money Indebtedness to the extent such restrictions restrict the transfer of
property subject to such security agreement;
(h) Permitted Refinancing Indebtedness, PROVIDED that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced;
(i) any Permitted Joint Venture, PROVIDED that such restrictions apply
only to the assets of such Permitted Joint Venture; or
(j) any agreement which has been entered into for the sale or
disposition of all of the assets or capital stock of a Subsidiary; PROVIDED,
HOWEVER, that with respect to this clause (j), such encumbrances or
restrictions shall exist (A) only with respect to the Subsidiary being sold
or disposed of and (B) only for a period of six months following the
execution of such agreement.
LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving entity), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to another
Person unless (i) the Company is the survivor or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the
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laws of the United States, any state thereof or the District of Columbia; (ii)
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction, no Default or Event of Default exists; and (iv) the
Company or the Person formed by or surviving any such consolidation or merger,
or to which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made will, at the time of such transaction after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional indebtedness pursuant to the Pro Forma Coverage Ratio test
set forth in the first paragraph of the covenant entitled "Incurrence of
Indebtedness." Notwithstanding the foregoing, clause (iv) shall not prohibit a
transaction, the principal purpose and effect of which is (as determined in good
faith by the Board of Directors of the Company and evidenced by a resolution
thereof) to change the state of incorporation of the Company, and such
transaction does not have as one of its purposes the evasion of the restrictions
of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that in the aggregate are no less favorable to
the Company or such Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5
million, the Board of Directors shall have obtained an opinion from an
investment banking firm of national standing to the effect that such Affiliate
Transaction is fair to the Company or such Subsidiary from a financial point of
view; PROVIDED, HOWEVER, that (i) employment contracts, "know-how" agreements,
compensation arrangements and loans to employees, in each case in the form
existing as of the date of the Indenture or representing a continuation,
extension, renewal, refinancing or replacement thereof on terms no less
favorable to the Company than those contained in such contracts, agreements,
arrangements or loans in the form existing as of the date of the Indenture, (ii)
transactions between or among the Company, its Subsidiaries and/or Permitted
Joint Ventures, (iii) the making of Physician Support Obligations, (iv) each
Merger Related Agreement, in each case in the form existing as of the date of
the Indenture or representing a continuation, extension, renewal, refinancing or
replacement thereof on terms no less favorable to the Company than those
contained in such Merger Related Agreement in the form existing as of the date
of the Indenture and (v) transactions permitted by the provisions of the
Indenture described above under the covenant "-- Limitations on Restricted
Payments," in each case, shall not be deemed Affiliate Transactions.
LIMITATIONS ON OTHER SUBORDINATED INDEBTEDNESS
The Indenture will provide that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is both
subordinate or junior in right of payment to any Senior Indebtedness and senior
in right of payment to the Notes.
LIMITATION ON LINE OF BUSINESS
The Company will not, and will not permit any Subsidiary to, engage in any
business other than a Permitted Business.
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REPORTS
The Indenture will provide that, whether or not required by the rules and
the regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified, independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) default for 30 days in the payment when due of interest on the Notes
(whether or not prohibited by the subordination provisions of the
Indenture);
(ii) default in payment when due of principal or premium, if any, on the
Notes at maturity, upon redemption or otherwise, including pursuant to a
Change of Control Offer or an Asset Sale Offer (whether or not prohibited by
the subordination provisions of the Indenture);
(iii) failure to perform or comply with any other covenant or agreement
of the Company under the Indenture or the Notes continued for 60 days after
written notice to the Company by the Trustee or Holders of at least 25% in
aggregate principal amount of Outstanding Notes;
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is
created after the date of the Indenture, which default results in the
acceleration of the maturity of such Indebtedness having an outstanding
principal amount of at least $15.0 million, or a failure to pay such
Indebtedness having an outstanding principal amount of at least $15.0
million at its stated maturity, provided that such acceleration or failure
to pay is not cured within 10 days after such acceleration or failure to
pay;
(v) failure by the Company or any of its Subsidiaries to pay final
non-appealable judgments (to the extent not covered by insurance and as to
which the insurer has not acknowledged coverage in writing) aggregating in
excess of $15.0 million which are not stayed within 60 days after their
entry; and
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default (as defined) shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the Outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
If an Event of Default (other than an Event of Default described in Clause
(vi) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; PROVIDED, HOWEVER, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and
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annul such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
If an Event of Default specified in Clause (vi) above occurs, the Outstanding
Notes will IPSO FACTO become immediately due and payable without any declaration
or other act on the part of the Trustee or any Holder. For information as to
waiver of defaults, see "-- Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder of
a Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Company will be required to furnish to the Trustee quarterly a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
and the subordination provisions of the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligation shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such Opinion of Counsel shall confirm, that
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel confirming that the Holders of
the outstanding Notes will not recognize income,
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gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as certain Events of Default specified in the Indenture are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must deliver to the Trustee an Opinion of Counsel to the
effect that such deposit shall not cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940; and (vii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Notes; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Note
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount of, (or
the premium) or interest on, any Note, (iii) change the place or currency of
payment of principal of (or premium), or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Note, (v) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture, (vi) reduce the percentage of aggregate
principal amount of Outstanding Notes necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults, (vii)
modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or the waiver of past defaults or covenants, except
as otherwise specified, or (viii) following the mailing of any Change of Control
Offer or Asset Sale Offer, modify the terms of such Change of Control Offer or
Asset Sale Offer for the Notes required under the "Change of Control" and "Asset
Sale" covenants contained in the Indenture in a manner materially adverse to the
Holders thereof.
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the Outstanding Notes, on behalf of all Holders of
Notes, may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest or a default arising from failure to
purchase any Note tendered pursuant to a Change of Control Offer or an Asset
Sale Offer.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of New
York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such
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claim as security or otherwise. The Trustee is permitted to engage in other
transactions with the Company or any Affiliate, PROVIDED, HOWEVER, that if it
acquires any conflicting interest (as defined in the Indenture or in the Trust
Indenture Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person;
(ii) Indebtedness incurred or created by the Company or any of its Subsidiaries
in connection with the transaction or series of transactions pursuant to which
such Person became a Subsidiary of the Company; and (iii) Indebtedness incurred
or created by the Company or any of its Subsidiaries in connection with the
acquisition of substantially all of the assets of an operating unit or business
of another person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the interest rate
implicit in the lease, compounded, semiannually) of the obligation of the lessee
of the property subject to such sale-leaseback transaction for rental payments
during the remaining term of the lease included in such transaction including
any
period for which such lease has been extended or may, at the option of the
lessor, be extended or until the earliest date on which the lessee may terminate
such lease without penalty or upon payment or penalty (in which case the rental
payments shall include such penalty), after excluding all amounts required to be
paid on account of maintenance and repairs, insurance, taxes, assessments,
water, utilities and similar charges.
"CALCULATION DATE" means, when used with respect to any calculation, the
date of the transaction giving rise to the need to make such calculation.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the discounted present value of the rental obligations of any person
under any lease of any property that would at such time be so required to be
capitalized on the balance sheet of such person in accordance with GAAP.
"CAPITAL STOCK" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d)(3) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act); (ii)
the adoption of a plan for the liquidation or dissolution of the Company; (iii)
the acquisition by any person or group (as defined above) (other than a
Permitted Holder) of a majority of the total voting power entitled to vote
generally in the election of
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directors of the Company; or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or disposition of "all or substantially all" of the
assets of the Company and its Subsidiaries, taken as a whole. There is no
precisely established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (a) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing Consolidated
Net Income), plus (b) provision for taxes based on income or profits to the
extent such provision for taxes was deducted in computing Consolidated Net
Income, plus (c) Consolidated Interest Expense of such Person for such period,
to the extent such expense was deducted in computing Consolidated Net Income,
plus (d) depreciation and amortization (including amortization of goodwill and
other intangibles and other non-cash charges (excluding any such non-cash charge
to the extent that it represents an accrual or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person for such period to the extent such depreciation and
amortization were deducted in computing Consolidated Net Income, in each case,
on a consolidated basis and determined in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the interest expense of such Person and its Subsidiaries for such period
on a consolidated basis, determined in accordance with GAAP (including
amortization of original issue discount and deferred financing costs (other than
deferred financing costs that are accelerated upon the redemption, repurchase or
prepayment of any Indebtedness and except as set forth in the proviso to this
definition), non-cash interest payments, the interest component of all payments
associated with all Capital Lease Obligations and net payments, if any, pursuant
to Hedging Obligations; PROVIDED, HOWEVER, that in no event shall any
amortization of deferred financing cost incurred on or prior to the date of the
Indenture in connection with the New Credit Facility or any amortization of
deferred financing costs incurred in connection with the issuance of the Notes
be included in Consolidated Interest Expense).
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP, excluding
any one-time charge or expense incurred or recorded prior to December 31, 1996,
to effect, or in connection with, the Merger, the Offerings, the Credit Facility
Refinancing or the Dividend PROVIDED, HOWEVER, that (i) the Net Income (but not
loss) of any Person that is not a Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a
Subsidiary thereof; (ii) except to the extent dividends or distributions
actually paid were included pursuant to the foregoing clause (i), the Net Income
of any person accrued prior to the date it becomes a Subsidiary of such person
or any of its Subsidiaries or that person's assets are acquired by such person
or any of its Subsidiaries shall be excluded; (iii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not,
at the date of determination, permitted without any prior government approval
(which has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders; and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its Subsidiaries as of such date plus (ii) the respective amounts reported
on such Person's balance sheet as of such date with respect to any series of
preferred stock (other than Disqualified Stock), less all write-ups (other than
write-ups
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resulting from foreign currency translations and write-ups of assets of a going
concern business made in accordance with GAAP as a result of the acquisition of
such business) subsequent to the date of the Indenture in the book value of any
asset owned by such Person or a Subsidiary of such Person, and excluding the
cumulative effect of a change in accounting principles, all as determined in
accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors either pursuant to the Shareholders Agreement
or with the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Company has any
Obligation under the New Credit Facility, the Existing Paracelsus Credit
Facility and (ii) any other Senior Indebtedness of the Company permitted under
the Indenture and which at the time of determination has an aggregate amount
outstanding of at least $10.0 million and is specifically designated in the
instrument creating or evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is required to be
redeemed, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final Stated Maturity of the Notes.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock or securities convertible into Capital Stock
(but excluding any debt security that is convertible into, or exchangeable for
Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of original issuance of the Notes after giving effect to
the application of the proceeds from the sale thereof as shown on a schedule to
the Indenture until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum of
(i) the Consolidated Interest Expense of such Person and its Subsidiaries for
such period; (ii) any interest expense on Indebtedness of another Person that is
Guaranteed by the referent Person or one of its Subsidiaries or secured by a
Lien on assets of such Person or one of its Subsidiaries (whether or not such
Guarantee or Lien is called upon); and (iii) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person (other than
preferred stock that constitutes Indebtedness), times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
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"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements, interest rate floor agreements and interest rate collar agreements
and (ii) other agreements or arrangements designed to protect such person
against fluctuations in interest rates.
"HOSPITAL" means a hospital, outpatient clinic, long-term care facility,
hospice, psychiatric facility or other facility that is used or useful in the
provision of healthcare services or a Related Business.
"INDEBTEDNESS" of any Person means at any date, without duplication, (i) all
obligations of such person for borrowed money (including net overdrafts in any
bank not extinguished within three days); (ii) all obligations of such person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such person to pay the deferred price of property required to be
accrued on the balance sheet of such person, except accounts payable arising in
the ordinary course of business; (iv) all Capital Lease Obligations of such
person; (v) all Indebtedness of others secured by a Lien on any asset of such
person, whether or not such Indebtedness is assumed by such person (the amount
of such obligation being deemed to be the lesser of the value of the property or
assets or the amount of the obligation so secured); (vi) all Indebtedness of
others Guaranteed by such person; (vii) all obligations of such person to
reimburse the issuer of any letter of credit; (viii) Attributable Debt of such
person; (ix) preferred stock issued by a Subsidiary of such person; (x)
Disqualified Stock; and (xi) Hedging Obligations; PROVIDED, HOWEVER, that
"Indebtedness" does not include any obligations pursuant to receivables
financing which are not required under GAAP to be booked as liabilities on the
balance sheet of such Person.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees, made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest and
any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MERGER RELATED AGREEMENT" means each of the Dividend and Note Agreement,
the Shareholder Note, the Shareholder Agreement, the Paracelsus Shareholder
Registration Rights Agreement, the Champion Investors Registration Rights
Agreement, the Services Agreement, the Insurance Agreement and the Non-Compete
Agreement.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP excluding, however, any amount
representing the amortization of goodwill or other intangible assets arising
from acquisitions subsequent to the date of the Indenture and excluding any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Assets Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary or non-recurring gain (but not loss), together with
any related provision for taxes on such extraordinary gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the
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<PAGE>
sale or other disposition of any non-cash consideration received in any Asset
Sale), net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof, amounts required to be applied to the
repayment of Indebtedness (other than Senior Indebtedness) secured by a Lien on
the asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees, expenses,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means the ownership, leasing, operation or management
of Hospitals and Related Businesses.
"PERMITTED HOLDER" means any of the Principal, a Related Party of the
Principal and any person employed in the Company in a management capacity on the
date of this Indenture.
"PERMITTED JOINT VENTURE" means a Person (i) which owns, leases, operates or
services a Hospital or Related Business or manufactures or markets healthcare
products and (ii) of which the Company or any Subsidiary of the Company owns a
30% or greater equity interest.
"PERMITTED LIENS" means (i) Liens in favor of the Company; (ii) Liens on
property of a Person existing at the time such Person either is merged into or
consolidated with the Company or any Subsidiary of the Company or becomes a
Subsidiary of the Company, PROVIDED, that such Liens (x) were not incurred in
connection with, or in contemplation of, such merger, consolidation or becoming
a Subsidiary and (y) do not extend to any assets other than those of the Person
merged into or consolidated with the Company or such Subsidiary; (iii) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company; PROVIDED that such Liens were not incurred in
connection with, or in contemplation of, such acquisition and do not extend to
any assets of the Company or any of its Subsidiaries other than the property so
acquired; (iv) Liens to secure Existing Indebtedness; (v) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of like nature incurred in the ordinary course of business;
and (vi) Liens securing Indebtedness incurred to refinance Indebtedness that has
been secured by a Lien permitted under the Indenture; PROVIDED that (a) any such
Lien shall not extend to or cover any assets or property not securing the
Indebtedness so refinanced and (b) the refinancing Indebtedness secured by such
Lien shall have been permitted to be incurred under the covenant entitled
"Incurrence of Indebtedness."
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; PROVIDED that: (i) the
principal amount (or accrued value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount (or accrued value, if
applicable) of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of any prepayment premiums and any other
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date on or after the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to, the Notes on terms at least
as favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
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"PHYSICIAN SUPPORT OBLIGATION" means any obligation or guarantee to, or on
behalf of or for the benefit of any physician, pharmacist or other allied
healthcare professional pursuant to a written agreement incurred in the ordinary
course of business in connection with recruiting, redirecting or retaining such
physician, pharmacist or other allied healthcare professional to provide service
to patients in the service area of any Hospital or Related Business owned,
leased or operated by any Subsidiary of the Company or any Permitted Joint
Venture, but excluding actual compensation for services provided by such
physician, pharmacist or other allied healthcare professional to any Hospital or
Related Business owned, leased or operated by the Company or any of its
Subsidiaries or any Permitted Joint Venture.
"PRINCIPAL" means Dr. Manfred George Krukemeyer.
"PRO FORMA COVERAGE RATIO" means with respect to any person for any period,
the PRO FORMA ratio of the Consolidated Cash Flow of such person for such period
to the Fixed Charges of such person for such period. The Pro Forma Coverage
Ratio shall, as applicable, be calculated on the following basis:
(i) notwithstanding clause (ii) of the definition of Consolidated Net
Income, if the Indebtedness which is being created, incurred or assumed is
Acquired Debt, the Pro Forma Coverage Ratio shall be determined after giving
effect to both the Fixed Charges related to the creation, incurrence or
assumption of such Acquired Debt and the Consolidated Cash Flow (A) of the
person becoming a Subsidiary of such person or (B) in the case of an
acquisition of assets which constitute substantially all of an operating
unit or business, relating to the assets being acquired by such person;
(ii) notwithstanding the definition of Consolidated Net Income, in the
event the Company or any of its Subsidiaries has acquired assets from a
person during the four-quarter reference period and such assets have been
owned and operated by the Company for more than one fiscal quarter, the
Consolidated Cash Flow shall be computed on a pro forma basis assuming such
assets were acquired on the first day of the four-quarter reference period
based on actual performance of the assets during the period owned;
(iii) there shall be excluded from Fixed Charges any Fixed Charges
related to Indebtedness repaid during and subsequent to the four-quarter
reference period and which is not outstanding on the Calculation Date; and
(iv) The creation, incurrence or assumption of any Indebtedness during
the four-quarter reference period or subsequent hereto and prior to the
Calculation Date, and the application of the proceeds therefrom, shall be
assumed to have occurred on the first day of the fourth quarter reference
period.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or its
Subsidiaries secured by Liens (i) on property purchased, acquired or constructed
after the date of original issuance of the Notes and used in the ordinary course
of business by the Company and its Subsidiaries and (ii) securing the payment of
all or any part of the purchase price or construction cost of such assets and
limited to the property so acquired and improvements thereof.
"RELATED BUSINESS" means (i) a business affiliated with, or providing
services or financing to, a Hospital or related or ancillary to the ownership,
leasing, operation, financing or management of a Hospital or (ii) any business
related or ancillary to the provision of healthcare services or products.
"RELATED PARTY" with respect to the Principal means (A) any 80% (or more)
owned Subsidiary, or spouse or immediate family member of such Principal or (B)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A), or (C) any Person employed by the
Company in a management capacity as of the date of the Indenture.
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"SENIOR INDEBTEDNESS" means (i) Obligations under the New Credit Facility
permitted to be incurred pursuant to the Indenture and (ii) the principal of
(and premium, if any) and accrued and unpaid interest, whether existing on the
date of the Indenture or thereafter incurred, in respect of (A) indebtedness of
the Company for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other instruments of indebtedness for which the Company is
responsible or liable; (iii) all Capital Lease Obligations of the Company; (iv)
all obligations of the Company (A) for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction, (B) under
interest rate swaps, caps, collars, options or similar arrangements and foreign
currency hedges entered into in respect of any obligations described in clauses
(i), (ii) and (iii) immediately above and (c) issued or assumed as the deferred
purchase price of property or services and all conditional sale obligations and
all obligations under any title retention agreement; (v) all obligations of the
type referred to in clauses (ii), (iii) and (iv) immediately above and all
dividends of other persons for the payment of which, in either case, the Company
is responsible or liable as obligor, guarantor or otherwise; (vi) all
obligations consisting of modifications, renewals, extensions, replacements and
refundings of any obligations described in clause (i), (ii), (iii), (iv) or (v)
immediately above; and (vii) any other Indebtedness which by its terms or the
terms of any instrument creating it is designated as "Senior Indebtedness" or
senior in right of payment to the Notes. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness shall not include (1) any
Indebtedness as to which the terms of the instrument creating or evidencing the
same provide that such Indebtedness is not superior in right of payment to the
Notes, (2) any Indebtedness which is subordinated in right of payment in any
respect to any other Indebtedness of the Company, (3) Indebtedness evidenced by
the Notes, the Existing Senior Subordinated Notes and the Shareholder
Subordinated Note, (4) any Indebtedness owed to a Person when such Person is a
Subsidiary or any other Affiliate of the Company, (5) that portion of any
Indebtedness which is Incurred in violation of the Indenture and (6) any
liability for Federal, state, local or other taxes owed or owing by the Company.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulations S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof, is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment.
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DESCRIPTION OF THE NEW CREDIT FACILITY
In connection with the Merger and the Credit Facility Refinancing, the
Company currently intends to arrange for the New Credit Facility with Bank of
America NT&SA, as Administrative Agent, Banque Paribas, as Documentation Agent,
and NationsBank, as Managing Agent, and a syndicate of other lenders at or as
soon as practicable after the Effective Time. The New Credit Facility will
provide for borrowings of up to $400.0 million. Although the Merger is not
conditioned upon the closing of the Credit Facility Refinancing, Champion and
Paracelsus may be required to obtain certain consents and waivers under their
respective existing credit facilities in order to consummate the Merger if
neither the Credit Facility Refinancing nor the Notes Offering is consummated.
The failure to obtain such consents and waivers may be deemed to give rise to a
default thereunder and perhaps cause other defaults under the outstanding
obligations of Champion and Paracelsus. There can be no assurance that such
consents and waivers, if required, would be obtained. See "Risk Factors --
Significant Leverage."
The Company currently intends to refinance, through borrowings under the New
Credit Facility, all amounts outstanding under the Existing Paracelsus Credit
Facility, dated as of December 8, 1995, by and among the Company, Bank of
America NT&SA, as Lead Agent, NationsBank, as Co-Agent, and the other banks
named therein. At May 31, 1996, the balance outstanding under the Existing
Paracelsus Credit Facility was approximately $189.0 million.
The Company's obligations under the New Credit Facility would constitute
Senior Indebtedness with respect to the Notes, the Existing Senior Subordinated
Notes and any other subordinated debt of the Company outstanding at any time
after the consummation of the Credit Facility Refinancing. In addition,
borrowings under the New Credit Facility would be secured by a first priority
lien on the capital stock of most of the Company's significant subsidiaries. It
would have priority as to such collateral over the Existing Senior Subordinated
Notes and the New Senior Subordinated Notes. To the extent the New Credit
Facility will involve commitments for future loans, such commitments may be
conditioned on continued compliance by the Company with the terms of the loan
agreement and the absence of any material adverse change in the Company's
business. The Company expects that the New Credit Facility will include
covenants that prohibit or limit, among other things, the sale of assets, the
making of acquisitions and other investments, the incurrence of additional debt
and liens and the payment of dividends, and that require the Company to maintain
a minimum consolidated net worth and to comply with certain financial ratios
tests.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), BA Securities, Inc. and NationsBanc
Capital Markets, Inc. (together with DLJ, the "Underwriters"), each of the
Underwriters has severally agreed to purchase from the Company, and the Company
has agreed to sell to each of the Underwriters, the respective principal amounts
of the Notes set forth opposite its name below, at the public offering price set
forth on the cover page of the Prospectus, less the underwriting discount:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................................... $
BA Securities, Inc....................................................................
NationsBanc Capital Markets, Inc. ....................................................
----------------
$ 250,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the consummation of the
Merger. The Underwriting Agreement also provides that the Company will indemnify
the Underwriters and its controlling persons against certain liabilities and
expenses, including liabilities under the Securities Act. The nature of the
Underwriters' obligations is such that the Underwriters are committed to
purchase all of the Notes if any of the Notes are purchased by them.
The Underwriters have advised the Company that the Underwriters propose to
offer the Notes directly to the public initially at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
offering price less a concession not to exceed % of the principal amount of
the Notes. The Underwriters may allow, and such dealers may reallow, discounts
not in excess of % of the principal amount of the Notes to certain other
dealers. After the initial public offering of the Notes, the offering price and
other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to $25,000,000 aggregate
principal amount of additional Notes from the Company at the public offering
price, less underwriting discounts and commissions, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the Notes
offered hereby. To the extent that the Underwriters exercise such option, each
of the Underwriters will become obligated, subject to certain conditions, to
purchase the same proportion of such additional principal amount as the
principal amount set forth opposite such Underwriter's name in the above table
bears to $250,000,000 aggregate principal amount of Notes.
The Company does not intend to list the Notes on any national securities
exchange. The Company has been advised by the Underwriters that, following the
completion of the Notes Offering, the Underwriters presently intend to make a
market in the Notes as permitted by applicable laws and regulations. However,
the Underwriters are under no obligation to do so and may discontinue any market
making activities at any time at the sole discretion of the Underwriters. No
assurance can be given as to the liquidity of any trading market for the Notes.
Immediately after giving effect to the Merger, affiliates of DLJ will
beneficially own shares of Common Stock representing 5.1% of the issued and
outstanding Common Stock. In addition, DLJ and its affiliates are parties to the
Participants Agreement and hold in the aggregate approximately $5.2 million
aggregate principal amount of the Champion Series D Notes. DLJ is also acting as
the lead managing underwriter for the Equity Offering. DLJ has acted as
Champion's financial advisor in the Merger and has performed investment banking
and other services for Paracelsus in the past including acting as a lead manager
in the sale of $75.0 million of the Existing Senior Subordinated Notes in
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October 1993 and has received usual and customary fees for such services. In
addition, DLJ has performed investment banking and other services for Champion
in the past and has received usual and customary fees for such services.
BA Securities, Inc. ("BA Securities") and affiliates provide or have
provided banking, advisory and other financial services to Paracelsus or its
direct affiliates in the ordinary course of business for which BA Securities and
such affiliates have received usual and customary fees. In addition, BA
Partners, a division of BA Securities, was a financial advisor to Paracelsus in
connection with the Merger for which BA Partners received usual and customary
fees. Bank of America NT&SA, an affiliate of BA Securities, is the Lead Agent
and a lender in the Existing Paracelsus Credit Facility and will be the
Administrative Agent and a lender in the New Credit Facility. BA Securities
acted as an arranger for the Existing Paracelsus Credit Facility for which it
received customary fees and will act as an arranger for the New Credit Facility
for which it will receive customary fees. BankAmerica Investment Corporation,
which is an affiliate of BA Securities, is also the holder of $6.0 million
aggregate principal amount of Champion Series D Notes, approximately $4.0
million aggregate principal amount of Champion Series E Notes and 240,000 shares
of Paracelsus Common Stock to be received in connection with the Merger.
NationsBank, an affiliate of NationsBanc Capital Markets, Inc., is the
Co-Agent and a lender under the Existing Paracelsus Credit Facility, a lender
under the Champion Credit Facility and will be the Managing Agent and lender
under the New Credit Facility.
It is anticipated that more than 10% of the proceeds of the Notes Offering
will be received by lenders to Paracelsus and Champion that are affiliated with
members of the National Association of Securities Dealers, Inc. ("NASD")
participating in the Notes Offering. Accordingly, the Notes Offering is being
conducted pursuant to Rule 2710(c)(8) of the NASD Rules of Conduct. In
accordance with this provision, has agreed to act as
"qualified independent underwriter" and the yield at which the Notes are issued
will be not lower than that recommended by in compliance with
the requirements of Rule 2720(c)(3) of the NASD Rules of Conduct. In connection
with the Notes Offering, in its role as qualified independent
underwriter has performed due diligence investigations and reviewed and
participated in the preparations of this Prospectus.
VALIDITY OF NOTES
The validity of the Notes offered hereby will be passed upon for the Company
by Skadden, Arps, Slate, Meagher & Flom, Los Angeles. The validity of the Notes
offered hereby will be passed upon for the Underwriters by Sullivan & Cromwell,
Los Angeles. Sullivan & Cromwell also represented Champion in the Merger.
EXPERTS
The (i) consolidated balance sheet of Champion Healthcare Corporation as of
December 31, 1994 and 1995 and the consolidated statements of operations,
stockholders' equity and cash flows of Champion Healthcare Corporation for each
of the three years in the period ended December 31, 1995; (ii) the balance sheet
of Dakota Heartland Healthcare System as of December 31, 1994 and 1995 and the
statements of income, partners' equity, and cash flows of Dakota Heartland
Healthcare System for the year ended December 31, 1995; (iii) the balance sheet
of Jordan Valley Hospital as of September 30, 1995 and the statements of income
and changes in owner's equity and cash flows of Jordan Valley Hospital for the
period from January 1, 1995 through September 30, 1995; and (iv) the
consolidated balance sheets of Salt Lake Regional Medical Center as of May 31,
1994 and April 13, 1995 and the consolidated statements of income, equity, and
cash flows of Salt Lake Regional Medical Center for each of the two years in the
period ended May 31, 1994 and the period from June 1, 1994
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through April 13, 1995 included in this Prospectus and the Registration
Statement, have been included herein in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of Paracelsus Healthcare Corporation
as of September 30, 1994 and 1995 and for each of the three years in the period
ended September 30, 1995 and the combined financial statements of Davis Hospital
and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center as of
December 31, 1994 and 1995 and for the years then ended appearing in this
Prospectus and the Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their respective reports thereon
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed under the Securities Act with the Commission the
Registration Statement for the registration of the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Notes, reference is made
to the Registration Statement, including the exhibits thereto, and the financial
statement schedules filed as a part thereof. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document referred to
herein are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit, reference
is made thereto for a complete description thereof, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company and Champion are subject to the informational requirements of
the Exchange Act and, in accordance therewith, file reports, proxy statements
(in the case of Champion only) and other information with the Commission. Such
reports and other information filed with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also may be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material
may also be accessed electronically at the Commission's site on the World Wide
Web located at http://www.sec.gov.
The shares of Champion Common Stock are currently listed on the AMEX, and
such material may also be inspected at the offices of the AMEX, 86 Trinity
Place, New York, New York 10006. However, Champion has been approved for listing
on the NYSE under the symbol "CHC," subject to official notice of issuance.
Thus, it is anticipated that prior to the Effective Time Champion Common Stock
will be delisted from the AMEX and listed on the NYSE. Material relating to
Champion may after such time also be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005. After consummation of the Merger,
Champion will no longer file reports, proxy statements or other information with
the Commission. Instead, such information would be provided, to the extent
required, in filings made by the Company. In addition, the Common Stock has been
approved for listing on the NYSE upon consummation of the Merger under the
symbol "PLS," subject to official notice of issuance. Accordingly, after
consummation of the Merger such material may also be inspected at the offices of
the NYSE at 20 Broad Street, New York, New York 10005.
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Paracelsus Financial Statements as of and for the years ended September 30, 1993,
1994 and 1995
Report of Ernst & Young LLP Independent Auditors.................................. F-4
Consolidated Balance Sheets -- September 30, 1994 and 1995........................ F-5
Consolidated Statements of Income -- Years ended September 30, 1993, 1994 and
1995............................................................................. F-6
Consolidated Statements of Shareholder's Equity -- Years ended September 30, 1993,
1994 and 1995.................................................................... F-7
Consolidated Statements of Cash Flows -- Years ended September 30, 1993, 1994 and
1995............................................................................. F-8
Notes to Consolidated Financial Statements........................................ F-10
Paracelsus Financial Statements as of and for the Six Months ended March 31, 1995
and 1996 (unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1995 and March 31, 1996.... F-21
Consolidated Statements of Income (unaudited) -- Six Months ended March 31, 1995
and 1996......................................................................... F-22
Consolidated Statements of Cash Flows (unaudited) -- Six Months ended March 31,
1995 and 1996.................................................................... F-23
Notes to Unaudited Condensed Consolidated Financial Statements.................... F-24
Davis Hospital and Medical Center, Pioneer Valley Hospital, and Santa Rosa Medical
Center Combined Financial Statements as of and for the years ended December 31,
1994 and 1995
Report of Ernst & Young LLP Independent Auditors.................................. F-26
Combined Balance Sheets -- December 31, 1994 and 1995............................. F-27
Combined Statements of Income and Changes in Retained Earnings -- Years ended
December 31, 1994 and 1995....................................................... F-28
Combined Statements of Cash Flows -- Years ended December 31, 1994 and 1995....... F-29
Notes to Combined Financial Statements............................................ F-30
Davis Hospital and Medical Center, Pioneer Valley Hospital, and Santa Rosa Medical
Center Combined Financial Statements for the Three Months ended March 31, 1995 and
1996 (unaudited)
Unaudited Combined Balance Sheet -- March 31, 1996................................ F-34
Unaudited Combined Statements of Income and Changes in Retained Earnings -- Three
Months ended March 31, 1995 and 1996............................................. F-35
Unaudited Combined Statements of Cash Flows -- Three Months ended March 31, 1995
and 1996......................................................................... F-36
Champion Financial Statements as of and for the years ended December 31, 1993, 1994
and 1995
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-37
Consolidated Balance Sheet -- December 31, 1994 and 1995.......................... F-38
Consolidated Statement of Operations -- Years Ended December 31, 1993, 1994 and
1995............................................................................. F-39
Consolidated Statement of Stockholders' Equity -- Years Ended December 31, 1993,
1994 and 1995.................................................................... F-40
Consolidated Statement of Cash Flows -- Years Ended December 31, 1993, 1994 and
1995............................................................................. F-41
Notes to Consolidated Financial Statements........................................ F-42
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Dakota Heartland Health System Financial Statements as of December 31, 1994 and 1995
and for the year ended December 31, 1995
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-61
Balance Sheet -- December 31, 1994 and 1995....................................... F-62
Statement of Income -- Year Ended December 31, 1995............................... F-63
Statement of Partners' Equity -- Years Ended December 31, 1994 and 1995........... F-64
Statement of Cash Flows -- Year Ended December 31, 1995........................... F-65
Notes to Financial Statements..................................................... F-66
Jordan Valley Hospital Financial Statements as of September 30, 1995 and for the
period from January 1, 1995 through September 30, 1995
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-69
Balance Sheet -- September 30, 1995............................................... F-70
Statement of Income and Changes in Owners' Equity -- For the Period from January
1, 1995 through September 30, 1995............................................... F-71
Statement of Cash Flows -- For the Period from January 1, 1995 through September
30, 1995......................................................................... F-72
Notes to Financial Statements..................................................... F-73
Salt Lake Regional Medical Center Financial Statements as of and for the years ended
May 31, 1993 and 1994 and as of April 13, 1995 and for the period from June 1, 1994
through April 13, 1995
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-77
Consolidated Balance Sheets -- May 31, 1994 and April 13, 1995.................... F-78
Consolidated Statements of Income -- Years Ended May 31, 1993 and 1994 and for the
Period from June 1, 1994 through April 13, 1995.................................. F-79
Consolidated Statements of Equity -- Years Ended May 31, 1993 and 1994 and for the
Period from June 1, 1994 through April 13, 1995.................................. F-80
Consolidated Statements of Cash Flows -- Years Ended May 31, 1993 and 1994 and for
the Period from June 1, 1994 through April 13, 1995.............................. F-81
Notes to Consolidated Financial Statements........................................ F-82
Champion Financial Statements as of and for the Three Months ended March 31, 1995
and 1996 (Unaudited)
Unaudited Condensed Consolidated Balance Sheet -- December 31, 1995 and March 31,
1996............................................................................. F-89
Unaudited Condensed Consolidated Statement of Operations -- Three Months Ended
March 31, 1995 and 1996.......................................................... F-90
Unaudited Condensed Consolidated Statement of Cash Flows -- Three Months Ended
March 31, 1995 and 1996.......................................................... F-91
Notes to Condensed Consolidated Financial Statements.............................. F-92
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Fiscal Year Ended September 30, 1995................................... PF-2
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Six Months Ended March 31, 1995........................................ PF-3
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Six Months Ended March 31, 1996........................................ PF-4
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Balance Sheet --
March 31, 1996................................................................... PF-5
Notes to Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial
Statements....................................................................... PF-6
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Fiscal
Year Ended September 30, 1995.................................................... PF-14
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six
Months Ended March 31, 1995...................................................... PF-15
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six
Months Ended March 31, 1996...................................................... PF-16
Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet -- March 31,
1996............................................................................. PF-17
Notes to Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements.. PF-18
Champion Unaudited Pro Forma Condensed Combining Statement of Income and Unaudited
Historical Condensed Balance Sheet
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Year Ended
December 31, 1995................................................................ PF-23
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months
Ended March 31, 1995............................................................. PF-24
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months
Ended March 31, 1996............................................................. PF-25
Champion Unaudited Historical Condensed Balance Sheet -- March 31, 1996........... PF-26
Notes to Champion Unaudited Pro Forma Condensed Combining Statements of Income.... PF-27
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
Paracelsus Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Paracelsus
Healthcare Corporation and subsidiaries as of September 30, 1994 and 1995, and
the related consolidated statements of income, shareholder's equity and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paracelsus
Healthcare Corporation and subsidiaries at September 30, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, as of
October 1, 1994, the Company changed its method of accounting for marketable
securities.
ERNST & YOUNG LLP
Los Angeles, California
December 14, 1995
F-4
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 1,452,000 $ 2,949,000
Marketable securities (NOTE 5).............................................. 16,960,000 10,387,000
Accounts receivable, less allowance for uncollectible accounts and
contractual adjustments of $56,507,000 in 1994 and $56,958,000 in 1995
(NOTE 4)................................................................... 68,244,000 81,039,000
Notes and other receivables (NOTE 6)........................................ 9,287,000 12,502,000
Supplies.................................................................... 10,602,000 10,565,000
Deferred income taxes (NOTE 2).............................................. 17,420,000 16,485,000
Other current assets........................................................ 6,493,000 4,510,000
---------------- ----------------
Total current assets...................................................... 130,458,000 138,437,000
Property and equipment (NOTES 3 AND 10):
Land and improvements....................................................... 24,699,000 23,366,000
Buildings and improvements.................................................. 144,066,000 137,966,000
Equipment................................................................... 101,559,000 99,748,000
Construction in progress.................................................... 636,000 7,332,000
---------------- ----------------
270,960,000 268,412,000
Less accumulated depreciation and amortization.............................. 97,123,000 102,746,000
---------------- ----------------
173,837,000 165,666,000
Marketable securities (NOTE 5)................................................ -- 12,169,000
Other assets (NOTE 6)......................................................... 25,706,000 28,360,000
---------------- ----------------
Total assets.................................................................. $ 330,001,000 $ 344,632,000
---------------- ----------------
---------------- ----------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Bank drafts outstanding..................................................... $ 2,179,000 $ 4,991,000
Accounts payable and accrued expenses....................................... 22,640,000 27,384,000
Accrued wages and benefits.................................................. 27,863,000 28,354,000
Accrued interest............................................................ 3,845,000 3,877,000
Current maturities of long-term debt and
capital lease obligations.................................................. 5,269,000 8,658,000
Current portion of self-insurance reserves.................................. 5,802,000 4,792,000
---------------- ----------------
Total current liabilities................................................. 67,598,000 78,056,000
Long-term debt and capital lease obligations,
less current maturities (NOTE 3)............................................. 112,449,000 113,070,000
Self-insurance reserves, less current portion (NOTE 9)........................ 23,117,000 25,176,000
Deferred income taxes (NOTE 2)................................................ 29,108,000 23,255,000
Minority interests............................................................ 214,000 126,000
Commitments and contingencies (NOTE 8)........................................
Shareholder's equity:
Common stock, no stated value:
Authorized shares -- 1,000
Issued and outstanding shares -- 450...................................... 4,500,000 4,500,000
Additional paid-in capital.................................................. 390,000 390,000
Unrealized gains on marketable securities, net of taxes (NOTE 5)............ -- 137,000
Retained earnings........................................................... 92,625,000 99,922,000
---------------- ----------------
Total shareholder's equity................................................ 97,515,000 104,949,000
---------------- ----------------
Total liabilities and shareholder's equity.................................... $ 330,001,000 $ 344,632,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------------
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total operating revenues (NOTE 10).......................... $ 435,102,000 $ 507,864,000 $ 509,729,000
Costs and expenses:
Salaries and benefits..................................... 174,849,000 209,772,000 209,672,000
Supplies.................................................. 34,245,000 42,890,000 40,780,000
Purchased services........................................ 48,951,000 55,078,000 58,113,000
Provision for bad debts................................... 26,629,000 33,110,000 39,277,000
Other operating expenses.................................. 100,287,000 114,096,000 99,777,000
Depreciation and amortization............................. 14,587,000 16,565,000 17,276,000
Interest.................................................. 10,213,000 12,966,000 15,746,000
Restructuring and unusual charges (NOTE 11)............... -- -- 5,150,000
---------------- ---------------- ----------------
Total costs and expenses.................................... 409,761,000 484,477,000 485,791,000
---------------- ---------------- ----------------
Income before minority interests, income taxes and
extraordinary loss......................................... 25,341,000 23,387,000 23,938,000
Minority interests.......................................... (2,683,000) (2,517,000) (1,927,000)
---------------- ---------------- ----------------
Income before income taxes and extraordinary loss........... 22,658,000 20,870,000 22,011,000
Income taxes (NOTE 2)....................................... 10,196,000 8,567,000 9,024,000
---------------- ---------------- ----------------
Income before extraordinary loss............................ 12,462,000 12,303,000 12,987,000
Extraordinary loss (net of income tax benefit of $346,000)
(NOTE 3)................................................... -- (497,000) --
---------------- ---------------- ----------------
Net income.................................................. $ 12,462,000 $ 11,806,000 $ 12,987,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------------- ADDITIONAL GAINS ON
OUTSTANDING PAID-IN MARKETABLE RETAINED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
----------- ------------ ---------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1992........................... 450 $ 4,500,000 $ 390,000 $ -- $ 72,576,000 $ 77,466,000
Dividends to shareholder........ -- -- -- -- (1,214,000) (1,214,000)
Net income...................... -- -- -- -- 12,462,000 12,462,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1993........................... 450 4,500,000 390,000 -- 83,824,000 88,714,000
Dividends to shareholder........ -- -- -- (3,005,000) (3,005,000)
Net income...................... -- -- -- 11,806,000 11,806,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1994........................... 450 4,500,000 390,000 -- 92,625,000 97,515,000
Dividends to shareholder........ -- -- -- -- (5,690,000) (5,690,000)
Cumulative effect of a change in
accounting for marketable
securities, net of taxes....... -- -- -- (67,000) -- (67,000)
Change in unrealized gains on
marketable securities, net of
taxes.......................... -- -- -- 204,000 -- 204,000
Net income...................... -- -- -- 12,987,000 12,987,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1995........................... 450 $ 4,500,000 $ 390,000 $ 137,000 $ 99,922,000 $ 104,949,000
--- ------------ ---------- ----------- ------------- ---------------
--- ------------ ---------- ----------- ------------- ---------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------------
1993 1994 1995
-------------- ---------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 12,462,000 $ 11,806,000 $ 12,987,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 14,587,000 16,565,000 17,276,000
Gain from disposal of facilities............................ -- -- (9,026,000)
Deferred income taxes....................................... (3,399,000) (5,226,000) (4,989,000)
Extraordinary loss.......................................... -- 497,000 --
Minority interests.......................................... 2,683,000 2,517,000 1,927,000
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable....................................... 43,780,000 (9,028,000) (12,261,000)
Supplies and other current assets......................... (2,873,000) (2,368,000) 2,020,000
Notes and other receivables............................... (1,066,000) (2,519,000) (3,215,000)
Accounts payable and other current liabilities............ (1,897,000) 9,410,000 8,079,000
Income taxes payable...................................... (1,568,000) -- --
Self-insurance reserves..................................... 7,151,000 5,457,000 1,049,000
-------------- ---------------- --------------
Net cash provided by operating activities..................... 69,860,000 27,111,000 13,847,000
INVESTING ACTIVITIES
Purchase of available-for-sale securities..................... (8,631,000) (8,329,000) (5,527,000)
Maturities of held-to-maturity securities..................... -- -- 139,000
Acquisitions, net of cash acquired............................ (9,477,000) -- (3,010,000)
Proceeds from disposal of facilities.......................... -- 1,698,000 18,564,000
Additions to property and equipment........................... (14,676,000) (14,342,000) (15,835,000)
Decrease in minority interests................................ (2,752,000) (2,651,000) (2,015,000)
Increase in other assets...................................... (6,622,000) (12,691,000) (2,986,000)
-------------- ---------------- --------------
Net cash used in investing activities......................... (42,158,000) (36,315,000) (10,670,000)
FINANCING ACTIVITIES
Long-term borrowings.......................................... 59,452,000 125,410,000 55,003,000
Payments of long-term debt and capital lease obligations...... (85,509,000) (108,618,000) (50,993,000)
Payments of subordinated promissory note payable.............. -- (4,335,000) --
Dividends to shareholder...................................... (1,214,000) (3,005,000) (5,690,000)
-------------- ---------------- --------------
Net cash provided by (used in) financing activities........... (27,271,000) 9,452,000 (1,680,000)
-------------- ---------------- --------------
Increase in cash and cash equivalents......................... 431,000 248,000 1,497,000
Cash and cash equivalents at beginning of year................ 773,000 1,204,000 1,452,000
-------------- ---------------- --------------
Cash and cash equivalents at end of year...................... $ 1,204,000 $ 1,452,000 $ 2,949,000
-------------- ---------------- --------------
-------------- ---------------- --------------
</TABLE>
F-8
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------------------
1993 1994 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Details of unrealized gains on marketable securities:
Marketable securities............................................ $ -- $ -- $ 208,000
Deferred taxes................................................... -- -- 71,000
-------------- ------------- -------------
Increase in shareholder's equity................................. $ -- $ -- $ 137,000
-------------- ------------- -------------
-------------- ------------- -------------
Exchange of land and building.................................... $ -- $ 1,074,000 $ --
-------------- ------------- -------------
-------------- ------------- -------------
Leases capitalized............................................... $ -- $ 713,000 $ --
-------------- ------------- -------------
-------------- ------------- -------------
Details of businesses acquired in purchase transactions:
Fair value of assets acquired.................................... $ 22,225,000 $ -- $ 3,010,000
Liabilities assumed, including capital lease obligations and note
payable to bank................................................. 10,766,000 -- --
-------------- ------------- -------------
Cash paid for acquisitions....................................... 11,459,000 -- 3,010,000
Cash acquired in acquisitions.................................... 1,982,000 -- --
-------------- ------------- -------------
Net cash paid for acquisitions................................... $ 9,477,000 $ -- $ 3,010,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paracelsus Healthcare Corporation (the "Company") owns, leases and operates
22 acute care, psychiatric and specialty hospitals, four skilled nursing
facilities and 13 medical office buildings. In addition, the Company is a
partner in seven partnerships (six being general and one being limited
partnerships), with ownership equal to or in excess of 50% in five, and less
than 50% in two. In May 1994, the founder, Chairman of the Board and sole
shareholder of the Company passed away with ownership of the Company and the
role of Chairman of the Board succeeding to his son, Dr. Manfred George
Krukemeyer, who is a citizen of the Federal Republic of Germany.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned or majority owned subsidiaries and partnerships. All
significant intercompany transactions and balances are eliminated in
consolidation. Minority interests represent income allocated to the minority
partners' investment.
OPERATING REVENUES
Operating revenues include healthcare services provided to patients which
are reported on an accrual basis in the period in which the services are
provided at established rates, net of third-party reductions related to
contractual adjustments for Medicare, Medicaid, managed care and other programs.
Contractual adjustments totaled $307,868,000, $394,110,000 and $407,888,000, for
1993, 1994 and 1995, respectively.
Contractual adjustments include differences between established billing
rates and amounts estimated by management as reimbursable under various
fixed-price, cost reimbursement and other contractual arrangements. In addition,
other activities including investment earnings, gains on disposal of facilities
(see Note 10), rental income and income from partnerships, all of which are used
exclusively for healthcare-related services provided by the Company, are
considered operating revenues.
Normal estimation differences between final settlements and amounts
recognized in previous years are reported as contractual adjustments in the
current year. The administrative procedures for the cost-based programs preclude
final determination of the payments due or receivable until after the Company's
cost reports are audited or otherwise reviewed by and settled with the
respective program agencies. The Company's estimate for final settlements of all
years through 1995 has been reflected in the consolidated financial statements.
Approximately 57%, 60% and 63% of the Company's gross revenues are for services
to Medicare, Medicaid, and Blue Cross patients for 1993, 1994 and 1995,
respectively.
MARKETABLE SECURITIES
As of October 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting principle.
The adoption of SFAS No. 115 had no effect on net income, but decreased
marketable securities as of October 1, 1994, by $102,000, decreased
shareholder's equity by $67,000 and increased deferred tax assets by $35,000.
Management determines the appropriate classification of marketable
securities (corporate bonds and government securities) at the time of purchase.
Marketable securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
F-10
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Held-to-maturity securities are stated at amortized cost. Marketable securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholder's
equity. The Company also determined that available-for-sale securities are
available for use in current operations and, accordingly, classified such
securities as current assets without regard to the securities' contractual
maturity dates.
The amortized cost of marketable securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in operating revenues.
Realized gains and losses, and declines in value judged to be other-
than-temporary are included in operating revenues. The cost of securities sold
is based on the specific identification method.
SUPPLIES
Supplies consisting of drugs and other supplies are stated at cost
(first-in, first-out method) which is not in excess of market.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
respective assets.
ORGANIZATION AND OTHER COSTS
Organization, loan and other costs (included in other assets) have been
capitalized and are amortized over periods ranging from 24 to 480 months. The
balance of organization, loan, and other costs at September 30, 1994 and 1995,
amounted to $16,469,000 and $18,224,000, respectively. The related accumulated
amortization at September 30, 1994 and 1995, amounted to $5,766,000 and
$4,835,000, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The statement also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
on October 1, 1996, and, based on current circumstances, does not believe the
effect of the adoption will be material.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consists principally of investments in marketable
securities and commercial premiums receivable. The Company's investments in
marketable securities are managed by professional investment managers within
guidelines established by the Board of Directors, which, as a matter of policy,
limit the amounts which may be invested in any one issuer. Concentrations of
credit risk with respect to accounts receivable are limited since a majority of
the receivables are due from the Medicare and Medicaid programs. Management does
not believe that there are any credit risks associated with these governmental
agencies. Commercial insurance, managed care and private receivables consist of
receivables from various payors, subject to differing economic conditions, and
do not represent any concentrated credit risks to the Company. Furthermore,
management continually monitors and adjusts its reserves and allowances
associated with these receivables.
F-11
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with
original maturities of three months or less.
2. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal.......................... $ 10,664,000 $ 11,144,000 $ 11,018,000
State............................ 2,931,000 2,649,000 2,995,000
-------------- -------------- --------------
13,595,000 13,793,000 14,013,000
Deferred:
Federal.......................... (3,434,000) (4,080,000) (4,419,000)
State............................ 35,000 (1,146,000) (570,000)
-------------- -------------- --------------
(3,399,000) (5,226,000) (4,989,000)
-------------- -------------- --------------
$ 10,196,000 $ 8,567,000 $ 9,024,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
During 1992, the Company changed its method of reporting income for tax
purposes from the cash basis to accrual basis. Under the cash basis, the Company
deferred approximately $72,000,000 of taxable income for periods ending prior to
October 1, 1991. Of the amounts deferred, $14,431,000, $11,429,000 and
$11,794,000 were included in 1993, 1994 and 1995 taxable income, respectively.
The effect of the change in reporting has been to increase the Company's income
for tax purposes, consistent with federal and state regulations, through 1997.
F-12
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
2. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation............................................. $ 21,833,000 $ 21,083,000
Change in method of reporting taxable income......................... 9,960,000 3,765,000
Accrued malpractice claims........................................... (4,969,000) (3,839,000)
Unrealized gains on marketable securities............................ -- 71,000
Other -- net......................................................... 2,284,000 2,175,000
-------------- --------------
Total deferred tax liabilities..................................... 29,108,000 23,255,000
Deferred tax assets:
Change in method of reporting taxable income......................... (3,853,000) (5,487,000)
Accrued malpractice claims........................................... 1,079,000 717,000
Allowance for bad debts.............................................. 10,813,000 10,959,000
Accrued bonuses...................................................... 2,064,000 2,337,000
Accrued workers' compensation claims................................. 424,000 404,000
Accrued vacation pay................................................. 1,933,000 1,870,000
Accrued expenses..................................................... 4,960,000 5,685,000
-------------- --------------
Total deferred tax assets.......................................... 17,420,000 16,485,000
-------------- --------------
Net deferred tax liabilities....................................... $ 11,688,000 $ 6,770,000
-------------- --------------
-------------- --------------
</TABLE>
A reconciliation of the differences between federal income taxes computed at
the statutory rate and the total provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate................................. 34.8% 35.0% 35.0%
State taxes, net of federal income tax benefit......... 7.0% 6.0% 6.0%
Effect of federal income tax rate increase on prior
years deferred taxes.................................. 3.2% -- --
--- --- ---
Effective income tax rate............................ 45.0% 41.0% 41.0%
--- --- ---
--- --- ---
</TABLE>
The Company made income tax payments of $15,863,000, $14,787,000 and
$11,656,000 during 1993, 1994 and 1995, respectively.
F-13
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Note payable with banks, making available $125,000,000 under a
revolving credit facility, collateralized by 55% of the common
stock of the Company. The revolving facility is available for three
years for up to $125,000,000 (increased to $230,000,000 effective
December 8, 1995 -- see Note 13). Interest on each facility accrues
at a rate equal to the sum of (a) either the reference rate, an off
shore dollar rate or a CD rate (as selected by the Company) plus
(b) the applicable margin. The average interest rate at September
30, 1995, was 6.0% (See Note 8).................................... $ 22,000,000 $ 27,500,000
Senior subordinated notes, interest payable semiannually on April 15
and October 15 of each year at 9.875%, with a maturity date of
October 15, 2003................................................... 75,000,000 75,000,000
Mortgages payable, $56,000 due monthly through December 1998,
including interest from 9.5% to 12.5%, collateralized by trust
deeds on buildings and land with a net book value of $9,194,000 at
September 30, 1995................................................. 4,755,000 4,629,000
Note payable to bank, due in May 1996, interest at prime plus 1.0%
(9.75% at September 30, 1995), collateralized by the accounts
receivable of the facility......................................... 3,259,000 3,259,000
Note payable, due in varying amounts through 1996, at varying
interest rates..................................................... 511,000 505,000
Capital lease obligations........................................... 12,193,000 10,835,000
---------------- ----------------
117,718,000 121,728,000
Less current maturities............................................. 5,269,000 8,658,000
---------------- ----------------
$ 112,449,000 $ 113,070,000
---------------- ----------------
---------------- ----------------
</TABLE>
On October 17, 1993, the Company completed a $75,000,000 public offering of
9.875% Senior Subordinated Notes (the "Notes") due 2003. The Notes, which are
subordinated to all senior indebtedness of the Company, are redeemable at the
option of the Company beginning October 15, 1998, at 104.94% of face value,
declining annually to 100% of face value on or after October 15, 2000, or at the
option of the holder upon the occurrence of a change in control, as defined. The
net proceeds from the offering were used to repay the 14.375% Senior
Subordinated Notes of $18,650,000 at a redemption price of 102.05% plus accrued
interest, and the outstanding balance under the Credit Facility of $54,500,000.
The extinguishment of the 14.375% Senior Subordinated Notes resulted in a loss
of $497,000 (net of income tax benefit of $346,000) which was recorded as an
extraordinary loss in 1994.
The Company's interest rate swap agreement, which converted the variable
interest rate on a portion of its revolving credit facility to a fixed interest
rate, terminated during May 1994. The interest rate swap agreement fixed the
interest rate on $20,000,000 of its bank debt at 7.8%. Each
F-14
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
quarter the Company paid or received an amount equal to the difference between
the fixed interest rate and the LIBOR rate. Net interest payments of $400,000
were recognized as an adjustment to interest expense in 1994.
The credit facility and the senior subordinated notes require the Company,
among other things, to maintain specified financial ratios, and restrict the
sale, lease or disposal of its assets.
Maturities of long-term debt and principal payments under capital lease
obligations as of September 30, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- ----------------------------------------------------------------------------
<S> <C>
1996...................................................................... $ 8,658,000
1997...................................................................... 1,560,000
1998...................................................................... 1,409,000
1999...................................................................... 489,000
2000...................................................................... 330,000
Thereafter................................................................ 109,282,000
----------------
$ 121,728,000
----------------
----------------
</TABLE>
The Company made interest payments of $12,458,000, $9,988,000 and
$15,789,000 during 1993, 1994 and 1995, respectively.
Property and equipment includes $13,534,000 and $12,566,000 at September 30,
1994 and 1995, respectively, for leases that have been capitalized. The
amortization of these assets is included in depreciation expense.
Future minimum payments under capital lease obligations as of September 30,
1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- ----------------------------------------------------------------------------
<S> <C>
1996...................................................................... $ 2,193,000
1997...................................................................... 2,083,000
1998...................................................................... 1,880,000
1999...................................................................... 972,000
2000...................................................................... 780,000
Thereafter................................................................ 8,915,000
----------------
Total minimum lease payments.............................................. 16,823,000
Amounts representing interest............................................. 5,988,000
----------------
Present value of net minimum lease payments (including current maturities
of $1,371,000)........................................................... $ 10,835,000
----------------
----------------
</TABLE>
4. COMMERCIAL PAPER NOTES
During 1993, PHC Funding Corporation II, a subsidiary of the Company formed
in March 1993, entered into an agreement with an unaffiliated trust (the
"Trust") to sell the hospital's eligible accounts receivable ("Eligible
Receivables") on a nonrecourse basis to the Trust. A special purpose subsidiary
of a major lending institution agreed to provide up to $65,000,000 in commercial
paper financing to the Trust to finance the purchase of the Eligible Receivables
from PHC Funding Corporation II. Eligible Receivables held by the Trust secure
the commercial paper financing. The Commercial Paper Notes have a term of not
more than 120 days. Eligible receivables sold to the Trust at
F-15
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
4. COMMERCIAL PAPER NOTES (CONTINUED)
September 30, 1994 and 1995, totaled $65,000,000. Interest expense charged to
the Trust related to the commercial paper financing is passed through to the
Company and included as interest expense in the Company's consolidated financial
statements.
5. MARKETABLE SECURITIES
The following table summarizes marketable securities at September 30, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
Fixed maturity securities:
Corporate bonds.......................... $ 435,000 $ 16,000 $ -- $ 451,000
U.S. Government bonds...................... 1,098,000 60,000 -- 1,158,000
Mortgage-backed bonds...................... 984,000 16,000 -- 1,000,000
Obligations of states and political
subdivisions.............................. 7,662,000 128,000 12,000 7,778,000
-------------- ----------- ----------- --------------
$ 10,179,000 $ 220,000 $ 12,000 $ 10,387,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
Held-to-maturity securities:
Fixed maturity securities:
Corporate bonds.......................... $ 1,857,000 $ 62,000 $ -- $ 1,919,000
Mortgage-backed bonds...................... 10,312,000 -- 408,000 9,904,000
-------------- ----------- ----------- --------------
$ 12,169,000 $ 62,000 $ 408,000 $ 11,823,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
The maturity distribution of the Company's marketable securities at
September 30, 1995, is as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------ ------------------------------
ESTIMATED FAIR ESTIMATED FAIR
AMORTIZED COST VALUE AMORTIZED COST VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed maturities due:
After one through five years........ $ 4,977,000 $ 5,091,000 $ -- $ --
After five through ten years........ 4,217,000 4,296,000 -- --
After ten years..................... 985,000 1,000,000 12,169,000 11,823,000
-------------- -------------- -------------- --------------
$ 10,179,000 $ 10,387,000 $ 12,169,000 $ 11,823,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
During the year ended September 30, 1995, proceeds from maturities of
held-to-maturity securities totaled $139,000. There were no realized gains or
losses in 1995.
6. TRANSACTIONS BETWEEN SHAREHOLDER AND COMPANY
The Company has a Know-How contract with an affiliate in Germany owned by
the Shareholder. This contract provides for the transfer of certain specified
Know-How to the Company relating to the operation of healthcare facilities and
the healthcare industry in general. The contract limited payments to $400,000
per year, subject to annual revisions. On October 1, 1994, the Know-How contract
was amended to limit the Know-How payments to the lesser of 3/4 percent of the
Company's net operating revenue, as defined, or $400,000. Such payments totaled
$400,000 per year for 1993, 1994 and 1995. In addition, the Company reimbursed
the affiliate $147,000, $153,000 and $89,000 for other services during 1993,
1994 and 1995, respectively.
F-16
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
6. TRANSACTIONS BETWEEN SHAREHOLDER AND COMPANY (CONTINUED)
During November 1993, the Company paid in full the subordinated promissory
note payable to shareholder of $4,335,000. In addition, the Company loaned the
shareholder $3,200,000 at 8 percent interest due annually with the principal and
unpaid interest due November 1996. In May 1994, the shareholder loan was amended
to increase shareholder borrowings to $5,000,000. In addition, principal of
$1,000,000 and accrued interest are due annually beginning May 1, 1995. The
principal portion of the loan due after one year is included in other assets.
7. PENSION PLANS
The Company has an Employees' Retirement Savings Plan covering substantially
all employees. Eligible employees may contribute up to 20% of pretax
compensation limited to an annual maximum in accordance with the Internal
Revenue Code. The Company will match $.50 for each $1.00 of employee
contributions up to 4% of employees' gross pay. The expense incurred in
connection with the plan was $1,180,000, $1,512,000 and $1,592,000 for 1993,
1994 and 1995, respectively.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease commitments for noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30 REAL ESTATE EQUIPMENT TOTAL
- -------------------------------------------------------- -------------- ------------- --------------
<S> <C> <C> <C>
1996.................................................. $ 11,111,000 $ 2,684,000 $ 13,795,000
1997.................................................. 10,881,000 2,025,000 12,906,000
1998.................................................. 10,318,000 1,457,000 11,775,000
1999.................................................. 9,946,000 373,000 10,319,000
2000.................................................. 9,897,000 237,000 10,134,000
Thereafter............................................ 16,074,000 190,000 16,264,000
-------------- ------------- --------------
Total minimum lease payments.......................... $ 68,227,000 $ 6,966,000 $ 75,193,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
Certain of these leases include renewal options, contain normal cost
escalation clauses and require payment of property taxes, insurance and
maintenance costs. The aggregate rental expense was $11,911,000, $17,677,000 and
$19,234,000 for 1993, 1994 and 1995, respectively.
In August 1994, Dr. Krukemeyer borrowed $15,000,000 from a lending
institution (the "Lending Institution") and pledged 45 percent of his stock in
the Company to secure the borrowing. To facilitate Dr. Krukemeyer's arrangements
with the Lending Institution, the Company amended its $125,000,000 Revolving
Credit Facility Agreement (the "Credit Agreement" -- see Note 3) with certain
financial institutions (the "Financial Institutions") pursuant to which the
Financial Institutions agreed to release 45 percent of their collateral interest
in the Company's stock. In the event that either the Company defaults under the
Credit Agreement or Dr. Krukemeyer defaults under his obligation to the Lending
Institution, the Lending Institution would have the right to foreclose on its 45
percent collateral interest in the Company's stock.
In connection with the extension of credit to Dr. Krukemeyer by the Lending
Institution, the Company entered into agreements with the Lending Institution
agreeing to pay, to the extent permitted by the Credit Agreement and Indenture
governing the Company's outstanding 9.875 percent Senior Subordinated Notes due
2003, (i) transfer payments, such as dividends and Know-How payments to Dr.
Krukemeyer in an amount equal to 50 percent of the consolidated net income of
the Company and its subsidiaries on a quarterly basis, and (ii) salary and bonus
payments to Dr. Krukemeyer equal to a minimum of $2,000,000 per year.
F-17
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is defending itself against a lawsuit filed by Aetna Life
Insurance Company ("Aetna") alleging false diagnosis and billings submitted for
treatment of Aetna patients at the Company's psychiatric facilities. Management
denies these allegations and believes the ultimate resolution of the lawsuit
will not have a material adverse effect on the Company's consolidated financial
position.
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's facilities and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. Management
believes the ultimate resolution of the proceedings presently pending against
the Company will not have a material adverse effect on the Company's
consolidated financial position.
9. SELF-INSURANCE RESERVES
Effective October 1, 1992, the Company formed a wholly-owned subsidiary,
Hospital Assurance Company Ltd. ("HAC") to insure general and professional
liability and workers' compensation claims up to $500,000 and $250,000 per
occurrence, respectively. Between October 1, 1987 and the formation of HAC, the
Company was self-insured for the first $500,000 of general and professional
liability claims. The Company has third-party excess insurance coverage over the
first $500,000 per occurrence up to $100,000,000. Accrued self-insurance
reserves include estimates for reported and unreported claims based upon
actuarial projections. The general and professional liability reserves for 1993,
1994 and 1995, are discounted at 6.5%, 6.5% and 7.0%, respectively.
The excess insurance coverage provides for a retrospective adjustment to
premiums to cover losses incurred by the insurance company for all policy years.
This general premium adjustment is not to exceed 100% of the standard premium
for each individual policy year. The potential maximum general premium
adjustment for the period October 1, 1987, through September 30, 1995, is
$14,807,000. No general premium adjustment has been made through September 30,
1995, and no significant adjustment is anticipated based upon current claim
projections.
10. ACQUISITIONS AND DISPOSITIONS
On September 30, 1995, the Company sold Womans Hospital in Mississippi to
the facility's lessee for $17,800,000 in cash which resulted in a gain of
$9,189,000 (included in operating revenues). Previously, in August 1994, the
Company divested the operations of Womans Hospital and entered into an operating
lease agreement with the lessee which granted the lessee an option to purchase
the facility at a cash flow multiple defined in the lease agreement. Also, in
August 1994, the lessee purchased land and a medical office building from the
Company for approximately $1,000,000. In October 1993, the Company acquired the
land and medical office building along with cash of $698,000 in exchange for
land it held with a carrying value of $1,772,000.
On September 5, 1995, the Company acquired the real and personal property
assets, and inventory of Jackson County Hospital, a 44-bed acute facility in
Gainesboro, Tennessee, for $582,000 in cash. The Company is operating the
facility under the name of Cumberland River Hospital -- South.
During August 1995, the Company sold the real and personal property assets
and inventory of Advanced Healthcare Diagnostic Services, a mobile diagnostic
imaging company, for $764,000 in cash which resulted in a loss of $163,000
(included in operating revenues).
On August 1, 1995, the Company purchased the accounts receivable, equipment
and intangible assets of Keith Medical Group, an outpatient medical clinic
located in Hollywood, California, for $2,428,000.
F-18
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
10. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On June 30, 1994, the Company assumed an operating lease of the real and
personal property assets of a 60-bed rehabilitation hospital located in Chico,
California, and for approximately $400,000 acquired working capital and
equipment.
On August 31, 1993, the Company purchased the real and personal property
assets of Desert Palms Community Hospital in Palmdale, California for
approximately $4,500,000 in cash. The funds were borrowed from the Company's
credit facility.
On June 30, 1993, the Company executed an operating lease of the real
property assets of Halstead Hospital in Halstead, Kansas. The Company also
entered into a capital lease for the purchase of substantially all of the
personal property at a cost of $3,000,000. American Health Properties, a real
estate investment trust that invests primarily in acute care hospitals, is the
lessor under both the real property operating lease and the capital lease.
On March 1, 1993, the Company entered into an operating lease for the lease
of the real property assets of Elmwood Medical Center in Jefferson, Louisiana.
American Health Properties is also the lessor under the real property operating
lease. The Company also acquired substantially all the personal property at a
cost of $9,432,000, including the assumption of existing capital leases.
The following table summarizes the unaudited pro forma consolidated results
of the Company and its material acquisitions and dispositions as though the
acquisitions and dispositions occurred at the beginning of each of the periods
presented giving effect to investment earnings on the proceeds from the sale of
Womans Hospital, the conversion of the Womans real property operating lease to a
sale, and the amortization of the excess of the purchase price over the fair
value of assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred for the years ended September 30, 1994 and 1995, had the acquisitions
and dispositions occurred at the beginning of each period and is not intended to
be indicative of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Operating revenues.................................................. $ 501,702 $ 498,889
Income before income taxes and extraordinary loss................... 19,803 11,004
Income before extraordinary loss.................................... 11,674 6,493
</TABLE>
11. RESTRUCTURING AND UNUSUAL CHARGES
On April 24, 1995, the Company closed the Bellwood Health Center psychiatric
facility due to declining admissions. The facility's patients were transferred
to another of the Company's psychiatric facilities. Management is currently
evaluating the disposition of the physical plant. In connection with the
closure, the Company recorded a restructuring charge of $973,000 for employee
severance benefits and contract termination costs. In addition, during 1995, the
Company paid certain executives special bonuses of $4,177,000 for services
provided to the Company. The special bonuses were accounted for as an unusual
charge.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
F-19
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of the Company's financial instruments
at September 30 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 1,452,000 $ 1,452,000 $ 2,949,000 $ 2,949,000
Long-term debt:
9.875% senior subordinated notes.............. 75,000,000 73,626,000 75,000,000 79,440,000
Mortgages payable............................. 4,755,000 4,899,000 4,629,000 4,684,000
</TABLE>
The carrying amount of the Company's notes payable under revolving credit
facility were reasonable approximations of their fair value.
It was not practical to estimate the fair value of notes and other
receivables because of the lack of a quoted market price and the inability to
estimate fair value without incurring excessive costs. Management believes there
has been no impairment of the carrying value of notes and other receivables.
13. SUBSEQUENT EVENTS
On November 28, 1995, the Company entered into an Asset Exchange Agreement
and a Stock Purchase Agreement (the "Exchange Transaction") to acquire
substantially all of the assets and operations of Pioneer Valley Hospital
("Pioneer"), a 139-bed hospital located in West Valley City, Utah, Davis
Hospital and Medical Center, a 120-bed hospital located in Layton, Utah, and
Santa Rosa Medical Center, a 129-bed hospital located in Milton, Florida, in
exchange for $38,500,000 in cash, and its Peninsula Medical Center, a 119-bed
hospital located in Ormond Beach, Florida, Elmwood Medical Center ("Elmwood"), a
135-bed hospital located in Jefferson, Louisiana, and Halstead Hospital
("Halstead"), a 190-bed hospital located in Halstead, Kansas. Coincident with
the Exchange Transaction, the Company will purchase the real property of Elmwood
and Halstead from a real estate investment trust ("REIT") for $52,000,000,
exchange the Elmwood and Halstead real property for Pioneer's real property, and
sell the Pioneer real property to the REIT (the "Real Property Purchase and Sale
Transaction"). The Exchange Transaction and the Real Property Purchase and Sale
Transaction are expected to close in January 1996 and are not expected to result
in a material gain or loss.
On December 8, 1995, the Company entered into a new Credit Facility which
increased the Company's Credit Facility from $125,000,000 to $230,000,000. The
Credit Facility is being increased to finance future acquisitions, refinance the
existing Credit Facility borrowings and for general corporate purposes,
including working capital and capital expenditures. The new Credit Facility
contains pricing terms more favorable to the Company, will be secured by the
stock of the Paracelsus subsidiaries and extends the conversion feature to a
term loan on November 30, 1998.
F-20
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 2,949 $ 3,149
Marketable securities............................................................................. 10,387 10,051
Accounts receivable, net.......................................................................... 81,039 88,141
Notes and other receivables....................................................................... 12,502 11,980
Supplies.......................................................................................... 10,565 10,634
Deferred income taxes............................................................................. 16,485 26,463
Other current assets.............................................................................. 4,510 4,798
------------- -----------
Total current assets............................................................................ 138,437 155,216
Property and equipment.............................................................................. 268,412 275,577
Less accumulated depreciation and amortization...................................................... 102,746 109,848
------------- -----------
165,666 165,729
Marketable securities............................................................................... 12,169 14,606
Other assets........................................................................................ 28,360 32,665
------------- -----------
Total Assets.................................................................................... $344,632 $368,216
------------- -----------
------------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Bank drafts outstanding........................................................................... $ 4,991 $ 3,135
Accounts payable and other current liabilities.................................................... 59,615 68,627
Current maturities of long-term debt and capital lease obligations................................ 8,658 5,186
Current portion of self-insurance reserves........................................................ 4,792 4,853
------------- -----------
Total current liabilities....................................................................... 78,056 81,801
Long-term debt and capital lease obligations less current maturities................................ 113,070 139,475
Self-insurance reserves, less current portion....................................................... 25,176 25,827
Deferred income taxes............................................................................... 23,255 24,607
Minority interests.................................................................................. 126 141
Shareholder's equity:
Common stock...................................................................................... 4,500 4,500
Additional paid-in capital........................................................................ 390 390
Unrealized gains on marketable securities......................................................... 137 42
Retained earnings................................................................................. 99,922 91,433
------------- -----------
Total shareholder's equity...................................................................... 104,949 96,365
------------- -----------
Total liabilities and shareholder's equity...................................................... $344,632 $368,216
------------- -----------
------------- -----------
</TABLE>
Note: The balance sheet at September 30, 1995 has been derived from the audited
financial statements at that date and includes all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Total operating revenues................................................................ $ 252,356 $ 260,590
Costs and expenses:
Salaries and benefits................................................................. 108,575 113,162
Supplies.............................................................................. 21,432 19,363
Purchased services.................................................................... 28,118 34,174
Provision for bad debts............................................................... 19,283 20,191
Other operating expenses.............................................................. 46,730 46,906
Depreciation and amortization......................................................... 8,734 7,972
Interest expense...................................................................... 7,652 7,685
Settlement costs...................................................................... -- 22,356
----------- -----------
Total costs and expenses............................................................ 240,524 271,809
Income (loss) before minority interests and
income taxes........................................................................... 11,832 (11,219)
Minority interests...................................................................... (1,204) (1,072)
----------- -----------
Income (loss) before income taxes....................................................... 10,628 (12,291)
Provision for income taxes (benefit).................................................... 4,357 (5,040)
----------- -----------
Net income (loss)....................................................................... $ 6,271 $ (7,251)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
F-22
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................................ $ 6,271 $ (7,251)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.......................................................... 8,734 7,972
Deferred income taxes.................................................................. (2,931) (8,576)
Minority interests..................................................................... 1,204 1,072
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (7,608) (7,102)
Supplies and other current assets.................................................... 466 (357)
Notes and other receivables.......................................................... (129) 522
Bank drafts outstanding.............................................................. (342) (1,856)
Accounts payable and other current liabilities....................................... (3,445) 9,012
Self-insurance reserves.............................................................. 2,893 712
---------- ----------
Net cash (used in) provided by operating activities...................................... 5,113 (5,852)
INVESTING ACTIVITIES
Purchase of marketable securities........................................................ (2,470) (2,246)
Additions to property and equipment...................................................... (5,322) (7,123)
Decrease in minority interests........................................................... (1,250) (1,057)
Increase in other assets................................................................. (1,998) (5,217)
---------- ----------
Net cash used in investing activities.................................................... (11,040) (15,643)
FINANCING ACTIVITIES
Long-term borrowings..................................................................... 32,500 31,500
Payments of long-term debt and capital lease obligations................................. (24,278) (8,567)
Dividends to shareholder................................................................. (1,640) (1,238)
---------- ----------
Net cash provided by financing activities................................................ 6,582 21,695
---------- ----------
Increase in cash and cash equivalents.................................................... 655 200
Cash and cash equivalents at beginning of period......................................... 1,452 2,949
---------- ----------
Cash and cash equivalents at end of period............................................... $ 2,107 $ 3,149
---------- ----------
---------- ----------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes........................................................................... $ 5,977 $ 5,048
---------- ----------
---------- ----------
Interest............................................................................... $ 7,041 $ 7,534
---------- ----------
---------- ----------
DETAILS OF UNREALIZED (LOSSES) GAINS ON MARKETABLE SECURITIES:
Marketable securities.................................................................. 5 (145)
Deferred taxes......................................................................... 2 (50)
---------- ----------
Increase (decrease) in shareholder's equity.............................................. $ 3 $ (95)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
F-23
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein have
been prepared by Paracelsus Healthcare Corporation (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in December 1995. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2. MARKETABLE SECURITIES
On November 15, 1995, the FASB staff issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report, the
Company chose to reclassify securities from held-to-maturity to
available-for-sale. At the date of transfer the amortized cost of those
securities was $2,000,000 and the unrealized loss on those securities was
$13,000, which was included in shareholder's equity.
NOTE 3. CONTINGENCIES
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's facilities and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. Management
believes the ultimate resolution of the proceedings presently pending against
the Company(or any of its subsidiaries) will not have a material effect on the
Company's financial position, results of operations, or cash flows.
NOTE 4. ACQUISITIONS/CLOSURES
On April 11, 1996, the Company entered into an Asset Purchase Agreement to
acquire a 125-bed acute care hospital located in Salt Lake City, Utah and its
surrounding campus for approximately $70 million in cash. The transaction is
expected to close in May 1996.
On April 12, 1996, the Company entered into an Agreement and Plan of Merger
("the Merger Agreement") with Champion Healthcare Corporation ("Champion"). The
Merger Agreement provides for, among other things, the merger (the "Merger") of
PC Merger Sub., Inc. a newly organized wholly owned subsidiary of the Company,
with and into Champion. Prior to the effective date of the Merger, the Company's
Common Stock will be split. At the effective date of the Merger, the holders of
Champion Common Stock will receive one right, and the holders of Champion
Preferred Stock will receive two rights, to receive one share of the Company's
Common Stock. Following the Merger, the Company's sole shareholder will own
approximately 60 percent of the Company's Common Stock and the stockholders of
Champion will own approximately 40 percent of the Company's Common Stock. The
Merger must be approved by the Stockholders of Champion. Concurrent with the
Merger Agreement, the Company will enter into a Dividend and Note Agreement
which will provide a dividend
F-24
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 4. ACQUISITIONS/CLOSURES (CONTINUED)
distribution to the Company' sole shareholder, who will in turn loan to the
Company a portion of the proceeds from the dividend distribution. The Merger
will be accounted for using the purchase method of accounting and is expected to
close in August 1996.
On March 15, 1996 the Company closed Desert Palms Community Hospital, an
acute care hospital located in Palmdale, California.
On November 28, 1995, the Company entered into an Asset Exchange Agreement
and a Stock Purchase Agreement (the "Exchange Transaction") to acquire Pioneer
Valley Hospital Hospital ("Pioneer"), a 139-bed hospital located in West Valley
City, Utah, Davis Hospital and Medical Center, 120-bed hospital located in
Laydon, Utah, and Santa Rosa Medical Center, a 129-bed hospital located in
Milton, Florida, in exchange for $38,500,000 in cash, and its Peninsula Medical
Center, a 119-bed hospital located in Ormond Beach, Florida, Elmwood Medical
Center ("Elmwood"), a 135-bed hospital located in Jefferson, Louisiana, and
Halstead Hospital ("Halstead"), a 190-bed hospital located in Halstead, Kansas.
Coincident with the Exchange Transaction, the Company will purchase the real
property of Elmwood and Halstead from a real estate investment trust ("REIT"),
exchange the Elmwood and Halstead real property for Pioneer's real property, and
sell the Pioneer real property to the REIT (the "Real Property Purchase and Sale
Transaction"). The Exchange Transaction and the Real Property Purchase and Sale
Transaction are expected to close in May 1996 and are not expected to result in
a material gain or loss.
NOTE 5. SETTLEMENT COSTS
During March 1996, the Company settled two lawsuits in connection with the
operation of its psychiatric programs. The Company recognized a charge for
settlement costs totaling $22,356,000 in the quarter ended March 31, 1996, for
the payment of legal fees associated with these two lawsuits, the settlement
payments, and the write off of certain psychiatric accounts receivables. The
Company did not admit liability in either case but resolved its dispute through
the settlements in order to re-establish a business relationship and/or avoid
further legal costs in connection with the disputes.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Davis Hospital and Medical Center
Pioneer Valley Hospital and
Santa Rosa Medical Center
We have audited the accompanying combined balance sheets of Davis Hospital and
Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center (the
"Hospitals") (all of which are wholly owned subsidiaries of Columbia/HCA
Healthcare Corporation) as of December 31, 1994 and 1995, and the related
statements of income and changes in retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Hospitals' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Davis Hospital and
Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center at
December 31, 1994 and 1995, and the combined results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
May 17, 1996
F-26
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................................... $ 456 $ 656
Accounts receivable, less allowance for doubtful accounts of $4,554 in 1994 and $6,641 in
1995.................................................................................... 14,494 13,658
Inventories.............................................................................. 1,933 2,243
Prepaid expenses and other............................................................... 614 1,088
--------- ---------
Total current assets....................................................................... 17,497 17,645
Property, plant and equipment, less accumulated depreciation............................... 50,723 49,215
Prepaid lease.............................................................................. 5,101 6,864
Leasehold value, less accumulated amortization of $2,209 in 1994 and $2,498 in 1995........ 3,191 2,902
Other assets............................................................................... 4,206 4,264
--------- ---------
Total assets............................................................................... $ 80,718 $ 80,890
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities........................................... $ 7,056 $ 7,356
Intercompany liabilities................................................................... 44,765 40,266
Shareholder's equity:
Common stock, Class B, $1 par value - 3,000 shares authorized and issued................. 3 3
Additional paid in capital............................................................... 8,259 8,259
Retained earnings........................................................................ 20,635 25,006
--------- ---------
Total shareholder's equity................................................................. 28,897 33,268
--------- ---------
Total liabilities and shareholder's equity................................................. $ 80,718 $ 80,890
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-27
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED STATEMENTS OF INCOME AND
CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total operating revenues................................................................. $ 99,096 $ 105,307
Costs and expenses:
Salaries, wages, and benefits.......................................................... 35,370 39,088
Supplies............................................................................... 13,452 14,680
Purchased services..................................................................... 9,368 10,158
Other operating expenses............................................................... 11,486 12,376
Provision for doubtful accounts........................................................ 6,019 7,515
Depreciation and amortization.......................................................... 6,154 5,570
Interest expense....................................................................... 3,835 3,280
Management fees........................................................................ 1,984 5,400
--------- -----------
Total costs and expenses................................................................. 87,668 98,067
--------- -----------
Income before income taxes............................................................... 11,428 7,240
Income taxes............................................................................. 4,514 2,869
--------- -----------
Net income............................................................................... 6,914 4,371
Retained earnings at beginning of year................................................... 13,721 20,635
--------- -----------
Retained earnings at end of year......................................................... $ 20,635 $ 25,006
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................. $ 6,914 $ 4,371
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 6,154 5,570
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (388) 836
Prepaid expenses, inventory and other current assets.................................... (183) (784)
Accounts payable and other liabilities.................................................. 201 300
--------- ---------
Net cash provided by operating activities................................................... 12,698 10,293
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment.................................................. (5,883) (4,171)
Disposals of property, plant and equipment.................................................. 53 109
(Increase) decrease in net leasehold value and other long-term assets....................... 1,170 (1,532)
--------- ---------
Net cash used in investing activities....................................................... (4,660) (5,594)
CASH FLOWS FROM FINANCING ACTIVITIES
Net transfers to Columbia................................................................... (7,583) (4,499)
--------- ---------
Increase in cash............................................................................ 455 200
Cash at beginning of year................................................................... 1 456
--------- ---------
Cash at end of year......................................................................... $ 456 $ 656
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest payments......................................................................... $ 3,835 $ 3,280
Income tax payments....................................................................... 4,514 2,869
Significant noncash transaction:
Prepayment of lease through intercompany balances......................................... -- 2,000
</TABLE>
See accompanying notes.
F-29
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION
Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa
Medical Center (the "Hospitals") are indirect wholly owned subsidiaries of
Columbia/HCA Healthcare Corporation ("Columbia"). The Hospitals provide health
care services to patients in and around their respective communities in Utah
(Davis Hospital and Medical Center and Pioneer Valley Hospital) and Florida
(Santa Rosa Medical Center). The Hospitals receive payment for patient services
from the federal government primarily under the Medicare program, state programs
under their respective Medicaid programs, health maintenance organizations,
preferred provider organizations and other private insurers and directly from
patients.
In connection with a Federal Trade Commission consent order resulting from
Columbia's merger with Health Trust, Inc. ("HTI"), Columbia agreed to sell the
Hospitals to Paracelsus Healthcare Corporation ("Paracelsus"). The Hospitals and
related entities were exchanged for three Paracelsus hospitals and related
entities as well as an additional cash payment as defined by the agreement. The
transaction closed on May 16, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF COMBINATION
The combined financial statements presented herein will be referred to for
the years ended December 31, but will include the financial statements of Davis
Hospital and Pioneer Valley Hospital for the years ended December 31, and Santa
Rosa Medical Center for the years ended August 31.
OPERATING REVENUES AND RECEIVABLES
Operating revenues are based on established billing rates less allowances
and discounts for patients covered by Medicare, Medicaid and various other
discount arrangements. Payments received under these programs and arrangements,
which are based on either predetermined rates or the cost of services, are
generally less than the Hospital's customary charges, and the differences are
recorded as contractual adjustments or policy discounts at the time service is
rendered. These contractual adjustments totaled $49,738,000 and $56,580,000 for
1994 and 1995, respectively.
Normal estimation differences between final settlements and amounts
recognized in previous years are reported as contractual adjustments in the
current year. The administrative procedures for cost-based programs preclude
final determination of the payments due or receivable until after the Hospitals'
cost reports are audited or otherwise reviewed by and settled with the
respective program agencies. The Hospitals' estimate for final settlements of
all years through 1995 has been reflected in the combined financial statements.
F-30
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Patient revenues under the Medicare and Medicaid programs amounted to
approximately 43% and 40% of total patient revenues in 1994 and 1995,
respectively. The Hospitals do not believe that there are any credit risks
associated with receivables due from governmental agencies. Concentrations of
credit risk from other payors is limited by the number of patients and payors.
INTERCOMPANY LIABILITIES
Intercompany liabilities represent, in part, the net excess of funds
transferred to or paid on behalf of the Hospitals over funds transferred to the
centralized cash management account of Columbia. Generally, this balance is
increased by automatic cash transfers from the account to reimburse the
Hospitals' bank accounts for operating expenses and to pay the Hospitals' debt,
completed construction project additions, fees and services provided by Columbia
and other operating expenses, such as payroll, interest, insurance, and income
taxes. Generally, the balance is decreased through daily cash deposits by the
Hospitals to the account. Management fees represent an allocation of home office
and regional expenses of Columbia.
At December 31, 1994 and 1995, intercompany balances also include certain
long-term debt balances amounting to $33,553,000 and $29,616,000, respectively,
which were allocated to the Hospitals by Columbia. All principal and interest
payments on the debt allocated from Columbia are made by the Hospitals through
Columbia. The Hospitals were charged interest on the allocated debt at rates
ranging from 11.9% to 10% during 1994 and 1995.
INVENTORIES
Inventories consisting of drugs and other supplies are stated at cost
(first-in, first-out method) which is not in excess of market.
PROPERTY AND EQUIPMENT
Depreciation is computed by the straight-line method over the estimated
useful life of the assets. Depreciation rates for buildings and improvements are
equivalent to useful lives ranging generally from 10 to 20 years. Estimated
useful lives of equipment vary generally from 4 to 10 years.
INCOME TAXES
Columbia files consolidated federal and state income tax returns which
include the accounts of the Hospitals. The provision for income taxes is
determined utilizing maximum federal and state statutory rates applied to income
before income taxes adjusted for certain items which are not deductible. Income
tax benefits or liabilities are reflected in the intercompany liabilities. All
income tax payments are made by the Hospitals through Columbia.
GENERAL AND PROFESSIONAL LIABILITY RISKS
Columbia assumes the liability for all general and professional liability
claims incurred and maintains the related reserve; accordingly, no reserve for
liability risks is recorded on the accompanying combined balance sheets. Prior
to April 24, 1995, Columbia maintained self-insurance coverage for general and
professional liability risks of the Hospitals. Davis Hospital and Medical Center
maintained reserves for general and professional liability risk up to certain
deductible limits during 1994.
F-31
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Costs attributable to the Hospitals were allocated based on actuarially
determined estimates. Effective April 24, 1995, the cost of general and
professional liability coverage were allocated by Columbia's captive insurance
company to the Hospitals based on actuarially determined estimates. The cost for
1994 and 1995 was approximately $1,046,000 and $1,137,000, respectively.
The Hospitals participate in a self-insured program for workers'
compensation and health insurance administered by Columbia. The cost, based on
the Hospitals' experience, was approximately $1,798,000 and $2,826,000 for 1994
and 1995, respectively.
LITIGATION AND OTHER MATTERS
The Hospitals are subject to claims and suits arising in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material effect on the Hospitals'
financial position, results of operations or cash flows.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements.................................................. $ 1,831 $ 1,824
Buildings and improvements............................................. 39,825 40,507
Equipment.............................................................. 41,938 45,957
--------- ---------
83,594 88,288
Less accumulated depreciation.......................................... 34,493 39,363
--------- ---------
49,101 48,925
Construction in progress............................................... 1,622 290
--------- ---------
$ 50,723 $ 49,215
--------- ---------
--------- ---------
</TABLE>
4. RETIREMENT PLANS
The Hospitals participate in Columbia's defined contribution retirement
plans, which cover substantially all employees. Benefits are determined
primarily as a percentage of a participant's earned income. Retirement expense
was approximately $1,676,000 in 1994 and $1,293,000 in 1995.
5. LEASES
Operating lease rental expense relating primarily to the rental of buildings
and equipment was approximately $2,662,000 and $3,367,000 in 1994 and 1995,
respectively.
F-32
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
5. LEASES (CONTINUED)
Future minimum rental commitments under noncancelable operating leases (with
an initial or remaining term in excess of one year) at December 31, 1995, are as
follows (in thousands):
<TABLE>
<CAPTION>
1996........................................ $ 3,133
<S> <C>
1997........................................ 3,069
1998........................................ 3,048
1999........................................ 2,666
2000........................................ 1,774
Thereafter.................................. 9,098
---------
Total minimum rental commitments............ $ 22,788
---------
---------
</TABLE>
6. PREPAID LEASE
Santa Rosa Medical Center is party to a prepaid lease agreement with Santa
Rosa County to lease certain real property and improvements. Effective September
1, 1994, the initial 20-year lease term, scheduled to terminate in the year
2005, was extended to the year 2025 for $2,000,000. In connection with the lease
extension, Santa Rosa Medical Center agreed to make capital improvements through
December 31, 2004, aggregating not less than $5,000,000.
Leasehold value in the accompanying combined balance sheets represents the
difference between market rent and contract rent, discounted to present value
over the initial lease term, at the date of acquisition of the Hospital by HTI.
Leasehold value is being amortized over the remaining initial lease term on a
straight-line basis.
7. AFFILIATED COMPANIES
The Hospitals incur expenses for management services provided by Columbia.
Due to the related nature of these entities, the amounts paid may not have been
the same if similar activities had been undertaken with unrelated parties.
F-33
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash........................................................................ $ 206
Accounts receivable, less allowance for doubtful accounts................... 15,664
Inventories................................................................. 2,019
Prepaid expenses and other.................................................. 1,040
--------------
Total current assets.......................................................... 18,929
Property, plant and equipment, less accumulated depreciation.................. 47,561
Prepaid lease................................................................. 5,961
Leasehold value, less accumulated amortization................................ 2,757
Other assets.................................................................. 4,063
--------------
Total assets.................................................................. $ 79,271
--------------
--------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities.............................. $ 8,750
Intercompany liabilities...................................................... 36,324
Shareholder's equity:
Common stock, Class B, $1 par value -- 3,000 shares authorized and issued... 3
Additional paid in capital.................................................. 8,259
Retained earnings........................................................... 25,935
--------------
Total shareholder's equity.................................................... 34,197
--------------
Total liabilities and shareholder's equity.................................... $ 79,271
--------------
--------------
</TABLE>
See accompanying notes.
F-34
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED STATEMENTS OF INCOME AND
CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total operating revenues................................................................... $ 26,861 $ 28,075
Costs and expenses:
Salaries, wages, and benefits............................................................ 9,712 10,658
Supplies................................................................................. 3,862 3,980
Purchased services....................................................................... 2,232 2,908
Other operating expenses................................................................. 3,190 3,202
Provision for doubtful accounts.......................................................... 1,495 1,777
Depreciation and amortization............................................................ 1,568 1,581
Interest expense......................................................................... 854 576
Management fees.......................................................................... 583 1,857
--------- ---------
Total costs and expenses................................................................... 23,496 26,539
--------- ---------
Income before income taxes................................................................. 3,365 1,536
Income taxes............................................................................... 1,329 607
--------- ---------
Net income................................................................................. 2,036 929
Retained earnings at beginning of period................................................... 20,635 25,006
--------- ---------
Retained earnings at end of period......................................................... $ 22,671 $ 25,935
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-35
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................................. $ 2,036 $ 929
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 1,568 1,581
Changes in operating assets and liabilities:
Accounts receivable.................................................................... (1,842) (2,006)
Prepaid expenses and inventories....................................................... (322) 272
Accounts payable and other current liabilities......................................... 114 1,394
--------- ---------
Net cash provided by operating activities.................................................. 1,554 2,170
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment................................................. (950) --
Disposals of property, plant and equipment................................................. -- 73
Decrease in net leasehold value and other long term assets................................. (750) 1,249
--------- ---------
Net cash used in investing activities...................................................... (1,700) 1,322
CASH FLOWS FROM FINANCING ACTIVITIES
Net transfers (to) from Columbia........................................................... 58 (3,942)
--------- ---------
Increase in cash........................................................................... (88) (450)
Cash at beginning of period................................................................ 456 656
--------- ---------
Cash at end of period...................................................................... $ 368 $ 206
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid during the period for:
Interest payments........................................................................ $ 854 $ 576
Income tax payments...................................................................... 1,329 607
</TABLE>
See accompanying notes.
F-36
<PAGE>
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 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 27, 1996
F-37
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 48,424 $ 7,583
Restricted cash........................................................................ 5,000 --
Accounts receivable, less allowance for doubtful accounts of $4,959 and $10,118 in 1994
and 1995, respectively................................................................ 17,115 33,262
Supplies inventory..................................................................... 1,942 3,470
Prepaid expenses and other current assets.............................................. 4,899 6,264
---------- ----------
Total current assets................................................................... 77,380 50,579
Property and equipment:
Land................................................................................... 4,510 6,418
Buildings and improvements............................................................. 48,888 115,688
Equipment.............................................................................. 25,016 42,343
Construction in progress............................................................... 8,839 4,666
---------- ----------
Total property and equipment......................................................... 87,253 169,115
Less allowances for depreciation and amortization...................................... 5,340 10,733
---------- ----------
Total property and equipment, net.................................................... 81,913 158,382
Investment in Dakota Heartland Health System............................................. 40,088 48,145
Goodwill, net of accumulated amortization of $37 and
$1,051 in 1994 and 1995, respectively................................................... 5,947 20,933
Intangible assets, net of accumulated amortization of $1,647 and
$2,052 in 1994 and 1995, respectively................................................... 5,718 7,438
Other assets............................................................................. 5,507 5,783
---------- ----------
Total assets......................................................................... $ 216,553 $ 291,260
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................................... $ 4,221 $ 1,166
Current portion of capital lease obligations........................................... 560 1,301
Accounts payable....................................................................... 10,637 13,952
Due to third parties................................................................... 2,241 8,829
Accrued and other liabilities.......................................................... 8,446 15,490
---------- ----------
Total current liabilities............................................................ 26,105 40,738
Long-term debt........................................................................... 102,626 159,670
Capital lease obligations................................................................ 2,658 2,777
Other long-term liabilities.............................................................. 11,037 10,177
Commitments and contingencies (Notes 3 and 13)
Redeemable preferred stock............................................................... 76,294 46,029
Common stock, $.01 par value:
Authorized - 25,000,000 shares, 4,223,975 and 11,868,230 shares issued and outstanding
in 1994 and 1995, respectively........................................................ 42 119
Common stock subscribed, 100,000 and 80,000 shares in 1994 and 1995, respectively........ 50 40
Common stock subscription receivable..................................................... (50) (40)
Paid in capital.......................................................................... 15,998 47,643
Accumulated deficit...................................................................... (18,207) (15,893)
---------- ----------
Total liabilities and stockholders' equity........................................... $ 216,553 $ 291,260
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net patient service revenue................................................ $ 86,728 $ 99,613 $ 163,500
Other revenue.............................................................. 3,104 4,580 4,020
----------- ----------- -----------
Net revenue............................................................ 89,832 104,193 167,520
Expenses:
Salaries and benefits.................................................... 36,698 41,042 72,188
Supplies................................................................. 11,641 12,744 21,113
Other operating expenses................................................. 24,033 29,767 44,594
Provision for bad debts.................................................. 5,669 7,812 12,016
Interest................................................................. 2,725 6,375 13,618
Depreciation and amortization............................................ 3,524 4,010 9,290
Equity in earnings of Dakota Heartland Health System..................... -- -- (8,881)
Asset write-down......................................................... 15,456 -- --
----------- ----------- -----------
Total expenses......................................................... 99,746 101,750 163,938
----------- ----------- -----------
Income (loss) before income taxes and extraordinary items................ (9,914) 2,443 3,582
Provision for income taxes................................................. 1,009 200 150
----------- ----------- -----------
Income (loss) before extraordinary items................................. (10,923) 2,243 3,432
Extraordinary items:
Loss on early extinguishment of debt, net of tax benefit of $634 for
1993.................................................................... (1,230) -- (1,118)
----------- ----------- -----------
Net income (loss)........................................................ $ (12,153) $ 2,243 $ 2,314
----------- ----------- -----------
----------- ----------- -----------
Loss applicable to common stock.......................................... $ (13,805) $ (2,467) $ (9,017)
----------- ----------- -----------
----------- ----------- -----------
Loss per common share:
Loss before extraordinary items.......................................... $ (11.21) $ (1.69) $ (1.86)
Extraordinary items...................................................... (1.10) -- (0.26)
----------- ----------- -----------
Loss per common share.................................................. $ (12.31) $ (1.69) $ (2.12)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL
-------------------------- ---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SUBSCRIBED RECEIVABLE CAPITAL DEFICIT
------------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1993........... 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)
Preferred stock dividends accrued,
including accretion of issuance
costs................................ (5,982)
Dividends declared pursuant to the
Recapitalization..................... (5,349)
Issuance of warrants.................. 668
Exercise of options/stock
subscriptions........................ 38,411 1 (10) 10 108
Shares issued pursuant to the
Recapitalization, net of issuance
costs................................ 7,605,844 76 42,200
Net income............................ 2,314
------------- ----- --- --- ----------- ------------
BALANCES AT DECEMBER 31, 1995......... 11,868,230 $ 119 $ 40 $ (40) $ 47,643 $ (15,893)
------------- ----- --- --- ----------- ------------
------------- ----- --- --- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income (loss).......................................................... $ (12,153) $ 2,243 $ 2,314
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary loss, net.................................................. 1,230 -- 1,118
Equity in earnings of Dakota Heartland Health System,
net of distributions.................................................... -- -- (8,056)
Depreciation and amortization............................................ 3,524 4,010 9,290
Deferred income taxes.................................................... (1,171) 1,600 --
Provision for bad debts.................................................. 5,669 7,812 12,016
Asset write-down......................................................... 15,456 -- --
Changes in operating assets and liabilities,
excluding acquisitions:
Accounts receivable.................................................... (6,842) (9,088) (14,864)
Supplies inventory..................................................... (446) (264) 144
Prepaid expenses and other current assets.............................. (169) (4,154) 2,103
Other assets........................................................... (1,654) (908) (3,210)
Accounts payable, income taxes payable and other accrued liabilities... 1,935 (1,968) 12,037
----------- ---------- ----------
Net cash provided by (used in) operating activities.................. 5,379 (717) 12,892
----------- ---------- ----------
Investing activities:
Purchase of facilities................................................... (5,813) -- (59,810)
Net payment for investment in partnership................................ -- (20,000) (2,000)
Cash acquired in acquisitions............................................ -- 4,341 361
Additions to property and equipment...................................... (4,726) (12,561) (42,822)
Proceeds from sales of property and equipment............................ -- -- 1,704
Investment in note receivable............................................ -- (757) (2,524)
----------- ---------- ----------
Net cash used in investing activities................................ (10,539) (28,977) (105,091)
----------- ---------- ----------
Financing activities:
Proceeds from issuance of long-term obligations.......................... 63,091 19,133 143,532
Payments related to issuance of long-term debt obligations and other
financing costs......................................................... (2,396) -- (3,927)
Payments on long-term obligations........................................ (28,516) (2,300) (94,715)
Payments on obligations assumed through acquisitions..................... -- (10,911) --
Proceeds from issuance of redeemable preferred stock and stock
warrants................................................................ 34,345 11,223 793
Payments related to preferred and common stock issuance.................. (882) -- (38)
Cash restricted under collateral agreement............................... -- (5,713) --
Cash released under collateral agreement................................. -- -- 5,713
----------- ---------- ----------
Net cash provided by financing activities............................ 65,642 11,432 51,358
----------- ---------- ----------
(Decrease) increase in cash and cash equivalents..................... 60,482 (18,262) (40,841)
Cash and cash equivalents at beginning of year............................. 6,204 66,686 48,424
----------- ---------- ----------
Cash and cash equivalents at end of year................................... $ 66,686 $ 48,424 $ 7,583
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATIONAL BACKGROUND
Champion Healthcare Corporation (the "Company"), a Delaware corporation, is
engaged in the ownership and management of general acute care and specialty
hospitals and related health care facilities. At December 31, 1995, including
hospital partnerships, the Company owns and/or operates seven acute care
hospitals, two psychiatric hospitals and a skilled nursing facility. See Note 16
"Subsequent Events" for a discussion of recent acquisition activity.
Including hospital partnerships, the seven general acute care hospitals
owned and/or operated by the Company provide a range of medical and surgical
services typically available in general acute care hospitals. These services
include inpatient care such as intensive and cardiac care, diagnostic services,
radiological services and emergency services. All of the hospitals provide an
extensive range of outpatient services, including ambulatory surgery, laboratory
and radiology. The Company's two psychiatric hospitals provide child, adolescent
and adult comprehensive psychiatric and chemical dependency treatment programs,
with inpatient, day hospital, outpatient and other ambulatory care.
Effective December 31, 1995, the Company and its preferred shareholders
entered into the 1995 Recapitalization Agreement to reduce the complexity of the
Company's capital structure and eliminate the accrual of future dividends on its
outstanding preferred stock and the resulting impact on earnings per share. As a
result of the Recapitalization Agreement, common shares outstanding increased
from 4,262,386 to 11,868,230 and preferred shares outstanding decreased from
10,452,370 to 2,605,714. The transactions comprising the 1995 Recapitalization
Agreement are herein collectively referred to as the "Recapitalization." See
Note 8 "Stockholders' Equity" for a discussion of the terms of the
Recapitalization.
NOTE 2. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of net revenue and expenses during the
period. Actual results could differ from those estimates. The most significant
areas which require the use of management's estimates relate to the
determination of estimated third-party payor settlements, allowance for
uncollectable accounts receivable, income tax valuation allowance and reserves
for professional liability risk.
NET PATIENT SERVICE REVENUE
The Company's facilities have entered into agreements with third-party
payors, including US government programs and managed care health plans, under
which the Company is paid based upon established charges, cost of services
provided, 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
F-42
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Medicare and Medicaid programs are generally less than billed charges.
Provisions for contractual adjustments are made to reduce charges to these
patients to estimated receipts based upon each program's principle of
payment/reimbursement (either prospectively determined or retrospectively
determined costs). Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. In management's opinion,
adequate allowance has been provided for possible adjustments that might result
from final settlements under these programs. Allowance for contractual
adjustments under these programs are deducted from accounts receivable in the
accompanying consolidated balance sheet.
OTHER REVENUE
Other revenue includes income from non-patient hospital activities such as
cafeteria sales and interest income, among others.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments,
primarily US 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.
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")
on January 1, 1995. All investments accounted for under SFAS No. 115 are
classified as available-for-sale, and the implementation of this statement had
no impact on net income.
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 uncollectable are charged against that allowance.
SUPPLIES INVENTORY
Inventory consists primarily 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 assets over their estimated useful lives ranging from 3
to 40 years.
F-43
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents costs in excess of net assets acquired and is amortized
on a straight line basis over a period of 20 years. Intangible assets consist of
deferred financing costs, non-compete agreements and various other intangible
assets. Deferred financing costs are amortized on a straight-line basis over the
term of the applicable debt. Costs related to non-compete agreements and other
intangibles are amortized on a straight-line basis over two to five years.
Amortization expense for 1993, 1994 and 1995 was approximately $1,209,000,
$1,000,000, and $2,724,000, of which approximately $139,000, $395,000, and
$845,000 relate to deferred financing costs.
CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
Through December 31, 1995, the Company reflected accumulated unpaid and
undeclared dividends on its 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. Pursuant to the
Recapitalization, all accrued preferred dividends at December 31, 1995
(approximately $12,614,000) were paid by the issuance of common stock at an
agreed price of $7.00 per share. Additionally, the holders of Series C and D
preferred stock have waived all dividends accruing after December 31, 1995. See
Note 8 "Stockholders' Equity" for a discussion of the terms of the
Recapitalization.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. 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.
LOSS PER SHARE
Loss per common and common equivalent share amounts are calculated by
dividing loss 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, and assuming the exercise, when dilutive, 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. Common stock
equivalents and other potentially dilutive securities have not been considered
because their effect was antidilutive in all years. Weighted average shares
outstanding used to determine earnings per common and common equivalent share
were 1,122,000, 1,457,000, and 4,255,000 in 1993, 1994 and 1995, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year financial statements
to conform to the 1995 presentation. These reclassifications had no effect on
the results of operations previously reported.
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 does not believe that the adoption of this statement
will have a material effect on its financial statements.
F-44
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. Entities will be allowed to
measure compensation expense for stock-based compensation under SFAS 123 or APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to
account for such compensation under APB Opinion No. 25 will be required to make
pro forma disclosures of net income and earnings per share as if SFAS 123 had
been applied. The Company is presently evaluating which alternative it will
adopt under SFAS 123 and has not yet quantified the potential impact on the
Company of adopting this new standard.
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS
PHYSICIANS AND SURGEONS HOSPITAL
The Company acquired Physicians and Surgeons Hospital in Midland, Texas on
May 1, 1993 for approximately $5,800,000 in cash and the assumption of
$1,200,000 in debt. The acquisition was accounted for as a purchase transaction
with operations reflected in the consolidated financial statements beginning May
1, 1993. The Company replaced P&S in the fourth quarter of 1995 with the newly
constructed 101 bed Westwood Medical Center. Total construction cost for the new
facility was approximately $39,017,000.
PSYCHIATRIC HEALTHCARE CORPORATION
On October 21, 1994, the Company acquired Psychiatric Healthcare 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 sale at the date of acquisition. The net purchase price,
including contingent consideration of $2,000,000 paid in 1995 and the assumption
of long term debt, was approximately $24,600,000. The Company paid no cash to
PHC shareholders. Total consideration paid by the Company consisted of the
assumption of approximately $14,880,000 in long-term debt and the issuance of
the following securities to PHC shareholders: (i) 264,306 shares of Series D
preferred stock, (ii) $7,123,000 of 11% Senior Subordinated Notes with 213,690
detachable warrants to acquire common stock and (iii) options, which were
subsequently exercised, to acquire an additional 7,561 shares of Series D
Preferred Stock and $202,000 principal amount of 11% Senior Subordinated Notes
with 6,060 detachable warrants. The payment of contingent consideration had been
subject to the Company's receipt of up to $2,000,000 from a combination of the
sale of the Sherman, Texas facility, a recovery from a lawsuit and certain
specified Medicaid payments. All conditions for the payment of contingent
consideration were substantially met in 1995, including the sale of Sherman
Hospital for approximately $1,300,000 in March 1995. The acquisition was
accounted for as a purchase transaction with operations reflected in the
consolidated financial statements effective October 1, 1994. 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.
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
F-45
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
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, (c) issued
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) issued 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 $38,876,000. The acquisition was accounted for as a
purchase transaction with operations reflected in the consolidated financial
statements effective December 1, 1994. The Company has completed its analysis of
the assets acquired and liabilities assumed and has allocated approximately
$8,946,000 in excess purchase price to goodwill, which is currently being
amortized over a 20 year period.
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 DHHS to cover any and all operating
deficits of DHHS. 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. As of
December 31, 1995, the Company has received $825,000 in cash distributions from
DHHS.
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 and Dakota members. Because the partners through the partnership
agreement have delegated substantially all management of the partnership to the
Company through the operating agreement, the authority of the Governing Board is
limited.
Beginning July 1996, 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 Dakota's pro rata share of earnings before depreciation, interest,
income taxes and amortization, as defined in the partnership agreement, less
Dakota's pro-rata share of the partnership's long-term debt. DHHS had earnings
F-46
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
before depreciation, interest, income taxes and amortization of approximately
$19,000,000 for the year ended December 31, 1995. Beginning January 1998, 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 has 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 certain financial information of DHHS as of December
31, 1994 and 1995, and for the year ended December 31, 1995 (dollars in
thousands). DHHS began operations on December 31, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenue.......................................... $ 106,011
Net income........................................... 16,148
Company's equity in the earnings of DHHS............. 8,881
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets....................................... $ 28,220 $ 39,008
Non-current assets................................... 44,298 55,854
Current liabilities.................................. 12,212 19,980
Non-current liabilities.............................. 129 57
Partners' equity..................................... 60,177 74,825
</TABLE>
SALT LAKE REGIONAL MEDICAL CENTER
On April 13, 1995, the Company acquired Salt Lake Regional Medical Center
("SLRMC") from Columbia/HCA Healthcare Corporation ("Columbia"). SLRMC is
comprised of a 200 bed tertiary care hospital and five clinics and is located in
Salt Lake City, Utah. Total acquisition cost for SLRMC was approximately
$61,042,000, which consisted of approximately $56,816,000 in cash and additional
consideration due to Columbia of approximately $1,767,000, as well as the
assumption of approximately $2,459,000 in capital lease obligations. Cash
consideration included approximately $11,783,000 for certain working capital
components, resulting in a net purchase price of approximately $49,259,000. The
Company funded the asset purchase from available cash and approximately
$30,000,000 in borrowings under its then outstanding credit facility. The
acquisition was accounted for as a purchase transaction with operations
reflected in the consolidated financial statements beginning April 14, 1995.
JORDAN VALLEY HOSPITAL
On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan")
from Columbia. Jordan is a 50 bed acute care hospital located in West Jordan,
Utah, a suburb of Salt Lake City. The Company acquired Jordan 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
preliminary cash consideration paid to the seller of approximately $10,750,000,
which included approximately $3,750,000 for certain net working capital
components, subject to adjustment, and reimbursement of certain capital
expenditures made previously by the seller. The transaction did not result in a
gain or loss. The Alabama facilities were acquired as part of the Company's
acquisition of AmeriHealth, Inc. on December 6, 1994.
F-47
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following selected unaudited pro forma financial information for the
years ended December 31, 1994 and 1995 assumes that the acquisition of SLRMC
occurred on January 1, 1994. The selected unaudited pro forma financial
information for the year ended December 31, 1994, assumes that the acquisitions
of AHH and PHC, and the formation of the DHHS partnership occurred on January 1,
1994. 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 1995
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenue......................................................... $ 195,915 $ 189,540
----------- -----------
----------- -----------
Equity in earnings of DHHS.......................................... $ 5,443 $ 8,881
----------- -----------
----------- -----------
Income (loss) before extraordinary item............................. $ (3,198) $ 3,999
----------- -----------
----------- -----------
Net income (loss)................................................... $ (3,198) $ 2,881
----------- -----------
----------- -----------
Loss applicable to common stock..................................... $ (8,196) $ (8,450)
----------- -----------
----------- -----------
Loss per common share before extraordinary item..................... $ (1.94) $ (1.72)
----------- -----------
----------- -----------
Loss per common share............................................... $ (1.94) $ (1.99)
----------- -----------
----------- -----------
Weighted average number of common shares outstanding................ 4,224 4,255
----------- -----------
----------- -----------
</TABLE>
NOTE 4. ASSET WRITE-DOWN
In December 1993, the Company ceased providing medical services at Gulf
Coast Hospital ("GCH"), one of two Company-owned hospitals located 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 the 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.
NOTE 5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following at December 31,
1994 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Accrued salaries and wages.............................................. $ 1,303 $ 3,851
Accrued vacation........................................................ 1,148 2,516
Accrued interest........................................................ 1,256 3,156
Other................................................................... 4,739 5,967
--------- ---------
Total accrued and other liabilities................................... $ 8,446 $ 15,490
--------- ---------
--------- ---------
</TABLE>
F-48
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1994 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Revolving Loan................................................................ $ 47,700
Term Loan..................................................................... $ 18,500 --
11% Senior Subordinated Notes (face amount of $99,089, net of a discount of
$642 at December 31, 1995)................................................... 62,703 98,447
Health Care REIT, Inc......................................................... 12,770 11,120
Wilmington Savings Fund Society............................................... 9,766 --
Other notes payable........................................................... 3,108 3,569
----------- -----------
Total debt.................................................................. 106,847 160,836
Less current portion.......................................................... (4,221) (1,166)
----------- -----------
Total long-term debt...................................................... $ 102,626 $ 159,670
----------- -----------
----------- -----------
</TABLE>
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")
maturing on December 31, 2003. The Notes bear interest at an annual effective
rate of 11.35% (11% stated rate). Interest is payable quarterly, and the stated
rate increases from 11% to 11.5% on March 31, 1996. The Notes include detachable
warrants for the purchase of 525,000 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 principal amount at December 31, 1995, to par at
December 31, 2002. Additionally, there is a requirement to repurchase all
outstanding Notes in the event of a change in control of the Company, at the
holder's option, 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.
On May 31, 1995, the Company refinanced and paid a $50,000,000 term and
revolving credit facility ("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 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. The interest rates on the Revolving Loan
and old credit facility were 8.85% and 9.12%, respectively, at December 31, 1995
and 1994. The Company currently has approximately $649,000 outstanding under
letters of credit. Proceeds from the refinancing were used to pay 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 payment) and December 31, 1994, respectively. With the
exception of certain assets collateralizing debt assumed in the Company's 1994
acquisition of PHC, 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
F-49
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
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 payment of its old credit
facility, the Company wrote off unamortized deferred financing costs of
$1,118,000, which had no tax effect. This amount has been recorded as an
extraordinary loss in the accompanying consolidated statement of operations. The
Company also prepaid the WSFS Loan with no material financial impact.
On December 30, 1994, pursuant to commitments obtained from the original
purchasers of the 11% Senior Subordinated Notes issued on December 31, 1993, the
Company issued an additional $19,133,000 of Notes with detachable warrants for
the purchase of 573,990 shares of common stock. No value was allocated to the
warrants at the time of issuance because the interest rate on the Notes was
considered a market rate and the exercise price was greater than the estimated
fair value of the common stock. The Notes bear interest at an effective annual
rate of 11%. All other terms of the Notes are substantially the same as those
discussed above.
In connection with the Company's acquisition of PHC, the Company issued
approximately $7,123,000 principal amount of Notes, and assumed approximately
$12,970,000 of mortgage financing on the PHC facilities, $257,000 in capitalized
leases, $159,000 in notes payable and a working capital credit facility with a
balance of approximately $1,494,000, which was repaid from available cash of the
Company and PHC. The Notes bear interest at an effective annual rate of 11%. All
other terms of the Notes are substantially the same as those discussed above.
The mortgage notes are payable to Health Care REIT, Inc. and bear interest
at an annual rate that increases yearly from 13.44% at December 31, 1995, to
15.4% at November 1, 2001. Thereafter, the mortgage bears interest at an annual
rate equal to the seven year US Treasuries rate plus 500 basis points.
Approximately $10,125,000 principal balance of the mortgage matures on December
1, 2008, with principal payments on that portion commencing in December 1995,
based on 25 year amortization. The remaining balance of the mortgage requires
quarterly principal payments of $200,000 through 1997. The Company sold the
Sherman, Texas facility for approximately $1,300,000 on March 22, 1995. 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 is now
collateralized by the Company's hospital in Alexandria, Louisiana.
Other notes payable bear interest at rates ranging from 5.1% to 11.8% and
are generally collateralized by the underlying assets to which they relate.
On November 5, 1993, the Company refinanced its subsidiary term and
revolving credit loans obtained in August 1991, with a $50,000,000 credit
facility comprised of a $20,000,000 term loan and a $30,000,000 revolving credit
facility (collectively, the "old credit facility," as referred to above). In
connection with the refinancing, 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.
The Company capitalized approximately $1,462,000 and $294,000 in interest
costs associated with the construction of a hospital and other medical related
facilities at December 31, 1995 and 1994, respectively. The Company had no
capitalized interest for the year ended December 31, 1993.
The Revolving Loan, Notes and Mortgages referenced above contain restrictive
covenants which include, among others, restrictions on additional indebtedness,
the payment of dividends and other
F-50
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
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 1995.
Maturities of debt as of December 31, 1995, were as follows (dollars in
thousands):
<TABLE>
<S> <C>
1996............................................................. $ 1,166
1997............................................................. 2,514
1998............................................................. 885
1999............................................................. 47,785
2000............................................................. 79
Thereafter....................................................... 108,407
---------
$ 160,836
---------
---------
</TABLE>
NOTE 7. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consisted of the following at December 31, 1994
and 1995 (See Note 8 "Stockholders' Equity" for a discussion of the effect of
the Recapitalization on the outstanding series of preferred stock):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Series D - Cumulative convertible redeemable preferred stock, $.01 par, 2,200,000 shares
authorized; 2,105,258 and 2,156,903 shares issued and outstanding at December 31, 1994 and
1995, respectively ($39,787 and $38,824 liquidation value in 1994 and 1995,
respectively)............................................................................. $ 38,754 $ 37,982
Series C - Cumulative convertible redeemable preferred stock, $.01 par, 500,000 shares
authorized; 448,811 shares issued and outstanding at December 31, 1994 and 1995 ($8,778
and $8,079 liquidation value in 1994 and 1995, respectively).............................. 8,740 8,047
Series BB - Cumulative convertible redeemable preferred stock, $.01 par; 1,577,547 shares
issued and outstanding at December 31, 1994............................................... 21,551 --
Series A-1 - Cumulative convertible redeemable preferred stock, $.01 par; 2,769,109 shares
issued and outstanding at December 31, 1994............................................... 3,206 --
Series A - Cumulative convertible redeemable preferred stock, $.01 par; 3,500,000 shares
issued and outstanding at December 31, 1994............................................... 4,043 --
--------- ---------
$ 76,294 $ 46,029
--------- ---------
--------- ---------
</TABLE>
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. Redemption of Series D shares will occur only on the redemption date
of June 1, 2000, at the redemption price of $18.00 per share. If all outstanding
shares of Series D and Series C can not be redeemed at the same time, then
redemption of such shares will be prorated with preference given to Series D, as
defined. Series D shares are entitled to liquidation payments of $18.00 per
share. If the Company is unable to pay fully the Series D and Series C
stockholders, then liquidation of such shares will be prorated with preference
given to
F-51
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED)
Series D, as defined. Series D will participate in any dividends declared on
common stock on an as converted basis. At December 31, 1995, the Series D shares
were convertible into 4,313,806 shares of common stock.
The Company issued 51,645 shares of Series D preferred stock to PHC
shareholders in 1995 pursuant to the exercise of options and the issuance of
contingent consideration due under the terms of the PHC purchase agreement. On
October 21, 1994, the Company issued 212,661 shares of Series D preferred stock
to PHC shareholders in connection with its acquisition of PHC. 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 December 30, 1994, issuance were $11,222,000.
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. Redemption of Series C
shares will occur only on the redemption date of June 1, 2000, at the redemption
price of $18.00 per share. Series C will participate in any dividends declared
on common stock on an as converted basis. If all outstanding shares of Series D
and Series C can not be redeemed at the same time, then redemption of such
shares will be prorated with preference given to Series D, as defined. Series C
shares are entitled to liquidation payments of $18.00 per share. If the Company
is unable to pay fully the Series D and Series C stockholders, then liquidation
of such shares will be prorated with preference given to Series D, as defined.
At December 31, 1995, Series C shares were convertible into 897,622 shares of
common stock.
The Company has the right to convert all or any shares of Series D and C
into common stock 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 not less than $10.00 per share.
VOTING RIGHTS FOR SERIES C AND D PREFERRED STOCK. Series C and D preferred
stock have voting rights on all matters according to the number of common shares
into which each Series 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 and liquidation requires the
following approvals by the then outstanding class or classes: (1) 75% of Series
C voting together as a class, and (2) 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 C and D preferred stock shall occur without the following approvals by
the then outstanding class or classes: (1) 90% of Series C voting together as a
class and (2) 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.
Pursuant to the Recapitalization, all outstanding shares Series A, A-1, and
BB preferred stock, under their existing terms, were converted into common stock
at December 31, 1995, along with all accrued dividends as of December 31, 1995.
In total, including additional consideration for the actions taken pursuant to
the Recapitalization, the holders of Series A, A-1, and BB preferred stock
received 5,889,523 shares of common stock. See Note 8 "Stockholders' Equity" for
a discussion of the terms of the Recapitalization.
F-52
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES BB
The Series BB cumulative convertible redeemable preferred stock ("Series
BB") was convertible, at the holder's option, into common stock at a price of
$5.90 per share until redemption date and were mandatorily redeemable on June
30, 2000, at $11.80 per share plus any accrued and unpaid dividends. Dividends
had accrued at a rate of 8% of the stated value of $11.80 per share and were
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.
SERIES A-1
Series A-1 cumulative convertible redeemable preferred stock ("Series A-1")
was 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.
Series A-1 shares were 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). Dividends on Series A-1 accrued at a rate of $.08
per share per annum. Dividends were payable in common stock and/or cash in the
event of a change of control, as define, 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. The Series A-1 preferred
stockholders were entitled to 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 such amounts were not available for payment by the
Company. Liquidation payments were subject to the prior liquidation rights of
the Series BB through D preferred stockholders.
SERIES A
Series A cumulative convertible redeemable preferred stock ("Series A") was
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.
F-53
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED STOCK
The changes in redeemable preferred stock for the years ended December 31,
1993, 1994 and 1995 were as follows (dollars in thousands, except share data):
<TABLE>
<CAPTION>
SERIES D SERIES C SERIES BB
------------------ ------------------ --------------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
--------- ------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.......................... 1,287,597 $ 15,272
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
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1993........................ 1,269,144 22,008 448,811 8,089 1,577,547 19,995
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
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1994........................ 2,105,258 38,754 448,811 8,740 1,577,547 21,551
Issuance of preferred stock -- Series D........... 51,645 930
Preferred dividends accrued, including accretion
of issuance costs................................ 3,222 653 1,559
Dividends declared pursuant to the
Recapitalization................................. 3,610 751 739
Recapitalization.................................. (8,534) (2,097) (1,577,547) (23,849)
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1995........................ 2,156,903 $37,982 448,811 $ 8,047 -- $ --
--------- ------- --------- ------- ---------- --------
--------- ------- --------- ------- ---------- --------
<CAPTION>
SERIES A-1 SERIES A
------------------- -------------------
SHARES AMOUNTS SHARES AMOUNTS
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.......................... 2,769,109 $2,876 3,500,000 $3,598
Exercise of stock warrants........................
Issuance of preferred stock -- Series C
(net of $46 in issue costs)......................
Issuance of preferred stock -- Series D
(net of $837 in issue costs).....................
Preferred dividends accrued, including accretion
of issuance costs................................ 128 167
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1993........................ 2,769,109 3,004 3,500,000 3,765
Issuance of preferred stock -- Series D
(net of $327 in issue costs).....................
Preferred dividends accrued, including accretion
of issuance costs................................ 202 278
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1994........................ 2,769,109 3,206 3,500,000 4,043
Issuance of preferred stock -- Series D...........
Preferred dividends accrued, including accretion
of issuance costs................................ 234 314
Dividends declared pursuant to the
Recapitalization................................. 110 139
Recapitalization.................................. (2,769,109) (3,550 ) (3,500,000) (4,496 )
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1995........................ -- $ -- -- $ --
---------- ------- ---------- -------
---------- ------- ---------- -------
</TABLE>
F-54
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY
RECAPITALIZATION
Effective December 31, 1995, the Company, pursuant to the 1995
Recapitalization Agreement, entered into several transactions to reduce the
complexity of the Company's capital structure and eliminate the accrual of
future dividends on its outstanding preferred stock and the resulting impact on
earnings per share. As a part of these transactions (i) all outstanding shares
of Series A, A-1, and BB preferred stock, pursuant to their terms, converted
into 4,797,161 shares of common stock, (ii) all accrued dividends at December
31, 1995, totaling approximately $12,614,000 on all classes of the Company's
outstanding preferred stock were paid by issuing 1,801,900 shares of common
stock at an agreed upon price of $7.00 per share, and (iii) the holders of
Series C and D preferred stock agreed to waive the future accrual of
preferential dividends. As a further part of these transactions, the Company
issued an additional 1,006,783 shares of common stock to all holders of its then
outstanding preferred stock as consideration for actions taken and agreed to
reduce the exercise prices of one series of warrants totaling 680,104 from $5.90
to $5.25 per share and two series of warrants totaling 2,447,670 from $9.00 to
$7.00 per share until May 13, 1996, after which the exercise prices revert to
their prior amounts. Warrant holders have the right to tender subordinated debt
in lieu of cash, where applicable. Shareholders approved the Recapitalization
and an Amended Certificate of Incorporation at a special shareholders meeting
held on February 12, 1996. As a result of the Recapitalization, common shares
outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and
preferred shares outstanding decreased from 10,452,370 to 2,605,714. Other than
for fractional shares, no cash consideration was paid under the terms of the
Recapitalization. On a pro forma basis, assuming the Recapitalization had
occurred on January 1, 1995, primary and fully diluted earnings per share would
have been $0.27 and $0.19, respectively, for the year ended December 31, 1995.
Under the terms of the Company's amended Certificate of Incorporation, the
Company is authorized to issue 25,000,000 shares of common stock, and 2,700,000
shares of preferred stock, divided into two series as follow: (i) 500,000 shares
of Series C, and (ii) 2,200,000 shares of Series D.
COMMON STOCK
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 stockholders' equity accounts were retroactively
restated to reflect the issuance of $0.01 par value common stock (See Note 3.
"Acquisitions and Other Investments"). 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 six 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"), Selected Executive Stock Option Plan No. 5,
dated May 25, 1995, and Directors' Stock Option Plan, dated 1992 (the
"Directors' Plan") (collectively, the "Plans"). Additionally, the Company has
options issued and outstanding to certain executive officers and key employees
under other authorized plans from which additional options are not actively
being issued.
F-55
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
At the Company's annual stockholders meeting on May 25, 1995, the
stockholders approved the adoption of the Selected Executive Stock Option Plan
No. 5, which authorized 144,500 shares of common stock for issuance under the
Plan.
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 through 5. 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.
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.
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
SHARES PER SHARE
----------- ------------------
<S> <C> <C>
STOCK OPTIONS OUTSTANDING AT JANUARY 1, 1993.......................... 690,000 $1.00 to $6.25
Granted............................................................... 15,000 $5.90 to $9.00
-----------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1993........................ 705,000 $1.00 to $9.00
Granted............................................................... 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
Granted............................................................... 159,000 $9.00
Exercised............................................................. (18,411) $5.35
Expired............................................................... (4,943) $3.92 to $35.65
-----------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1995........................ 1,452,229 $1.00 to $25.67
-----------
</TABLE>
At December 31, 1995, options for the purchase of 1,044,852 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, 1995, the Company had reserved 1,811,147 shares of common stock for
awards under its various stock option plans, of which 358,918 were available for
new grants.
WARRANTS
As of December 31, 1995, the Company had issued and outstanding a total of
2,858,541 warrants to purchase 3,244,412 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. Pursuant to the Recapitalization
approved by the shareholders on February 12, 1996, the exercise prices on
certain of the warrants were reduced until May 13, 1996, after which the
exercise prices revert to their prior amounts (see Recapitalization above).
F-56
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................................. $ 1,310 $ (1,600) $ 100
State................................................................... 236 200 50
--------- --------- ---------
Total current provision (benefit)..................................... 1,546 (1,400) 150
--------- --------- ---------
Deferred:
Federal................................................................. (537) 1,600 --
State................................................................... -- -- --
--------- --------- ---------
Total deferred expense (benefit)...................................... (537) 1,600 --
--------- --------- ---------
Provision for income taxes................................................ $ 1,009 $ 200 $ 150
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory rate of 34%........... $ (4,004) $ 831 $ 838
State income taxes, net of federal benefit................................ 156 132 33
Changes in valuation allowance............................................ 4,359 (849) (580)
Extraordinary item........................................................ (634) -- --
Net operating loss for which no benefit is recognizable................... 525 -- --
Other..................................................................... (27) 86 (141)
--------- --------- ---------
Provision for income taxes................................................ 375 200 150
Amount allocated to extraordinary item.................................... 634 -- --
--------- --------- ---------
Total provision for income taxes.......................................... $ 1,009 $ 200 $ 150
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the deferred tax assets and (liabilities) at December 31,
1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................................................ $ 5,894 $ 7,062
Depreciable equipment.......................................................... (12,532) (11,680)
Amounts expensed for book purposes not
currently deductible for tax.................................................. 4,237 2,779
Investments in partnerships.................................................... (800) (140)
Tax credits.................................................................... 441 388
Less valuation allowance....................................................... (2,046) (3,281)
---------- ----------
Net deferred tax liability................................................... (4,806) (4,872)
Less current portion......................................................... (1,671) (2,521)
---------- ----------
Noncurrent portion........................................................... $ (6,477) $ (7,393)
---------- ----------
---------- ----------
</TABLE>
F-57
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
The current deferred tax asset was included in prepaid expenses and other
current assets in 1995 and 1994. The noncurrent deferred tax liability in 1994
and 1995 was included in other long-term liabilities.
At December 31, 1995, the Company had net operating losses and tax credit
carryforwards for income tax purposes of approximately $18,587,000 and $388,000,
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 $68,000 and $320,000, respectively.
For federal income tax purposes, due to certain changes in ownership of
AmeriHealth, Inc., its net operating loss carryforward of $7,727,000 (included
in the Company's net operating loss carryforward) may be limited to
approximately $1,900,000 per year under the 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 $68,000 and $100,000,
respectively, which may also be limited because of the change in ownership.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes paid....................................................... $ 478 $ 878 $ 95
Interest paid........................................................... 2,762 5,582 12,528
</TABLE>
NOTE 11. 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 1993, 1994 and 1995
was $84,000, $258,000 and $319,000, respectively.
NOTE 12. 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. MPI received approximately $283,000 and $421,000 in fees
from the Company for the years ended December 31, 1994 and 1995, respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements related to
buildings and equipment. Future annual minimum lease payments under
noncancelable operating leases with initial or remaining terms of one year or
more were as follows at December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
1996.............................................................. $ 2,649
1997.............................................................. 2,266
1998.............................................................. 1,842
1999.............................................................. 1,544
2000.............................................................. 1,230
Thereafter........................................................ 2,379
---------
$ 11,910
---------
---------
</TABLE>
F-58
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for 1993, 1994 and 1995 was approximately $2,348,000,
$2,648,000 and $3,530,000, 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 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. At December 31, 1994 and 1995, the Company had
accrued approximately $2,681,000 and $3,171,000, 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, results of
operations or liquidity.
NOTE 14. QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the Company's quarterly financial data for
the years ended December 31, 1994 and 1995 (dollars in thousands, except per
share data).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 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 (3)........................ .21 (0.31) (0.12) (1.03)
Fully diluted income per common share (3)......................... .15 -- (1) -- (1) -- (1)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995(1) QUARTER QUARTER(2) QUARTER QUARTER
- ------------------------------------------------------------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue....................................................... $ 28,727 $ 43,319 $ 45,789 $ 49,685
Income before extraordinary item.................................. 177 829 791 1,635
Net income (loss)................................................. 177 (289) 791 1,635
Primary loss per common share: (3)
Loss before extraordinary item per common share................. (0.31) (0.16) (0.17) (1.22)
Loss per common share........................................... (0.31) (0.42) (0.17) (1.22)
</TABLE>
- ------------------------
(1) Fully diluted earnings per share for the period has not been presented due
to the antidilutive effect of such calculation.
(2) The net loss for the second quarter of 1995 included an extraordinary loss
of approximately $1,118,000 from the early extinguishment of debt.
Additionally, results for the quarter and six months ended June 30, 1995,
and the nine months ended September 30, 1995, have been restated from
amounts previously reported in Form 10Q and 10Q/A to eliminate the tax
benefit associated with the extraordinary loss due to a revision in the
Company's estimate of the impact of net operating loss carryforwards.
(3) Earnings per share is computed independently for each quarter presented;
therefore, 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.
F-59
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
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 12% in 1993, 39% and 18% in 1994, and 42% and 19% in
1995, respectively, of the Company's total gross revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximates fair value
due to the short term maturities of these instruments. The carrying amounts of
the Company's fixed rate long-term borrowings at December 31, 1994 and 1995,
approximate their fair value.
The carrying value of the Company's revolving credit agreement approximates
fair value because the interest rate on such agreement is variable and based on
current market rates.
NOTE 16. SUBSEQUENT EVENTS
On January 31, 1996, the Company entered into a letter of intent to sell the
149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia in exchange
for the 100 bed Poplar Springs Hospital in Petersburg, VA. Both facilities are
psychiatric hospitals. The Company anticipates receiving additional cash
consideration as a result of the sale, net of certain working capital components
and the respective facilities' long term debt. This transaction is subject to
numerous contingencies, including adequate due diligence and various regulatory
approvals; accordingly, the Company is presently unable to conclude whether
consummation of this transaction is more likely than not to occur.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Governing Board of
Dakota Heartland Health System:
We have audited the accompanying balance sheet of Dakota Heartland Health
System (the Partnership) as of December 31, 1994 and 1995, and the related
statements of income, partners' equity and cash flows for the year ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dakota Heartland Health
System as of December 31, 1994 and 1995, and the results of its operations,
partners' equity and cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 16, 1996
F-61
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
BALANCE SHEET
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 397,300 $ 19,062,865
Patient receivables, net of allowance for uncollectible accounts of $3,439,911
and $3,396,655 in 1994 and 1995, respectively................................. 21,530,288 17,339,282
Due from partners.............................................................. 4,000,000
Supplies inventory............................................................. 1,724,706 1,602,786
Prepaid expenses and other current assets...................................... 568,052 1,003,019
-------------- --------------
Total current assets......................................................... 28,220,346 39,007,952
Property and equipment, at cost.................................................. 42,333,642 52,940,547
Other assets:
Investment in and advances to affiliates....................................... 1,964,073 1,835,223
Organizational costs, less accumulated amortization of $45,291................. -- 1,057,215
Other.......................................................................... -- 20,943
-------------- --------------
Total assets................................................................. $ 72,518,061 $ 94,861,880
-------------- --------------
-------------- --------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 3,788,183 $ 12,380,016
Estimated third-party payor settlements........................................ 3,426,079 2,008,176
Accrued salaries, wages and employee benefits.................................. 4,754,690 3,548,505
Other current liabilities...................................................... 242,563 2,043,794
-------------- --------------
Total current liabilities.................................................... 12,211,515 19,980,491
Other liabilities................................................................ 91,404 --
Minority interest................................................................ 38,478 56,877
Partners' equity................................................................. 60,176,664 74,824,512
-------------- --------------
Total liabilities and partners' equity....................................... $ 72,518,061 $ 94,861,880
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net patient service revenue.................................................. $ 99,098,598
Other revenue................................................................ 6,912,796
-------------
Net revenue................................................................ 106,011,394
-------------
Expenses:
Salaries and benefits...................................................... 38,796,941
Professional fees.......................................................... 20,446,296
Supplies................................................................... 16,299,957
Depreciation and amortization.............................................. 2,405,978
Repairs and maintenance.................................................... 1,079,489
Utilities.................................................................. 1,224,450
Insurance.................................................................. 789,648
Rents and leases........................................................... 2,003,288
Provision for uncollectible accounts....................................... 3,797,944
Property taxes............................................................. 910,264
Other...................................................................... 2,109,291
-------------
Total expenses........................................................... 89,863,546
-------------
Net income................................................................... $ 16,147,848
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
CHAMPION DAKOTA TOTAL EQUITY
-------------- --------------- ---------------
<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)
-------------- --------------- ---------------
Partners' equity, December 31, 1994............................ 40,088,332 20,088,332 60,176,664
Net income..................................................... 8,881,316 7,266,532 16,147,848
Partners' distributions........................................ (825,000) (675,000) (1,500,000)
-------------- --------------- ---------------
Partners' equity, December 31, 1995............................ $ 48,144,648 $ 26,679,864 $ 74,824,512
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................. $ 16,147,848
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,405,978
Gain on sale of property, plant and equipment............................. (1,388)
Provision for uncollectible accounts...................................... 3,797,944
Minority interest......................................................... 18,399
Changes in operating assets and liabilities:
Patient receivables, net................................................ 393,062
Supplies inventory...................................................... 121,920
Prepaid expenses and other current assets............................... (434,967)
Other assets............................................................ (20,943)
Accounts payable........................................................ 8,591,833
Estimated third-party payor settlements................................. (1,417,903)
Accrued expenses........................................................ (1,206,185)
Other liabilities....................................................... 1,709,827
------------
Net cash provided by operating activities................................. 30,105,425
------------
Cash flows from investing activities:
Purchase of property and equipment.......................................... (12,967,592)
Payment for organizational costs............................................ (1,102,506)
Contribution from partners.................................................. 4,000,000
Other....................................................................... 130,238
------------
Net cash used in investing activities..................................... (9,939,860)
------------
Cash flows from financing activities:
Partners' draws............................................................. (1,500,000)
------------
Net cash used in financing activities..................................... (1,500,000)
------------
Increase in cash and cash equivalents......................................... 18,665,565
Cash and cash equivalents, beginning of year.................................. 397,300
------------
Cash and cash equivalents, end of year........................................ $ 19,062,865
------------
------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest...................................... $ 15,236
Cash paid for taxes......................................................... 447,207
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
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 140-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 (see also
Note 4).
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net income during the reporting period.
Actual results could differ from those estimates. The most significant areas
which require the use of management's estimates relate to the determination of
the estimated third-party payor settlements, the allowance for uncollectible
accounts receivable and obsolete inventory.
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).
SUPPLIES INVENTORY:
Supplies inventory is stated at the lower of cost or market, with cost
determined substantially on the first-in, first-out basis.
PROPERTY AND EQUIPMENT:
Property and equipment acquisitions are recorded at cost at the date of
receipt. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, ranging from 4 to 25 years.
Maintenance and repairs are charged to expense as incurred while renewals and
betterments are capitalized. The costs and related accumulated depreciation on
asset disposals are removed from the accounts and any gain or loss is included
in income.
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.
Entities owned by the Partnership have paid income taxes during 1995 totaling
$447,207.
F-66
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications have been made in the 1994 financial statements to
conform to the 1995 presentation.
2. 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 services
provided, predetermined rates by diagnosis, fixed per diem rates or discounts 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 charges to these patients to estimated receipts
based upon each program's principle of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final settlements
under these programs are subject to administrative review and audit. The Company
records adjustments, if any, resulting from such review or audits during the
period in which these adjustments become known. Allowance for contractual
adjustments under these programs are netted in accounts receivable in the
accompanying Balance Sheet. It is management's opinion that adequate allowance
has been provided for possible adjustments that might result from final
settlements under these programs.
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of December 31, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Land and land improvements................................... $ 2,387,095 $ 2,360,412
Buildings and improvements................................... 20,087,268 21,624,868
Fixed equipment.............................................. 4,724,125 4,899,749
Major movable equipment...................................... 12,516,205 13,863,470
Minor movable equipment...................................... 1,101,633 1,003,318
Construction in progress..................................... 606,250 10,638,351
Property held for expansion.................................. 911,066 911,066
-------------- --------------
42,333,642 55,301,234
Less accumulated depreciation................................ -- 2,360,687
-------------- --------------
$ 42,333,642 $ 52,940,547
-------------- --------------
-------------- --------------
</TABLE>
F-67
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
4. 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>
INVESTMENTS AND ADVANCES
OWNERSHIP ----------------------------
CORPORATION PERCENTAGE 1994 1995
- ----------------------------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Orthopro, Inc.......................................................... 50% $ 203,155
Country Health, Inc.................................................... 49% 665,629 $ 805,632
Health Care Incinerators, Inc./Thom Linen.............................. 33% 193,235 210,701
Dakota Outpatient Center............................................... 50% 311,604 356,016
Dakota Day Surgery..................................................... 50% 590,450 462,874
------------- -------------
$ 1,964,073 $ 1,835,223
------------- -------------
------------- -------------
</TABLE>
During 1995, the Partnership sold its 50% interest in Orthopro, Inc.
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, 1995, the balance of the note was $2,416,564.
DOC also leases its real property to Dakota Hospital, Dakota Day Surgery
(DDS) and Dakota Clinic, Ltd. (an unrelated corporation), under noncancelable
10-year net operating leases. Future minimum annual lease payments to be paid by
the Hospital and DDS are $1,414,500 through 1998.
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. DDS had operating
income in 1995.
5. CREDIT RISK
The Partnership's revenues consist primarily of amounts due from the
Medicare and Medicaid programs in addition to amounts due from insurance
carriers and individuals. The Partnership 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 Partnership 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 46% and 9% of the Partnership's total gross
revenue.
F-68
<PAGE>
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 September 30, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 28, 1995
F-69
<PAGE>
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-70
<PAGE>
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-71
<PAGE>
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-72
<PAGE>
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.
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.
F-73
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
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>
3. ACCRUED AND OTHER LIABILITIES:
Details of accrued and other liabilities at September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
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,
F-74
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASES: (CONTINUED)
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>
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>
<CAPTION>
(IN THOUSANDS)
<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-75
<PAGE>
JORDAN VALLEY HOSPITAL
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-76
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Salt Lake Regional Medical Center
We have audited the accompanying consolidated balance sheets of Salt Lake
Regional Medical Center (formerly known as Holy Cross Hospital of Salt Lake
City), and subsidiaries (the "Hospital"), as of May 31, 1994 and April 13, 1995,
and the related consolidated statements of income, equity, and cash flows for
each of the two years in the period ended May 31, 1994 and for the period from
June 1, 1994 through April 13, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Salt Lake
Regional Medical Center and subsidiaries as of May 31, 1994 and April 13, 1995,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended May 31, 1994 and for the period from June
1, 1994 through April 13, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 11, 1995
F-77
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 13,
MAY 31, 1994 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 3,277 $ 535
Investments
Operating....................................................................... 1,839
Held by trustees................................................................ 418
------------ -------------
5,534 535
Accounts receivable, less allowance for doubtful accounts of $3,098 and $2,076,
respectively....................................................................... 13,501 14,116
Other accounts receivable........................................................... 1,185 694
------------ -------------
14,686 14,810
Supplies inventories................................................................ 1,100 1,123
Prepaid expenses and other current assets........................................... 89 1,094
------------ -------------
Total current assets.......................................................... 21,409 17,562
Investment assets limited as to use, net of current portion
Held by trustees.................................................................. 902
Board designated.................................................................. 5,902
Donor restricted and other........................................................ 1,578
------------
8,382
Property and equipment:
Land.............................................................................. 1,193 737
Buildings and improvements........................................................ 31,213 32,099
Equipment......................................................................... 42,779 45,017
Construction in progress.......................................................... 619 658
------------ -------------
Total property and equipment.................................................. 75,804 78,511
Less allowances for depreciation and amortization................................. 40,426 43,819
------------ -------------
Total property and equipment, net............................................. 35,378 34,692
Other assets........................................................................ 2,398 115
------------ -------------
Total assets.................................................................. $ 67,567 $ 52,369
------------ -------------
------------ -------------
LIABILITIES AND EQUITY
Current liabilities:
Current portion of capitalized lease obligation................................... $ 233 $ 545
Accounts payable.................................................................. 3,004 1,946
Due to third-party payors......................................................... 4,045 438
Accrued and other liabilities..................................................... 5,137 6,910
Due to HTI........................................................................ 6,015
------------ -------------
Total current liabilities..................................................... 12,419 15,854
Capitalized lease obligation, net of current portion................................ 16,857 1,914
Other long-term liabilities......................................................... 58 228
Due to HCHSC........................................................................ 2,072
Commitments and contingencies (Note 4)
Fund Balance:
General........................................................................... 34,583
Donor restricted.................................................................. 1,578
Owner's Equity:
Contributed capital............................................................... 32,663
Retained earnings................................................................. 1,710
------------ -------------
Total liabilities and equity.................................................. $ 67,567 $ 52,369
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-78
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRIL 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net patient service revenue........................................... $ 81,358 $ 86,536 $ 65,585
Other revenue......................................................... 3,565 4,328 2,792
------------ ------------ -------------
Net revenue....................................................... 84,923 90,864 68,377
Operating expenses:
Salaries, wages and benefits........................................ 36,569 37,931 26,875
Supplies............................................................ 14,842 14,917 12,423
Other operating expenses............................................ 25,929 28,173 18,449
Provision for bad debts............................................. 3,623 3,464 3,573
Interest............................................................ 1,171 929 653
Depreciation and amortization....................................... 4,252 4,529 4,067
------------ ------------ -------------
Total expenses.................................................... 86,386 89,943 66,040
Income (loss) before income taxes and extraordinary item.............. (1,463) 921 2,337
Provision for income taxes............................................ 1,027
------------ ------------ -------------
Income (loss) before extraordinary item............................... (1,463) 921 1,310
Extraordinary item -- early extinguishment of debt (no tax benefit
recognized).......................................................... 846
------------ ------------ -------------
Net income (loss)..................................................... $ (1,463) $ 921 $ 464
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-79
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRI1 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
GENERAL
Balance, beginning of period......................................... $ 37,503 $ 36,817 $ 34,583
Net income (loss) prior to the acquisition by HTI.................... (1,463) 921 (1,246)
Fund Transfers....................................................... 135 174 20
Related Party Transfers.............................................. 642 (3,329) (6,339)
Capital contribution by HCHSC........................................ 5,645
Net assets transferred to HTI........................................ (32,663)
------------ ------------ -------------
Balance, end of period............................................. 36,817 34,583 --
DONOR RESTRICTED
Balance, beginning of period......................................... 3,088 3,152 1,578
Donations, gifts and bequests........................................ 945 785 7
Grants............................................................... 42 4
Fund transfers....................................................... (135) (174) (20)
Related party transfers.............................................. (290) (201)
Investment income.................................................... 121 235 (112)
Expenditures for donor restricted purposes........................... (619) (2,223) (351)
Other................................................................ (37)
Capital distribution to HCHSC........................................ (1,065)
------------ ------------ -------------
Balance, end of period............................................. 3,152 1,578 --
OWNER'S EQUITY
Net assets contributed by HTI........................................ 32,663
Net income for the period from August 16, 1994 through April 13,
1995................................................................ 1,710
-------------
Balance, end of period............................................. 34,373
------------ ------------ -------------
Total equity, end of period........................................ $ 39,969 $ 36,161 $ 34,373
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-80
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRIL 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $ (1,463) $ 921 $ 464
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Extraordinary loss on early extinguishment of debt.................. 846
Depreciation and amortization....................................... 4,252 4,529 4,067
Loss on sale of assets.............................................. 84 24 47
Provision for bad debts............................................. 3,623 3,464 3,573
Deferred tax benefit................................................ (540)
Deferred revenue and other credits.................................. 31 (455) (58)
Changes in operating assets and liabilities:
Accounts receivable............................................... (5,273) (2,032) (14,972)
Supplies inventories.............................................. 83 (23)
Prepaid expenses and other assets................................. (706) 388 920
Due to third-party payors......................................... 2,024 631 663
Accounts payable, accrued liabilities and other liabilities....... 1,221 (1,056) 3,292
------------ ------------ -------------
Cash provided (used) by operating activities.................... 3,793 6,497 (1,721)
INVESTING ACTIVITIES
Net increase in current investments................................... 87 127 339
Net increase in investments limited as to use......................... (1,473) 1,764 6,702
Additions to property and equipment................................... (7,421) (3,427) (3,946)
Proceeds from sale of assets.......................................... 21 809 46
Other................................................................. 1,540 (859)
------------ ------------ -------------
Cash provided (used) for investing activities................... (7,246) (1,586) 3,141
FINANCING ACTIVITIES
Payments on long-term debt and refinancing............................ (204) (215) (5,853)
Issuance of debt from HCHSC........................................... 1,020
Issuance of debt from HTI............................................. 6,015
Payment of debt to HCHSC.............................................. (1,523) (2,072)
Other equity transactions, net........................................ 841 (4,729) (2,252)
------------ ------------ -------------
Cash used for financing activities.............................. (886) (3,924) (4,162)
------------ ------------ -------------
Change in cash and cash equivalents................................... (4,339) 987 (2,742)
Cash and cash equivalents at beginning of period...................... 6,629 2,290 3,277
------------ ------------ -------------
Cash and cash equivalents at end of period............................ $ 2,290 $ 3,277 $ 535
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-81
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
On April 13, 1995, CHC-Salt Lake City, Inc. (the "Company") completed its
acquisition of Salt Lake Regional Medical Center (the "Hospital") from
Healthtrust, Inc. -- The Hospital Company ("HTI"). The Hospital is comprised of
a 200 bed tertiary care hospital and five clinics and is located in Salt Lake
City, Utah. The Hospital was formerly a tax-exempt hospital, Holy Cross Hospital
of Salt Lake, which was owned by Holy Cross Health Systems Corporation
("HCHSC"). The Hospital was acquired by HTI on August 15, 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. These
financial statements are based on HCHSC historical cost because HTI ownership of
the hospital was temporary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Hospital
and its controlled ventures. All material intercompany transactions and account
balances have been eliminated in consolidation.
CASH EQUIVALENTS
Highly liquid investments, primarily U.S. government backed securities and
certificates of deposits with a maturity of three months or less when purchased,
excluding amounts for which use is limited by board or donor designation or by
trust agreements, have been defined as cash equivalents. The carrying amounts
reported in the balance sheets for cash equivalents approximate fair value.
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.
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. For the years ended May 31, 1993 and 1994 and for
F-82
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the period ended April 13, 1995, respectively, approximately 39%, 40% and 38% of
total patient care revenue resulted from the Medicare program, and approximately
10%, 9% and 8%, respectively, resulted from Medicaid program.
INVESTMENTS
Investments acquired by purchase are stated at cost, adjusted for
impairments in value that are deemed to be other than temporary. Market values
for investments are based on quoted market prices. Investments limited as to
use, that are required for obligations classified as current liabilities and
Board designated investments and are immediately available to the Hospital for
their stated purpose, are reported in current assets.
Board designated investments limited as to use represent certain funds from
operations and other sources designated by the Board of Directors to be used to
fund future capital asset replacements, for the retirement of certain long-term
debt or for other purposes.
Certain donations, grants and bequests are restricted by donors and are
recorded at fair market value at the date of receipt. Income from and
expenditures of restricted donations are recorded as revenue and expenses in the
period used, or as general equity transfers if use is restricted for property or
equipment purchases. Bequests receivable are recorded at a nominal amount until
the Hospital receives the bequest.
SUPPLIES INVENTORIES
Inventories are stated at cost, determined principally by the last-in,
first-out (LIFO) 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 5 and 30 years. Amortization of capital leases
is included with depreciation expense.
UNAMORTIZED DEBT ISSUANCE COSTS
Debt issuance costs are amortized using the bonds outstanding method over
the repayment term of the related debt. Amortization is included in depreciation
and amortization expense.
CHARITY CARE
Consistent with its mission prior to the acquisition by HTI, the Hospital
provides medical care to all patients regardless of their ability to pay. In
accordance with the Hospital's policies related to the provision of charity
care, patients who were unable to pay for services were identified based on
patient financial information and other subsequent analysis. The Hospital did
not pursue collection from these patients and such amounts were excluded from
net patient revenue. Charity care charges foregone were approximately $1,014,000
in 1993, $1,440,000 in 1994, and $1,228,000 in 1995.
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. As described in Note 1, the Hospital had
been a tax-exempt entity prior to the acquisition by HTI. Earning for the period
from August 16, 1994 to April 13,
F-83
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
1995 were included in HTI consolidated tax return. 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. INVESTMENTS:
The composition of investment assets limited as to use at May 31, 1994, was
as follows:
<TABLE>
<CAPTION>
MARKET
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Investments held by trustees under loan agreements:
Cash and short-term investments.............................. $ 201 $ 201
Funds invested in direct obligations of the U.S.
Government.................................................. 1,119 1,119
Less current portion......................................... (418) (418)
--------- ---------
902 902
Board designated investments:
Cash and short-term investments.............................. 5,902 5,902
--------- ---------
5,902 5,902
Donor restricted and other investments:
Cash and short-term investments.............................. 925 935
Common trust funds and other................................. 653 653
--------- ---------
1,578 1,588
--------- ---------
$ 8,382 $ 8,392
--------- ---------
--------- ---------
</TABLE>
Investment income, which is included in other revenue, net, was
approximately $693,000, $837,000 and $47,000 for 1993, 1994 and 1995,
respectively.
Investments consisted of commercial paper, money market instruments, U.S.
Government obligations, marketable equity securities and high grade corporate
bonds. The market values of investment were determined based on quoted market
rates.
3. ACCRUED AND OTHER LIABILITIES:
Details of accrued and other liabilities at May 31, 1994 and April 13, 1995
were as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries and wages..................................... $ 1,834 $ 1,675
Accrued vacation............................................... 2,195 2,074
Income taxes payable to HTI.................................... 1,567
Other.......................................................... 1,108 1,594
--------- ---------
Total accrued and other liabilities.......................... $ 5,137 $ 6,910
--------- ---------
--------- ---------
</TABLE>
F-84
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt, which included capital leases and amounts due to HCHSC, at
May 31, 1994 and April 13, 1995, were as follows:
<TABLE>
<CAPTION>
MATURITY 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Series 1990 Salt Lake City, Utah, Flexible Rate Revenue
Bonds, principal payable at various dates through 2009,
interest payable monthly at variable rates ranging from
2.2% to 2.5%, collateralized by a renewable, irrevocable
letter of credit in the amount of $12,296,000 which expires
on February 1, 1997........................................ Various $ 7,323
Series 1986 Salt Lake City, Utah, Industrial Revenue Bonds,
principal payable annually, interest payable semiannually
at rates from 6.0% to 7.4%................................. 2018 9,480
Notes payable to owner, principal payable at various dates,
interest payable at 10.5%.................................. $ 6,015
Capital leases, principal and interest payable monthly,
interest payable monthly at rates ranging from 5.8% to
9%......................................................... Various 287 2,459
--------- ---------
17,090 8,474
Less current portion (including $6,015 for 1995 due to
HTI)..................................................... (233) (6,560)
--------- ---------
$ 16,857 $ 1,914
--------- ---------
--------- ---------
</TABLE>
The carrying amounts of the variable rate, long-term debt approximate their
fair values. The fair values of the fixed rate, long-term debt and capital lease
obligations were estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the fixed rate, long-term debt and capital lease obligations at
April 13, 1995, approximated their carrying amount.
Generally, mandatory deposits were required to be made to sinking and other
funds held by trustees for payment of principal and interest.
Prior to the acquisition by HTI, the Hospital extinguished the Series 1986
Industrial Revenue Bonds of approximately $9,480,000. The Hospital recognized an
extraordinary loss of approximately $846,000, for which no tax benefit was
recognized because HCHSC was tax-exempt. Additionally, the 1990 Series Flexible
Rate Revenue Bonds were distributed to the HCHSC concurrent with the HTI
acquisition.
OBLIGATED GROUP AND OTHER REQUIREMENTS
Under the Master Trust Indenture, HCHSC and certain of its subsidiaries,
which included the Hospital (the "Obligated Group") could issue obligations to
finance certain activities. Those members of the Obligated Group that elected to
obtain financing under the Master Trust Indenture were guarantors for the
repayment of obligations issued by other members of the Obligated Group up to
certain limits, although each issuer was considered the principal obligor.
F-85
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
The Series 1990 Utah Pooled Financing Bonds and the Series 1986 Salt Lake
City Industrial Revenue Bonds were collateralized by a Master Trust Indenture
that was collateralized by all accounts, contract rights and receipts of the
Hospital. The obligations referenced above contained restrictive covenants that
included, 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 Hospital was in compliance with all loan covenants at May
31, 1994. The obligations referenced above were not acquired by HTI in the sale
of the Hospital by HCHSC.
The Master Trust Indenture requires establishment of certain funds, not
available for general purposes, which were held with and controlled by a trustee
for payment of certain construction costs, bond issuance costs, principal and
interest and maintenance of cash reserves. Details of funds held by the trustee
at May 31, 1994 were:
<TABLE>
<CAPTION>
1994
---------------
(IN THOUSANDS)
<S> <C>
Debt service reserve fund........................................... $ 902
Bond fund........................................................... 40
Interest fund....................................................... 378
-------
1,320
Less current portion.............................................. (418)
-------
$ 902
-------
-------
</TABLE>
INTEREST COSTS
During 1993, 1994 and 1995, interest costs totaled approximately $1,171,000,
$929,000 and $653,000, respectively, of which $81,000 was capitalized during
1994. Interest paid was approximately $1,149,000, $933,000, and $579,000 in
1993, 1994 and 1995, respectively.
5. LEASES:
The Hospital leases certain land, buildings and equipment under capital and
operating leases that expire at various dates through 2000. Rental expense,
which includes provisions for maintenance in some cases, amounted to
approximately $2,318,000, $2,693,000 and $1,698,000 in 1993, 1994 and 1995,
respectively. Future minimum rental commitments at April 13, 1995, under a
capital lease and noncancelable operating leases with a remaining term of
greater than one year were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
--------- -----------
- --------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
1996........................................................ $ 801 $ 636
1997........................................................ 701 570
1998........................................................ 624 472
1999........................................................ 624 132
2000........................................................ 208 46
--------- -----------
Total minimum obligations................................... 2,958 $ 1,856
-----------
-----------
Less amounts representing interest........................ 499
---------
Present value of minimum obligations........................ 2,459
Less current portion...................................... 545
---------
Long term obligations at April 13, 1995..................... $ 1,914
---------
---------
</TABLE>
F-86
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
For the period from August 16, 1994 to April 13, 1995, the Hospital earned
approximately $2,737,000 in pre-tax income. The provision for income taxes
consisted of the following for the period from August 16, 1994 through April 13,
1995.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Current:
Federal........................................................... $ 1,440
State............................................................. 127
-------
Total current provision......................................... 1,567
Deferred:
Federal........................................................... (496)
State............................................................... (44)
-------
Total deferred benefit.......................................... (540)
-------
Provision for income taxes.......................................... $ 1,027
-------
-------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Federal income tax benefit at statutory rate of 34%................. $ 795
Loss for period in which no tax benefit recognized.................. 136
State income taxes, net of federal benefit.......................... 83
Other............................................................... 13
-------
Total provision for income taxes.................................. $ 1,027
-------
-------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is based on earnings for the period in which the Hospital was
subject to federal income taxes. The components of the deferred tax assets and
(liabilities) at April 13, 1995 were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Allowance for bad debts....................................................... $ 768
Excess of tax over book basis in property and equipment....................... (228)
------
Net deferred tax asset...................................................... 540
Less current portion.......................................................... (768)
------
Noncurrent portion.......................................................... $ (228)
------
------
</TABLE>
The current deferred tax asset is included in prepaid expenses and other
current assets. The noncurrent deferred tax liability is included in other
long-term liabilities.
7. RELATED PARTY TRANSACTIONS:
The Hospital purchased certain services from Shared Services which is the
administrator of the Holy Cross Employees Benefit Trust (the "Benefit Trust").
The Benefit Trust provided health, life and long-term disability benefits to
employees of the Hospital. Premiums for these benefits were approximately
$2,263,000, $2,332,000 and $527,000 for 1993, 1994 and 1995, respectively.
Havican
F-87
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
Insurance Company ("Havican"), a subsidiary of Shared Services, is the captive
insurance company from which the Hospital obtained its primary professional
liability insurance. Premiums paid to Havican were approximately $994,000,
$1,346,000 and $240,000 for 1993, 1994 and 1995, respectively. Premiums paid to
HTI for professional liability insurance during 1995 were approximately
$177,000. In addition, the Hospital has limited its liability through the
purchase of umbrella coverage from third-party insurers.
Through August 15, 1994, the Hospital provided pension benefits for
substantially all of its full-time employees through a defined benefit pension
plan sponsored by HCHSC. The Hospital withdrew from the plan in connection with
its acquisition by HTI. The liability or asset associated with the Hospital's
withdrawal, if any, was retained by HCHSC. Pension expense for the years ended
May 31, 1993 and 1994 and the period ended April 13, 1995, were $1,065,000,
$1,050,000 and $210,000, respectively.
HCHSC provided certain management services in the normal course of business
to the Hospital. For 1993, 1994 and 1995, the expenses allocated to the Hospital
were approximately $1,356,000, $1,486,000 and $304,000, respectively.
8. SALE OF ASSETS TO HTI:
As described in Note 1, HCHSC sold the Hospital to HTI in August 1994. At
the time of the sale, HTI assumed Hospital debts in excess of assets retained of
approximately $4,580,000, which has been reflected in the financial statements
as a capital distribution from donor restricted funds of $1,065,000 and a
capital contribution to general funds of $5,645,000.
F-88
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 7,583 $ 5,670
Accounts receivable, less allowance for doubtful accounts of $10,116 and $14,041 at
December 31, 1995 and March 31, 1996, respectively................................. 33,262 36,407
Supplies inventory.................................................................. 3,470 3,872
Prepaid expenses and other current assets........................................... 6,264 6,290
------------ -----------
Total current assets............................................................ 50,579 52,239
Property and equipment, less allowances for depreciation and amortization of $10,733
and $11,901 at December 31, 1995 and March 31, 1996, respectively.................. 158,382 166,997
Investment in Dakota Heartland Health System........................................ 48,145 52,118
Other assets........................................................................ 34,154 36,668
------------ -----------
Total assets...................................................................... $ 291,260 $ 308,022
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations..................... $ 2,467 $ 2,834
Accounts payable.................................................................... 13,952 12,743
Due to third parties................................................................ 8,829 8,052
Other current liabilities........................................................... 15,490 12,860
------------ -----------
Total current liabilities........................................................... 40,738 36,489
Long-term debt and capital lease obligations........................................ 162,447 181,212
Other long-term liabilities......................................................... 10,177 10,445
Redeemable preferred stock.......................................................... 46,029 46,078
Common stock, $.01 par value:
Authorized -- 25,000,000 shares, 11,868,230 and 12,012,603 shares issued and
outstanding at December 31, 1995 and March 31, 1996, respectively................. 119 120
Common stock subscribed 80,000 shares at December 31, 1995 and March 31, 1996,
respectively....................................................................... 40 40
Common stock subscription receivable................................................ (40) (40)
Paid in capital..................................................................... 47,643 48,178
Accumulated deficit................................................................. (15,893) (14,500)
------------ -----------
Total liabilities and stockholders' equity........................................ $ 291,260 $ 308,022
------------ -----------
------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-89
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
Net patient service revenue............................................................. $ 27,625 $ 49,898
Other revenue........................................................................... 1,102 783
--------- ---------
Net revenue......................................................................... 28,727 50,681
Operating expenses:
Salaries and benefits................................................................. 12,762 22,006
Other operating and administrative.................................................... 10,913 19,232
Provision for bad debts............................................................... 2,073 3,670
Interest.............................................................................. 2,630 4,587
Depreciation and amortization......................................................... 1,532 3,016
Equity in earnings of Dakota Heartland Health System.................................. (1,478) (3,973)
--------- ---------
Total expenses...................................................................... 28,432 48,538
--------- ---------
Income before income taxes.......................................................... 295 2,143
Provision for income taxes.............................................................. 118 750
--------- ---------
Net income.......................................................................... $ 177 $ 1,393
--------- ---------
--------- ---------
Income (loss) applicable to common stock............................................ $ (1,312) $ 1,344
--------- ---------
--------- ---------
Income (loss) per common share:
Primary............................................................................. $ (.31) $ .10
--------- ---------
--------- ---------
Fully Diluted....................................................................... N/A $ .08
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-90
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Operating activities:
Net income.......................................................................... $ 177 $ 1,393
Equity in earnings of Dakota Heartland Health System................................ (1,478) (3,973)
Depreciation and amortization....................................................... 1,532 3,016
Provision for bad debts............................................................. 2,073 3,670
Changes in assets and liabilities, net of effects from acquisitions
Increase in assets................................................................ (1,008) (5,195)
Decrease in liabilities........................................................... (2,459) (4,477)
---------- ----------
Net cash used in operating activities........................................... (1,163) (5,566)
---------- ----------
Investing activities:
Additions to property and equipment................................................. (7,060) (2,697)
Investment in Jordan Valley Hospital................................................ (10,746)
Investment in Dakota Heartland Health System........................................ (2,000)
Investment in Salt Lake Regional Medical Center..................................... (3,000)
Proceeds from sale of property and equipment........................................ 1,300
Investment in note receivable....................................................... (793) (50)
Other............................................................................... (576) (575)
---------- ----------
Net cash used in investing activities........................................... (12,129) (14,068)
---------- ----------
Financing activities:
Proceeds from the issuance of long-term obligations................................. 18,512
Payments on long-term debt and capital lease obligations............................ (1,989) (768)
Other............................................................................... (235) (23)
---------- ----------
Net cash provided by (used in) financing activities............................. (2,224) 17,721
---------- ----------
Decrease in cash and cash equivalents........................................... (15,516) (1,913)
Cash and cash equivalents at beginning of period...................................... 48,424 7,583
---------- ----------
Cash and cash equivalents at end of period............................................ $ 32,908 $ 5,670
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-91
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 1995,
included in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1995.
The Company's business is seasonal in nature and subject to general economic
conditions and other factors. Accordingly, operating results for the three
months ended March 31, 1996, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. Entities will be allowed to
measure compensation expense for stock-based compensation under SFAS 123 or APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue accounting for such compensation under the provisions of APB
Opinion No. 25.
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's adoption of SFAS 121 on January 1, 1996, had no
material effect on its financial statements.
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 the partnership agreement and 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.
F-92
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 (dollars in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenue................................................. $ 26,088 $ 27,623
Net income.................................................. 2,687 7,223
Company's equity in the earnings of DHHS.................... 1,478 3,973
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets.............................................. $ 39,008 $ 38,095
Non-current assets.......................................... 55,854 56,226
Current liabilities......................................... 19,980 12,258
Non-current liabilities..................................... 57 15
Partners' equity............................................ 74,825 82,048
</TABLE>
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
December 31, 1995 and March 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Revolving Loan.............................................................. $ 47,700 $ 66,200
11% Senior Subordinated Notes, net of discount (face amount of $99,089 and
$98,705 at December 31, 1995 and March 31, 1996, respectively)............. 98,447 98,076
Health Care REIT, Inc....................................................... 11,120 10,908
Other notes payable and capital lease obligations........................... 7,647 8,862
------------ -----------
Total debt and capital lease obligations.................................. 164,914 184,046
Less current portion........................................................ (2,467) (2,834)
------------ -----------
Total long-term debt and capital lease obligations........................ $ 162,447 $ 181,212
------------ -----------
------------ -----------
</TABLE>
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 March 31, 1996 and December 31, 1995.
4. ACQUISITIONS
JORDAN VALLEY HOSPITAL
On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan")
from Columbia/ HCA Healthcare Corporation ("Columbia"). Jordan is a 50 bed acute
care hospital located in West Jordan, Utah, a suburb of Salt Lake City. Jordan
was acquired 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 preliminary cash consideration paid to
Columbia of approximately $10,750,000. Cash consideration included approximately
$3,750,000 for certain net working
F-93
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. ACQUISITIONS (CONTINUED)
capital components, which are subject to adjustment and final settlement by the
parties, and reimbursement of certain capital expenditures made previously by
Columbia. The transaction did not result in a gain or loss. The Alabama
facilities were acquired as part of the Company's acquisition of AmeriHealth,
Inc. on December 6, 1994.
The following selected unaudited pro forma financial information for the
three months ended March 31, 1995 and 1996, assumes that the acquisition of
Jordan and Salt Lake Regional Medical Center ("SLRMC") occurred on January 1,
1995. The Company acquired SLRMC on April 13, 1995. 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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue...................................................................... $ 49,353 $ 51,919
--------- ---------
--------- ---------
Net income....................................................................... $ 1,313 $ 1,268
--------- ---------
--------- ---------
Income (loss) applicable to common stock......................................... $ (176) $ 1,219
--------- ---------
--------- ---------
Income (loss) per common share:
Primary........................................................................ $ (0.04) $ 0.09
--------- ---------
--------- ---------
Fully diluted.................................................................. N/A $ 0.07
---------
---------
Weighted average number of common shares outstanding:
Primary........................................................................ 4,228 12,835
--------- ---------
--------- ---------
Fully diluted.................................................................. N/A 18,184
---------
---------
</TABLE>
5. INCOME PER SHARE
Primary income per common and common equivalent share is calculated by
dividing the income attributable to common stock (net income less preferred
stock dividend requirements and accretion of preferred stock issuance costs) 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 was
not presented for the quarter ended March 31, 1995, due to the anti-dilutive
effect of such calculation. The fully diluted income per share computation for
the quarter ended March 31, 1996, assumed the conversion of 2,608,176 shares of
convertible preferred stock into a weighted average of 5,216,027 common shares,
and that no preferred dividends on the preferred stock were provided (See Note
6).
The weighted average number of shares used in computing income (loss) per
share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
Primary.......................................................... 4,277,975 12,835,211
----------- -------------
----------- -------------
Fully Diluted.................................................... N/A 18,183,900
-------------
-------------
</TABLE>
F-94
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
Effective December 31, 1995, the Company and its Preferred shareholders
entered into the 1995 Recapitalization Agreement that, among other things,
eliminated the accrual of future dividends on its outstanding Preferred Stock.
At March 31, 1996, the Company had outstanding 2,608,176 shares of Series C and
D Cumulative Convertible Redeemable Preferred Stock (collectively, "Preferred
Stock") which were convertible into 5,216,352 shares of common stock. The
Company's Certificate of Incorporation, as amended, certain preferred stock
purchase agreements, and its Senior and other debt agreements prohibit or place
limitations on the payment of cash dividends to holders of preferred and common
stock.
7. INCOME TAXES
The income tax provision recorded for the quarters ended March 31, 1995 and
1996 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.
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.
9. SUBSEQUENT EVENT
Effective April 12, 1996, the Company executed a definitive Agreement and
Plan of Merger (the "Merger Agreement") with Paracelsus Healthcare Corporation,
a privately held California corporation ("Paracelsus") and PC Merger Sub., Inc.,
a newly formed Paracelsus subsidiary. The Merger Agreement provides for, among
other things, the merger of PC Merger Sub., Inc. with and into the Company (the
"Merger"). Each share of the Company's common stock will convert into one share
of Paracelsus common stock, and each share of the Company's Preferred Stock will
convert into two shares of Paracelsus common stock. Dr. Manfred George
Krukemeyer, currently the Chairman of the Board and sole shareholder of
Paracelsus, and members of Paracelsus management will own approximately 60% of
the Company, and current Company security holders will own approximately 40% of
Paracelsus common stock on a fully diluted basis. The consummation of the Merger
is conditioned upon, among other things, Dr. Krukemeyer entering into a
shareholder agreement (the "Shareholder Agreement") with Paracelsus to be
effective at the time of the Merger. The Shareholder Agreement, among other
things, set forth (i) restrictions on certain acquisitions and dispositions of
Paracelsus voting securities, (ii) certain rights and obligations relating to
board representation and (iii) certain rights of first refusal for Dr.
Krukemeyer. The Shareholder agreement will also impose other customary
standstill restrictions. The Merger is subject to a number of customary
conditions including filings with the Securities and Exchange Commission,
approval of the stockholders of the Company and Paracelsus, and antitrust
filings. In the event that the Merger Agreement is terminated, under certain
circumstances Paracelsus and the Company have agreed to pay a termination fee to
the other.
Effective April 12, 1996, the Company and holders of its 11% Senior
Subordinated Notes under agreements dated December 31, 1993, (the "Series D
Notes") and May 1, 1995, (the "Series E Notes")
F-95
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. SUBSEQUENT EVENT (CONTINUED)
and certain holders of its Preferred Stock entered into an Agreement in
Contemplation of the Merger, that among other things provided (i) the parties
thereto holding shares of Preferred Stock agreed to vote their Preferred Shares
for the Merger, (ii) the holders of the Series D Notes agreed among other things
(a) to waive any rights to cause the Company to purchase from such holders the
Series D Notes in the event of a change in control caused by the Merger and (b)
surrender their Series D Notes for prepayment at a premium depending upon the
year of prepayment, and (iii) the holder of the Series E Notes agreed among
other things (x) to waive any rights to cause the Company to purchase from such
holders the Series E Notes in the event of a change in control caused by the
Merger and (y) to surrender their Series E Notes for prepayment at a premium
depending upon the year of such prepayment and upon whether warrants to purchase
Company common stock are surrendered in connection with such prepayment.
Pursuant to the 1995 Recapitalization Agreement entered into by the Company
and certain of its security holders effective December 31, 1995, the Company
agreed to reduce the exercise prices of one series of 680,104 warrants from
$5.90 to $5.25 per share and two series totaling 2,447,670 warrants from $9.00
to $7.00 per shares until May 13, 1996, after which the exercise prices revert
to their prior amounts. As of May 13, 1996, warrants have been exercised to
purchase approximately 2,370,000 shares of common stock, resulting in cash
proceeds to the Company of approximately $8,715,000 and the tender of
approximately $4,840,000 in Company subordinated notes in lieu of cash.
On January 31, 1996, the Company entered into a letter of intent to sell the
149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia/HCA
Healthcare Corporation in exchange for the 100 bed Poplar Springs Hospital in
Petersburg, VA. Both facilities are psychiatric hospitals. On May 6, 1996, the
Company and Columbia mutually agreed to terminate this transaction.
F-96
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
The Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Financial Statements set forth below have been derived from the Paracelsus
Unaudited Pro Forma Condensed Combining Financial Statements and the Champion
Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited
Historical Condensed Balance Sheet included elsewhere in this Prospectus. The
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial
Statements reflect the effect of the Merger and certain related transactions, in
each case as if such transactions had occurred at the beginning of each period
presented for purposes of the pro forma income statements and operating data and
on March 31, 1996 for purposes of the pro forma balance sheet. The Paracelsus
and Champion Unaudited Pro Forma Condensed Combining Financial Statements also
give effect to certain acquisitions and dispositions by each of Paracelsus and
Champion completed since the beginning of each of the periods presented.
The Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Statement of Income for the fiscal year ended September 30, 1995 includes
Paracelsus' historical results of operations for the fiscal year ended September
30, 1995 and Champion's historical results of operations for the year ended
December 31, 1995. The Paracelsus and Champion Unaudited Pro Forma Condensed
Combining Statement of Income for the six months ended March 31, 1995 and 1996
include Paracelsus' and Champion's historical results of operations for the same
six-month periods. The Unaudited Pro Forma Condensed Combining Balance Sheet
includes the historical balance sheets of Paracelsus and Champion as of March
31, 1996.
The Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Financial Statements set forth below and the Paracelsus Unaudited Pro Forma
Condensed Combining Financial Statements and the Champion Unaudited Pro Forma
Condensed Combining Statements of Income included elsewhere herein do not
purport to present the financial position or results of operations of Paracelsus
and Champion had the transactions and events assumed therein occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be expected in the future. The Paracelsus and Champion
Unaudited Pro Forma Condensed Combining Financial Statements set forth below are
qualified in their entirety by reference to, and should be read in conjunction
with, the Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements and the Champion Unaudited Pro Forma Condensed Combining Statements
of Income and Unaudited Historical Condensed Balance Sheet included elsewhere in
this Prospectus. See "Risk Factors -- Significant Leverage," "Prospectus Summary
- -- Refinancings in Connection with the Merger," "Paracelsus Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Champion Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PF-1
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARACELSUS CHAMPION FOR THE PRO FORMA FOR
PRO FORMA PRO FORMA MERGER THE MERGER
<S> <C> <C> <C> <C>
Total operating revenues........................................ $ 501,633 $ 195,633 $ (367)(1) $ 696,899
Costs and expenses:
Salaries and benefits......................................... 206,035 82,040 288,075
Supplies...................................................... 44,816 26,012 70,828
Purchased services............................................ 59,302 26,688 85,990
Provision for bad debts....................................... 41,054 14,562 55,616
Other operating expenses...................................... 92,828 25,483 (400)(2) 117,911
Depreciation and amortization................................. 17,167 10,344 4,912(3) 31,635
(788)(4)
Interest...................................................... 17,241 15,738 3,824(5) 36,803
Equity in earnings of DHHS.................................... (8,881) (8,881)
Restructuring and unusual charges............................. 4,177 4,177
----------- ----------- ------------- -------------
Total costs and expenses........................................ 482,620 191,986 7,548 682,154
----------- ----------- ------------- -------------
Income before minority interests and income taxes............... 19,013 3,647 (7,915) 14,745
Minority interests.............................................. (1,927) (1,927)
----------- ----------- ------------- -------------
Income before income taxes...................................... 17,086 3,647 (7,915) 12,818
Income taxes.................................................... 7,005 277 (1,936)(6) 5,346
----------- ----------- ------------- -------------
Net income...................................................... 10,081 3,370 (5,979) 7,472
Preferred dividends accrued..................................... 11,331 (11,331)(7)
----------- ----------- ------------- -------------
Income (loss) applicable to common stock........................ $ 10,081 $ (7,961) $ 5,352 $ 7,472
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Income (loss) per share....................................... $ (1.87) $ 0.15
----------- -------------
----------- -------------
Weighted average number of common and common equivalent shares
outstanding.................................................... 4,255 46,069(8) 50,324
----------- ------------- -------------
----------- ------------- -------------
Ratio of earnings to fixed charges (9).......................... 1.8x 1.2x 1.3x
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-2
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARACELSUS CHAMPION FOR THE PRO FORMA FOR
PRO FORMA PRO FORMA MERGER THE MERGER
<S> <C> <C> <C> <C>
Total operating revenues........................................ $ 250,331 $ 97,109 $ (200)(1) $ 347,240
Costs and expenses:
Salaries and benefits......................................... 106,039 42,168 148,207
Supplies...................................................... 22,082 13,703 35,785
Purchased services............................................ 27,502 12,113 39,615
Provision for bad debts....................................... 19,061 7,943 27,004
Other operating expenses...................................... 44,796 12,823 (200)(2) 57,419
Depreciation and amortization................................. 8,665 4,413 2,456(3) 15,338
(196)(4)
Interest...................................................... 8,260 6,948 1,891(5) 17,099
Equity in earnings of DHHS.................................... (2,363) (2,363)
----------- ----------- ------------- -------------
Total costs and expenses........................................ 236,405 97,748 3,951 338,104
----------- ----------- ------------- -------------
Income (loss) before minority interests
and income taxes............................................... 13,926 (639) (4,151) 9,136
Minority interests.............................................. (1,204) (1,204)
----------- ----------- ------------- -------------
Income (loss) before income taxes............................... 12,722 (639) (4,151) 7,932
Income taxes (benefit).......................................... 5,215 70 (1,048)(6) 4,237
----------- ----------- ------------- -------------
Net income (loss)............................................... 7,507 (709) (3,103) 3,695
Preferred dividends accrued..................................... 2,727 (2,727)(7)
----------- ----------- ------------- -------------
Income (loss) applicable to common stock........................ $ 7,507 $ (3,436) $ (376) $ 3,695
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Income (loss) per share......................................... $ (0.81) $ 0.07
----------- -------------
----------- -------------
Weighted average number of common and common equivalent shares
outstanding.................................................... 4,244 46,083(8) 50,327
----------- ------------- -------------
----------- ------------- -------------
Ratio of earnings to fixed charges (9).......................... 2.2x -- 1.4x
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-3
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
PARACELSUS CHAMPION FOR THE FOR THE
PRO FORMA PRO FORMA MERGER MERGER
<S> <C> <C> <C> <C>
Total operating revenues.................................... $ 265,626 $ 103,089 $ (160)(1) $ 368,555
Costs and expenses:
Salaries and benefits..................................... 111,987 43,940 155,927
Supplies.................................................. 21,604 13,113 34,717
Purchased services........................................ 33,786 13,757 47,543
Provision for bad debts................................... 20,987 6,858 27,845
Other operating expenses.................................. 46,393 13,135 (200)(2) 59,328
Depreciation and amortization............................. 8,275 6,905 2,456(3) 17,137
(499)(4)
Interest.................................................. 8,863 9,187 1,636(5) 19,686
Equity in earnings of DHHS................................ (6,609) (6,609)
Settlement costs.......................................... 22,356 22,356
----------- ----------- ------------ -----------
Total costs and expenses.................................... 274,251 100,286 3,393 377,930
----------- ----------- ------------ -----------
Income (loss) before minority interests
and income taxes........................................... (8,625) 2,803 (3,553) (9,375)
Minority interests.......................................... (1,072) (1,072)
----------- ----------- ------------ -----------
Income (loss) before income taxes........................... (9,697) 2,803 (3,553) (10,447)
Income taxes (benefit)...................................... (3,976) 1,037 (802)(6) (3,741)
----------- ----------- ------------ -----------
Net income (loss)........................................... (5,721) 1,766 (2,751) (6,706)
Preferred dividends accrued................................. 6,899 (6,899)(7)
----------- ----------- ------------ -----------
Income (loss) applicable to common stock.................... $ (5,721) $ (5,133) $ 4,148 $ (6,706)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Loss per share.............................................. $ (0.63) $ (0.14)
----------- -----------
----------- -----------
Weighted average number of common and common equivalent
shares outstanding......................................... 8,121 38,880(8) 47,001
----------- ------------ -----------
----------- ------------ -----------
Ratio of earnings to fixed charges (9)...................... -- 1.3x --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-4
<PAGE>
PARACELSUS AND CHAMPION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
PARACELSUS CHAMPION FOR THE FOR THE
PRO FORMA HISTORICAL(A) MERGER MERGER
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 3,149 $ 5,670 $(53,667)(10) $ 8,819
53,667(10)
Marketable securities................................................... 10,051 -- 10,051
Accounts receivable, less allowance for uncollectibles.................. 100,015 36,407 136,422
Supplies................................................................ 9,652 3,872 13,524
Deferred income taxes................................................... 26,463 2,521 18,646(11) 47,630
Other current assets.................................................... 4,918 3,769 (1,000)(12) 7,687
--------- ------------- ------------- ---------
Total current assets.................................................. 154,248 52,239 17,646 224,133
Property and equipment, net of accumulated depreciation................... 195,809 166,997 38,022(13) 400,828
Investment in DHHS........................................................ 52,118 52,118
Other assets.............................................................. 57,854 36,668 60,215(13) 151,737
(3,000)(12)
--------- ------------- ------------- ---------
Total assets.......................................................... $ 407,911 $308,022 $112,883 $ 828,816
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities.......................... $ 77,411 $ 33,655 $ 4,000(14) $ 115,066
Current maturities of long-term debt.................................... 458 2,834 3,292
--------- ------------- ------------- ---------
Total current liabilities............................................. 77,869 36,489 4,000 118,358
Long-term debt and capital lease obligations.............................. 183,102 181,212 49,667(10) 413,981
Deferred income taxes..................................................... 24,607 7,394 15,589(13) 47,590
Other long-term liabilities............................................... 25,968 3,051 1,500(14) 30,519
Redeemable preferred stock................................................ 46,078 (46,078)(13)
Shareholders' equity...................................................... 96,365 33,798 (21,113)(15) 218,368
(9,604)(16)
5,478(13)
147,242(13)
(33,798)(13)
--------- ------------- ------------- ---------
Total liabilities and shareholders' equity............................ $ 407,911 $308,022 $112,883 $ 828,816
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
</TABLE>
- ------------------------
(a) There are no pro forma adjustments to the Champion historical balance sheet.
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-5
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
(1) To reflect the pro forma reduction in interest income as a result of the
repayment of a $4,000,000 promissory note due to Paracelsus, which is
expected to be paid in full by Dr. Krukemeyer contemporaneously with the
payment of the Dividend.
(2) To reflect the pro forma reduction in other operating expenses due to the
termination of the Know-how Contract upon consummation of the Merger. See
"Certain Relationships and Related Transactions -- Other Transactions."
(3) To adjust depreciation and amortization expense based on the revaluation of
Champion's depreciable assets and the increase in goodwill in connection
with the allocated purchase price (see Note 13). The acquired assets are
estimated to have an average remaining useful life of approximately 20
years based on the Company's assumption that Champion's hospital assets
consist of 65% buildings and improvements and 35% equipment with the useful
lives of such assets determined in accordance with Paracelsus' depreciation
policy (35 years, 20 years and 10 years for buildings, improvements and
equipment, respectively). Cost in excess of the fair market value of net
assets acquired ("Goodwill") is amortized on a straight line basis over a
20 year period.
(4) To record the pro forma decrease in amortization of deferred financing
costs associated with the Champion Credit Facility, Champion Notes and
certain other Champion indebtedness. Unaudited Pro Forma Condensed
Combining Statements of Income assume that no value is assigned to such
deferred financing costs in connection with the purchase price allocation.
(5) To record interest expense on the pro forma increase of approximately
$42,482,000 in the Existing Paracelsus Credit Facility to pay for various
Merger related expenditures (See Note 10) and the pro forma issuance of the
Shareholder Subordinated Note. The interest rates in effect under the
Existing Paracelsus Credit Facility were 7.9% for the year ended September
30, 1995, 7.8% for the six months ended March 31, 1995, and 6.6% for the
six months ended March 31, 1996. The Shareholder Subordinated Note will
have an annual interest rate of 6.51%. The following table summarizes the
pro forma change in interest expense.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Merger related increase in Existing Paracelsus Credit
Facility................................................. $ 3,356 $ 1,657 $ 1,402
Shareholder Subordinated Note............................. 468 234 234
------------- --------- ---------
Pro forma adjustment.................................. $ 3,824 $ 1,891 $ 1,636
------------- --------- ---------
------------- --------- ---------
</TABLE>
PF-6
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(6) To reflect the pro forma provision for income taxes at the effective rate
(41%) giving effect to the acquired operations and excluding the
amortization of Goodwill, which is non-deductible for tax purposes.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma adjustments to income before income taxes..... $ 7,915 $ 4,151 $ 3,553
Non-deductible Goodwill amortization.................... (3,193) (1,596) (1,596)
------------- --------- ---------
4,722 2,555 1,957
Effective tax rate...................................... 41% 41% 41%
------------- --------- ---------
Pro forma adjustment.................................. $ 1,936 $ 1,048 $ 802
------------- --------- ---------
------------- --------- ---------
</TABLE>
(7) To eliminate the historical dividend requirements on the Champion Preferred
Stock outstanding during the respective periods as a result of the
conversion of each share of Champion Preferred Stock into two shares of
Paracelsus Common Stock pursuant to the Merger.
PF-7
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(8) To adjust common and common equivalent shares used to calculate income
(loss) per share. The pro forma adjustment reflects the following events
related to the Merger for the fiscal year ended September 30, 1995 and the
six months ended March 31, 1995 and 1996 as more specifically described
below:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Paracelsus Stock Split of each share of Paracelsus
Common Stock outstanding prior to the Effective Time
of the Merger into 66,159.426 shares of Paracelsus
Common Stock.......................................... 29,772 29,772 29,772
Dilutive effect of shares of Champion Common Stock
issued during the period in connection with (i) the
exercise of Champion Options and Champion Warrants and
(ii) the conversion of Champion Preferred Stock into
Champion Common Stock in connection with Champion's
1995 recapitalization................................. 7,613 2,809 3,892
Dilutive effect of Champion Common Stock equivalents,
based on the treasury stock method using the
historical stock prices of Champion Common Stock...... 729 837 -- (a)
Conversion of each share of Champion Preferred Stock
into two shares of Paracelsus Common Stock in the
Merger................................................ 5,211 9,920 5,216
Dilutive effect of Paracelsus Options to be outstanding
upon consummation of the Merger, based on the treasury
stock method using the historical stock prices of
Champion Common Stock................................. 2,744 2,745 -- (a)
------------- --------- ---------
Pro forma adjustment................................... 46,069 46,083 38,880
------------- --------- ---------
------------- --------- ---------
</TABLE>
-------------------------------
(a) Not applicable due to anti-dilutive impact.
(9) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of financing costs and the interest component of
capitalized leases and that portion of operating lease expense which
management believes is representative of the interest component of rental
expenses. For the six months ended March 31, 1995, Champion pro forma
earnings were inadequate to cover fixed charges by $639,000. For the six
months ended March 31, 1996, after giving effect to the Merger, combined
pro forma earnings were inadequate to cover fixed charges by $9,375,000.
PF-8
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(10) To reflect the pro forma sources and uses of cash in connection with the
Shareholder Subordinated Note and other Merger-related expenditures as of
March 31, 1996, summarized as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENT ADJUSTMENT
TO CASH TO DEBT
(IN THOUSANDS)
<S> <C> <C>
Sources:
Merger related increase in Existing Paracelsus Credit Facility..... $ 42,482 $ 42,482
Shareholder Subordinated Note...................................... 7,185 7,185
Repayment of Dr. Krukemeyer's promissory note due to Paracelsus.... 4,000
----------- -----------
Pro forma adjustment -- total sources.......................... $ 53,667 $ 49,667
----------- -----------
----------- -----------
Uses:
Estimated Merger expenses.......................................... $ 6,000
Bonuses to be paid to Champion officers upon consummation of the
Merger............................................................ 3,054
Cash compensation paid in connection with the cancellation of the
Phantom Equity Plan (as defined below)............................ 20,500
Estimated severance and relocation costs........................... 3,000
Paracelsus Dividend................................................ 21,113
-----------
Pro forma adjustment -- total uses............................. $ 53,667
-----------
-----------
</TABLE>
(11) To record current deferred tax assets at the effective rate (41%) resulting
from the following Merger-related events (in thousands):
<TABLE>
<S> <C>
Compensation expense associated with the cancellation of the
Phantom Equity Plan:
Cash compensation............................................... $ 20,500
Grant of Value Options.......................................... 12,317
Estimated severance and relocation costs.......................... 3,000
Record vesting of Paracelsus employees in SERP (as defined below)
upon consummation of the Merger.................................. 4,000
Compensation expense associated with Paracelsus Options granted to
Paracelsus officers and directors................................ 3,833
---------
43,650
Income tax benefit at the effective rate of 41%................... 41%
---------
17,896
Reversal of valuation allowance on Champion deferred tax assets... 750
---------
Pro forma adjustment............................................ $ 18,646
---------
---------
</TABLE>
PF-9
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(12) To reflect the pro forma repayment of Dr. Krukemeyer's promissory note due
to Paracelsus ($1,000,000 current, $3,000,000 long-term (see Note 10)).
(13) To record the Merger using the purchase method of accounting, including the
adjustment of Champion's balance sheet to reflect the estimated fair market
value of its property and equipment, based on the per share market price of
Champion Common Stock on April 12, 1996, the last trading day prior to the
announcement of the Merger ($10.50), less a 25% discount to reflect the
limited number of shares of Champion Common Stock that were freely tradable
at the date of the Merger. The Merger Agreement does not specify the
Champion Common Stock market price to be used in the calculation of the
purchase price. The purchase price allocation reflected in the Unaudited
Pro Forma Condensed Combining Balance Sheet is based upon the best
information currently available without a final independent appraisal of
Champion's facilities. For the purpose of allocating net acquisition costs
among the Champion assets acquired, Paracelsus has tentatively allocated
35% of the excess acquisition cost over the carrying value of Champion's
assets to property and equipment and 65% to Goodwill. It is the intention
of Paracelsus and Champion to more fully evaluate the net assets acquired
and, as a result, the allocation of acquisition cost may change. Paracelsus
and Champion do not expect the final allocation of acquisition cost to be
materially different from that assumed in the Unaudited Pro Forma Condensed
Combining Balance Sheet. The following table summarizes the calculation of
the preliminary purchase price allocation (in thousands, except market
price data):
<TABLE>
<S> <C> <C> <C>
Champion common and common equivalent shares outstanding (a)......... 21,856
Discounted per share price (b)....................................... $ 7.88
---------
Discounted market value of Champion Common Stock..................... $ 172,225
Less proceeds from options and warrants assumed exercised............ (24,983)
---------
147,242
Plus: Estimated Merger expenses................................. 6,000
Bonuses to be paid to Champion officers upon consummation
of the Merger............................................ 3,054
Prior service cost of including certain Champion officers
in SERP.................................................. 1,500
Market value of Paracelsus Options to be granted to
Champion officers........................................ 5,478
---------
Total purchase price.................................... 163,274
Less: Champion stockholders' equity............................. $ (33,798)
Champion Preferred Stock.................................. (46,078)
Reversal of valuation allowance on Champion deferred tax
assets (see Note 11)..................................... (750)
Plus assets not acquired:
Champion Goodwill......................................... 21,238
Champion deferred financing costs......................... 4,749
---------
Net assets acquired....................................... (54,639)
---------
Acquisition cost in excess of net assets acquired....... $ 108,635
---------
---------
ALLOCATION OF ACQUISITION COSTS IN EXCESS OF NET ASSETS ACQUIRED:
Acquisition costs in excess of net assets acquired allocated to
property and equipment -- 35%....................................... $ 38,022
---------
---------
Acquisition costs in excess of net assets acquired allocated to
Goodwill -- 65%..................................................... $ 70,613
Less: Champion Goodwill......................................... (21,238)
Champion deferred financing costs......................... (4,749)
---------
44,626
Pro forma increase in deferred tax liability due to step up in
property and equipment.............................................. 15,589
---------
Net pro forma adjustment to Goodwill................................. $ 60,215
---------
---------
</TABLE>
PF-10
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
- --------------------------
<TABLE>
<C> <S> <C>
(a) Champion total common and common equivalent shares consist of the
following components as of March 31, 1996:
Shares of Champion Common Stock outstanding........................... 12,013
Conversion of Champion Preferred Stock (each share of Champion
Preferred Stock into two shares of Paracelsus Common Stock in the
Merger).............................................................. 5,216
Champion Options, Champion Warrants and subscription for Champion
Common Stock Shares assumed exercised................................ 4,627
---------
Champion total common and common equivalent shares outstanding........ 21,856
---------
---------
(b) Per share discount of Champion Common Stock:
Market price of Champion Common Stock on April 12, 1996, the last
trading date prior to the announcement of the Merger................. $ 10.50
Estimated discounted value due to limited liquidity of Champion Common
Stock................................................................ 75%
---------
Discounted per share price............................................ $ 7.88
---------
---------
</TABLE>
(14) To record a pro forma increase in current liabilities of approximately
$4,000,000 in connection with the vesting of Paracelsus employees in the
SERP and a pro forma increase in long-term liabilities of approximately
$1,500,000 as a result of the inclusion of the certain Champion officers in
the SERP.
(15) To reflect the pro forma payment of the Dividend in the amount of
$21,113,000.
(16) To reflect the pro forma reduction in shareholders' equity for the
following Merger-related events (in thousands):
<TABLE>
<S> <C>
Cash compensation paid in connection with the cancellation of the
Phantom Equity Plan (see Note 10)................................ $ 20,500
Record vesting of Paracelsus employees in SERP upon consummation
of the Merger (see Note 14)...................................... 4,000
Estimated severance and relocation costs (see Note 10)............ 3,000
---------
Total......................................................... 27,500
---------
Less income tax effect:
Income tax benefit at the effective rate of 41%................. 11,275
Grant of Value Options upon cancellation of Phantom Equity
Plan........................................................... 5,050
Options granted to Paracelsus officers.......................... 1,571
---------
Net income tax effect......................................... 17,896
---------
Pro forma adjustment to shareholders' equity...................... $ 9,604
---------
---------
</TABLE>
The Unaudited Pro Forma Condensed Combining Statements of Income for the
fiscal year ended September 30, 1995 and the six months ended March 31, 1995 and
1996, exclude the effects of the following charges resulting from the Merger (in
thousands):
<TABLE>
<S> <C>
Total charges excluded from the Unaudited Pro Forma Condensed
Combining Statements of Income (see Note 11).................... $ 43,650
Income tax benefit at the effective rate of 41%.................. (17,896)
---------
Net reduction to income (loss) applicable to common stock........ $ 25,754
---------
---------
</TABLE>
PF-11
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
Loss per share would have been the following if the impact of such
charges were reflected on the Unaudited Pro Forma Condensed Combining
Statements of Income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Loss per share.............................. $ (0.39) $ (0.47) $ (0.69)
------ --------- ---------
------ --------- ---------
</TABLE>
PF-12
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following tables present the Paracelsus Unaudited Pro Forma Condensed
Combining Balance Sheet as of March 31, 1996, and the Paracelsus Unaudited Pro
Forma Condensed Combining Statements of Income for the six months ended March
31, 1996 and 1995 and the fiscal year ended September 30, 1995, to reflect the
effect of the acquisition by Paracelsus of the Columbia Hospitals (Pioneer, a
139-bed hospital in West Valley City, Utah, Davis, a 120-bed hospital in Layton,
Utah, and Santa Rosa, a 129-bed hospital in Milton, Florida) on May 17, 1996,
the sale by Paracelsus of Womans Hospital, a 111-bed hospital in Jackson,
Mississippi on September 30, 1995 and the closure of the Closed Facility,
Bellwood Health Center, a psychiatric facility in Bellwood, California, on April
24, 1995. The Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet
assumes that the acquisition of the Columbia Hospitals occurred on March 31,
1996, and the Paracelsus Unaudited Pro Forma Combining Statements of Income
assume that the acquisition of the Columbia Hospitals occurred at the beginning
of each period and the sale of Womans Hospital and the closure of the Closed
Facility occurred on October 1, 1994.
Paracelsus acquired the Columbia Hospitals from Columbia for consideration
consisting of $38,500,000 in cash and the exchange of the Exchanged Hospitals
(Peninsula, a 119-bed hospital in Ormond Beach, Florida, Elmwood, a 135-bed
hospital in Jefferson, Louisiana, and Halstead, a 190-bed hospital in Halstead,
Kansas). The acquisition was accounted for as a purchase transaction. Paracelsus
financed the cash portion of the acquisition of the Columbia Hospitals from
borrowings under the Existing Paracelsus Credit Facility. Paracelsus also
engaged in the Real Property Purchase and Sale Transaction whereby it purchased
the real property of Elmwood and Halstead from a REIT, exchanged the Elmwood and
Halstead real properties with Columbia for Pioneer's real property, and sold
Pioneer's real property to the REIT.
Paracelsus sold Womans Hospital to the facility's lessee for $17,800,000 in
cash, which resulted in a gain of $9,189,000. In August of 1994, Paracelsus had
divested the operations of Womans Hospital and entered into an operating lease
agreement with the lessee, which granted the lessee the option to purchase the
facility at an amount defined in the lease agreement.
In connection with the closure of the Closed Facility, Paracelsus recorded a
restructuring charge of $973,000 for employee severance benefits and contract
termination costs.
The Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income
for the fiscal year ended September 30, 1995 includes Paracelsus' historical
results of operations for the fiscal year ended September 30, 1995 and the
Columbia Hospitals' historical results of operations for the year ended December
31, 1995. The Paracelsus Unaudited Pro Forma Condensed Combining Statements of
Income for the six months ended March 31, 1995 and 1996 include Paracelsus' and
the Columbia Hospitals' historical results of operations for the same six-month
period. The Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet
includes the historical balance sheets of Paracelsus and the Columbia Hospitals
as of March 31, 1996.
The Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements
do not purport to present the financial position or results of operations of
Paracelsus had the acquisitions occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be expected in the
future. The Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements following are qualified in their entirety by reference to, and should
be read in conjunction with, the historical consolidated financial statements of
Paracelsus and the historical combined financial statements of the Columbia
Hospitals included elsewhere herein.
PF-13
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWOOD
WOMANS HEALTH
HOSPITAL CENTER
(OCTOBER 1, (OCTOBER 1,
1994 TO 1994 TO
PARACELSUS COLUMBIA SEPTEMBER APRIL 24, PRO FORMA PARACELSUS
HISTORICAL HOSPITALS 30, 1995) 1995) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues......................... $509,729 $105,307 $(11,003) $(5,706) $(96,694)(1) $501,633
Costs and expenses:
Salaries and benefits.......................... 209,672 39,088 -- (1,731) (40,994)(1) 206,035
Supplies....................................... 40,780 14,680 -- (5) (10,639)(1) 44,816
Purchased services............................. 58,113 10,158 -- (594) (8,375)(1) 59,302
Provision for bad debts........................ 39,277 7,515 -- (843) (4,895)(1) 41,054
Other operating expenses....................... 99,777 17,776 (265) (4,208) (20,252)(2) 92,828
Depreciation and amortization.................. 17,276 5,570 (622) (183) (4,874)(3) 17,167
Interest....................................... 15,746 3,280 -- (228) (1,557)(4) 17,241
Restructuring and unusual charges.............. 5,150 -- -- (973) 4,177
---------- --------- ------------ ----------- ------------ ---------
Total costs and expenses......................... 485,791 98,067 (887) (8,765) (91,586) 482,620
---------- --------- ------------ ----------- ------------ ---------
Income before minority interests and income
taxes........................................... 23,938 7,240 (10,116) 3,059 (5,108) 19,013
Minority interests............................... (1,927) -- -- -- (1,927)
---------- --------- ------------ ----------- ------------ ---------
Income (loss) before income taxes................ 22,011 7,240 (10,116) 3,059 (5,108) 17,086
Income taxes (benefit)........................... 9,024 2,869 (4,148) 1,254 (1,994)(5) 7,005
---------- --------- ------------ ----------- ------------ ---------
Net income (loss)................................ $ 12,987 $ 4,371 $ (5,968) $ 1,805 $ (3,114) $ 10,081
---------- --------- ------------ ----------- ------------ ---------
---------- --------- ------------ ----------- ------------ ---------
Ratio of earnings to fixed
charges (9)..................................... 2.1x 1.8x
---------- ---------
---------- ---------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-14
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA WOMANS BELLWOOD PRO FORMA PARACELSUS
HISTORICAL HOSPITALS HOSPITAL HEALTH CENTER ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues......... $ 252,356 $ 52,136 $ (922) $ (5,389) $ (47,850)(1) $ 250,331
Costs and expenses:
Salaries and benefits.......... 108,575 18,674 (1,731) (19,479)(1) 106,039
Supplies....................... 21,432 7,093 (5) (6,438)(1) 22,082
Purchased services............. 28,118 4,701 (594) (4,723)(1) 27,502
Provision for bad debts........ 19,283 3,116 (843) (2,495)(1) 19,061
Other operating expenses....... 46,730 7,215 (121) (2,261) (6,767)(2) 44,796
Depreciation and
amortization.................. 8,734 3,165 (309) (129) (2,796)(3) 8,665
Interest....................... 7,652 1,832 (114) (1,110)(4) 8,260
----------- ----------- ----------- ------------- ------------- -----------
Total costs and expenses......... 240,524 45,796 (430) (5,677) (43,808) 236,405
----------- ----------- ----------- ------------- ------------- -----------
Income (loss) before minority
interests and income taxes...... 11,832 6,340 (492) 288 (4,042) 13,926
Minority interests............... (1,204) -- -- -- -- (1,204)
----------- ----------- ----------- ------------- ------------- -----------
Income (loss) before income
taxes........................... 10,628 6,340 (492) 288 (4,042) 12,722
Income taxes (benefit)........... 4,357 2,599 (202) 118 (1,657)(5) 5,215
----------- ----------- ----------- ------------- ------------- -----------
Net income (loss)................ $ 6,271 $ 3,741 $ (290) $ 170 $ (2,385) $ 7,507
----------- ----------- ----------- ------------- ------------- -----------
----------- ----------- ----------- ------------- ------------- -----------
Ratio of earnings to fixed
charges (9)..................... 2.1x 2.2x
----------- -----------
----------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-15
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA PRO FORMA PARACELSUS
HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Total operating revenues................................... $ 260,590 $ 54,999 $ (49,963)(1) $ 265,626
Costs and expenses:
Salaries and benefits.................................... 113,162 21,096 (22,271)(1) 111,987
Supplies................................................. 19,363 7,769 (5,528)(1) 21,604
Purchased services....................................... 34,174 5,301 (5,689)(1) 33,786
Provision for bad debts.................................. 20,191 3,264 (2,468)(1) 20,987
Other operating expenses................................. 46,906 12,849 (13,362)(2) 46,393
Depreciation and amortization............................ 7,972 3,134 (2,831)(3) 8,275
Interest................................................. 7,685 1,377 (199)(4) 8,863
Settlement costs......................................... 22,356 -- 22,356
----------- --------- -------------- -----------
Total costs and expenses................................... 271,809 54,790 (52,348) 274,251
----------- --------- -------------- -----------
Income (loss) before minority interests and income taxes... (11,219) 209 2,385 (8,625)
Minority interests......................................... (1,072) -- (1,072)
----------- --------- -------------- -----------
Income (loss) before income taxes.......................... (12,291) 209 2,385 (9,697)
Income taxes (benefit)..................................... (5,040) 86 978(5) (3,976)
----------- --------- -------------- -----------
Net income (loss).......................................... $ (7,251) $ 123 $ 1,407 $ (5,721)
----------- --------- -------------- -----------
----------- --------- -------------- -----------
Ratio of earnings to fixed charges (9)..................... -- --
----------- -----------
----------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-16
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA PRO FORMA PARACELSUS
HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,149 $ 206 $ (206)(6) $ 3,149
Marketable securities.................................. 10,051 -- 10,051
Accounts receivable, less allowance for
uncollectibles........................................ 100,121 15,664 (15,770)(6)(7) 100,015
Supplies............................................... 10,634 2,019 (3,001)(6)(7) 9,652
Deferred income taxes.................................. 26,463 -- 26,463
Other current assets................................... 4,798 1,040 (920)(6)(7) 4,918
----------- --------- -------- -----------
Total current assets................................. 155,216 18,929 (19,897) 154,248
Property and equipment, net of accumulated depreciation
and amortization........................................ 165,729 47,561 (17,481)(8) 195,809
Other assets............................................. 47,271 12,781 (2,198)(6)(8) 57,854
----------- --------- -------- -----------
Total assets......................................... $ 368,216 $ 79,271 $ (39,576) $ 407,911
----------- --------- -------- -----------
----------- --------- -------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities......... $ 76,615 $ 8,750 $ (7,954)(6)(7) $ 77,411
Current maturities of long-term debt and capital lease
obligations........................................... 5,186 -- (4,728)(4) 458
----------- --------- -------- -----------
Total current liabilities............................ 81,801 8,750 (12,682) 77,869
Long-term debt and capital lease obligations............. 139,475 -- 43,627(4) 183,102
Deferred income taxes.................................... 24,607 -- 24,607
Other long-term liabilities.............................. 25,968 36,324 (36,324)(6) 25,968
Shareholder's equity..................................... 96,365 34,197 (34,197)(6) 96,365
----------- --------- -------- -----------
Total liabilities and shareholder's equity........... $ 368,216 $ 79,271 $ (39,576) $ 407,911
----------- --------- -------- -----------
----------- --------- -------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-17
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS
(1) To remove the historical operating results of the Exchanged Hospitals.
(2) To adjust other operating expenses for the exchange of the Exchanged
Hospitals, the acquisition, sale and leaseback of the Pioneer real property,
and the net change in allocated corporate overhead. Other operating expenses
are estimated to decrease on a pro forma basis as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED ---------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Operating expenses related to Paracelsus Hospitals..... $ (21,518) $ (9,609) $ (10,454)
Payments under operating lease arrangement to REIT..... 7,051 3,555 3,526
Decrease in Columbia Hospitals allocated corporate
overhead.............................................. (5,785) (713) (6,434)
-------- --------- ----------
Pro forma adjustment................................. $ (20,252) $ (6,767) $ (13,362)
-------- --------- ----------
-------- --------- ----------
</TABLE>
Paracelsus assumed there would be no incremental increase in corporate
overhead as a result of the acquisition of the Columbia Hospitals and the
related disposition of the Exchanged Hospitals because the overall corporate
overhead after the transaction is expected to be the same as it was before
the transactions.
(3) To adjust depreciation and amortization based on the revaluation of the
acquired depreciable assets to fair value and the increase in Goodwill in
connection with the purchase price allocation (see Note 8). The acquired
assets are estimated to have an average useful life of approximately 18
years based on an allocation of the appraised values of the assets acquired
and the useful lives of such assets in accordance with Paracelsus'
depreciation policy (35 years, 20 years and 10 years for buildings,
improvements, and equipment, respectively). The Goodwill is being amortized
over a 20-year period. Depreciation and amortization are estimated to
decrease on a pro forma basis, as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Depreciation expense related to the Exchanged
Hospitals............................................... $ (3,381) $ (1,626) $ (1,693)
Excess historical depreciation and amortization expense
for the Columbia Hospitals acquired over the
depreciation and amortization of the fair value of the
Columbia Hospitals' assets acquired..................... (1,579) (1,170) (1,138)
Adjustment for Bellwood Health Center corporate
allocation.............................................. 86 -- --
------- --------- ---------
Pro forma adjustment................................... $ (4,874) $ (2,796) $ (2,831)
------- --------- ---------
------- --------- ---------
</TABLE>
The net decrease in historical cost depreciation and amortization for each
of the periods presented resulted from the acquisition, sale and leaseback
of the Pioneer real property (See Note 2).
(4) To record the pro forma increase in the Paracelsus Existing Credit Facility
and related interest expense as a result of the acquisition of the Columbia
Hospitals, net of the effect of the sale of Womans Hospital (year ended
September 30, 1995 only). The acquisition of the Columbia Hospitals assumes
an increase in the principal amount outstanding under the Paracelsus
Existing Credit Facility by $43,627,000. Such amount is comprised of
$38,500,000 in cash consideration, $1,626,000 for payment of closing costs,
$4,728,000 to refinance current maturities of long-term
PF-18
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS (CONTINUED)
debt of the Paracelsus Hospitals not assumed by Columbia, offset in part by
a payment from Columbia of $1,764,000 for a net working capital deficit
assumed by Paracelsus, net of a $537,000 payment for a note receivable
acquired (included in Other Assets). The average interest rates in effect
under the Paracelsus Existing Credit Facility were 7.90% for the fiscal year
ended September 30, 1995, and 7.80% and 6.60% for the six months ended March
31, 1995 and 1996, respectively. Interest expense on a pro forma basis
decreased, as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Increase in interest expense to finance the acquisition
of the Columbia Hospitals............................... $ 3,447 $ 1,701 $ 1,440
Interest expense on the Columbia Hospitals debt not
assumed by Paracelsus................................... (3,280) (1,832) (1,377)
Interest expense on the Exchanged Hospitals debt assumed
by Columbia............................................. (546) (399) (262)
Adjustment for Bellwood Health Center corporate
allocation.............................................. 228 114
Reduction in interest expense assuming the proceeds from
the sale of Womans Hospital were applied to reduce
Paracelsus' credit facility............................. (1,406) (694)
------- --------- ---------
Pro forma adjustment................................... $ (1,557) $ (1,110) $ (199)
------- --------- ---------
------- --------- ---------
</TABLE>
(5) To reflect the pro forma provision for income taxes at the statutory rate
(41%) giving effect to the hospitals acquired and divested.
(6) To remove the assets not acquired, liabilities not assumed and the
shareholder's equity of the Columbia Hospitals acquired.
(7) To remove the assets and liabilities of the Exchanged Hospitals as partial
consideration for the Columbia Hospitals acquired.
(8) To record the acquisition of the Columbia Hospitals using the purchase
method of accounting, including adjustment of the balance sheet of the
Columbia Hospitals acquired to reflect the transfer of assets of the
Exchanged Hospitals and the allocation of the estimated fair values of
property and equipment acquired in excess of the carrying values. The
purchase price allocation
PF-19
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS (CONTINUED)
reflected in the Unaudited Pro Forma Condensed Combined Balance Sheet is
based upon an independent appraisal. The following table summarizes the
calculation of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Total cash consideration, including estimated closings costs (See
Note 4)............................................................. $ 40,126
Fair value of the Exchanged Hospitals transferred to Columbia........ 31,761
---------
Total estimated purchase price..................................... 71,887
Columbia's basis in property and equipment transferred to
Paracelsus.......................................................... (47,561)
---------
Excess purchase price.............................................. 24,326
Purchase price allocated to Goodwill................................. (13,069)
---------
Purchase price allocated to property and equipment................. 11,257
Basis of the Exchanged Hospitals transferred to Columbia............. (28,738)
---------
Net pro forma adjustment......................................... $ (17,481)
---------
---------
Purchase price allocated to Goodwill................................. $ 13,069
Less: Basis in Goodwill of the Exchanged Hospitals................... (3,023)
Columbia Hospitals long-term net assets not acquired............ (12,244)
---------
Net pro forma adjustment......................................... $ (2,198)
---------
---------
</TABLE>
The Real Property Purchase and Sale Transaction was accounted for as an
exchange of assets between Paracelsus, Columbia and the REIT which had no
effect on the Paracelsus Unaudited Pro Forma Condensed Combining Balance
Sheet.
(9) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of financing costs and the interest component of
capitalized leases and that portion of operating lease expense which
management believes is representative of the interest component of rental
expenses. Historical and pro forma earnings were insufficient to cover fixed
charges by $11,219,000 and $8,625,000, respectively, for the six months
ended March 31, 1996.
PF-20
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME AND
UNAUDITED HISTORICAL CONDENSED BALANCE SHEET
The following tables present the Unaudited Pro Forma Condensed Combining
Statements of Income for the year ended December 31, 1995 and the six months
ended March 31, 1995 and 1996, to illustrate the effect of Champion's
acquisition of Jordan Valley, a 50-bed hospital in West Jordan, Utah, on March
1, 1996, the acquisition of SLRMC, a 200-bed hospital in Salt Lake City, Utah,
on April 13, 1995, the formation of DHHS, the partnership between the wholly
owned subsidiary of Champion that owned Heartland Medical Center ("Heartland"),
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, effective December 31, 1994 and
the AmeriHealth Merger on December 6, 1994. The Unaudited Pro Forma Condensed
Combining Statements of Income assume the acquisition of Jordan Valley occurred
at the beginning of each period. The Unaudited Pro Forma Condensed Combining
Statements of Income for the year ended December 31, 1995 and the six months
ended March 31, 1995 assume the acquisition of SLRMC occurred on January 1, 1995
and October 1, 1994, respectively. The Unaudited Pro Forma Condensed Combining
Statement of Income for the six months ended March 31, 1995 assumes the
formation of DHHS and the AmeriHealth Merger occurred October 1, 1994. The
Unaudited Historical Condensed Balance Sheet is presented for informational
purposes only.
Jordan Valley is a 50-bed acute care hospital located in West Jordan, Utah,
a suburb of Salt Lake City. Jordan Valley was acquired from Columbia in exchange
for Autauga, an 85-bed acute care hospital and a 72-bed skilled nursing
facility, both in Prattville, Alabama, plus preliminary cash consideration paid
to Columbia of approximately $10,750,000. Cash consideration included
approximately $3,750,000 for certain net working capital components, which are
subject to adjustment and final settlement by the parties, and reimbursement of
certain capital expenditures made previously by Columbia. The acquisition was
accounted for as a purchase transaction with operations reflected in the
consolidated financial statements beginning March 1, 1996.
SLRMC is comprised of a 200-bed tertiary care hospital and five clinics and
is located in Salt Lake City, Utah. SLRMC was acquired from Columbia for total
consideration of approximately $61,042,000, which consisted of approximately
$56,816,000 in cash and a note payable due to Columbia of approximately
$1,767,000, as well as the assumption of approximately $2,459,000 in capital
lease obligations. Cash consideration included approximately $11,783,000 for
certain working capital components, resulting in a net purchase price of
approximately $49,259,000. Champion funded the asset purchase from available
cash and approximately $30,000,000 in borrowings under its then outstanding
credit facility, which Champion subsequently repaid from the proceeds from the
issuance of the Champion Series E Notes. The acquisition was accounted for as a
purchase transaction with operations reflected in the consolidated financial
statements beginning April 14, 1995.
On December 6, 1994, Champion's predecessor merged with AmeriHealth. The
AmeriHealth Merger was accounted for as a recapitalization of Champion with
Champion as the acquiror (a reverse acquisition). The common shareholders of
AmeriHealth received one share of Champion common stock for every 5.70358 shares
of common stock of AmeriHealth and a cash distribution of $0.085 per AmeriHealth
common share. The common shareholders of Champion's predecessor received one
share of Champion Common Stock for each predecessor share of common stock
outstanding prior to the AmeriHealth Merger. The preferred shareholders of
Champion's predecessor received one share of Champion preferred stock for each
predecessor share of preferred stock outstanding prior to the AmeriHealth
Merger. Additionally, Champion assumed approximately $17,700,000 in debt,
resulting in a net purchase price of approximately $38,876,000. The AmeriHealth
Merger was accounted for as a purchase transaction. AmeriHealth owned and
managed two acute care hospitals with a combined total of 265 licensed beds:
Metropolitan Hospital in Richmond, Virginia with 180 beds and Autauga Medical
Center in Prattville, Alabama with 85 beds. AmeriHealth also owned a 72 bed
skilled nursing facility, Autauga Health Care Center in Prattville, Alabama.
PF-21
<PAGE>
In connection with the formation of DHHS, Champion and Dakota contributed
their respective hospitals both debt and lien free (except for capitalized
leases), and Champion contributed an additional $20,000,000 in cash, each in
exchange for 50% ownership in DHHS. In addition, each partner contributed
$2,000,000 in cash to the working capital of DHHS. A $20,000,000 special
distribution was made to Dakota after capitalization of DHHS 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 DHHS. Also on
December 21, 1994, Champion entered into an operating agreement with DHHS and
Dakota to manage the combined operations of the two hospitals. Under the terms
of the partnership agreement, Champion is obligated to advance funds to DHHS to
cover any and all operating deficits of DHHS. Champion will receive 55% of the
net income and distributable cash flow ("DCF") of DHHS 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. Champion accounts for its investment in DHHS under the
equity method.
These Unaudited Pro Forma Condensed Combining Statements of Income do not
purport to present the financial position or results of operations of Champion
had the acquisitions occurred on the dates specified, nor are they necessarily
indicative of the results of operations that may be expected in the future. The
Unaudited Pro Forma Condensed Combining Statements of Income following are
qualified in their entirety by reference to, and should be read in conjunction
with, the historical consolidated financial statements of Champion included
elsewhere herein.
PF-22
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CHAMPION JORDAN SLRMC (3
HISTORICAL VALLEY MONTHS AND PRO FORMA CHAMPION
(1) HOSPITAL 13 DAYS) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C>
Net revenue................................ $ 167,520 $ 20,973 $ 22,438 $ (15,298)(2)(3) $ 195,633
Costs and expenses:
Salaries and benefits.................... 72,188 8,000 8,090 (6,238)(2) 82,040
Supplies................................. 21,113 2,751 4,012 (1,864)(2) 26,012
Purchased services....................... 23,595 2,570 2,296 (1,773)(2) 26,688
Provision for bad debts.................. 12,016 1,929 1,527 (910)(2) 14,562
Other operating expenses................. 20,999 3,531 3,611 (2,658)(2)(4) 25,483
Depreciation and amortization............ 9,290 1,128 1,372 (1,446)(2)(5) 10,344
Interest................................. 13,618 -- 45 2,075(6) 15,738
Equity in earnings of DHHS............... (8,881) -- -- (8,881)
------------ --------- ----------- -------- -----------
Total costs and expenses................... 163,938 19,909 20,953 (12,814) 191,986
------------ --------- ----------- -------- -----------
Income before income taxes................. 3,582 1,064 1,485 (2,484) 3,647
Income taxes............................... 150 394 557 (824)(7) 277
------------ --------- ----------- -------- -----------
Net income................................. 3,432 670 928 (1,660) 3,370
Preferred dividends accrued................ 11,331 -- -- 11,331
------------ --------- ----------- -------- -----------
Loss applicable to common stock............ $ (7,899) $ 670 $ 928 $ (1,660) $ (7,961)
------------ --------- ----------- -------- -----------
------------ --------- ----------- -------- -----------
Loss per share............................. $ (1.86) $ (1.87)
------------ -----------
------------ -----------
Weighted average number of common and
common equivalent shares outstanding...... 4,255 4,255
------------ -----------
------------ -----------
Ratio of Earnings to Fixed Charges(15)..... 1.2x 1.2x
------------ -----------
------------ -----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-23
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1994 FOR THE
ACQUISITION 1994 JORDAN
CHAMPION AMERIHEALTH AND INVESTMENT ACQUISITION VALLEY PRO FORMA
HISTORICAL (1) (2 MONTHS) ADJUSTMENTS AND INVESTMENT HOSPITAL SLRMC ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue......... $ 61,623 $ 4,683 $ (10,497)(8)(9) $ 55,809 $ 11,035 $ 37,144 $ (6,879)(2)(3)
Cost and expenses:
Salaries and
benefits......... 26,951 3,662 (3,962)(9) 26,651 4,149 14,261 (2,893)(2)
Supplies.......... 6,818 1,071 (1,304)(9) 6,585 1,300 6,895 (1,077)(2)
Purchase
services......... 8,804 1,195 (2,871)(9)(10) 7,128 1,006 5,030 (1,051)(2)
Provision for bad
debts............ 5,183 1,713 (529)(9) 6,367 1,263 1,979 (1,666)(2)
Other operating
expenses......... 8,886 894 (1,335)(9) 8,445 884 4,323 (829)(2)
Depreciation and
amortization..... 3,023 366 (197)(9)(11) 3,192 718 2,402 (1,899)(2)(5)
Interest.......... 4,204 331 (145)(9)(12) 4,390 307 2,251(6)
Equity in earnings
of DHHS.......... (1,478) (885)(9)(13) (2,363)
------------- ------------- --------------- --------------- ----------- ----------- -------
Total costs and
expenses........... 62,391 9,232 (11,228) 60,395 9,320 35,197 (7,164)
------------- ------------- --------------- --------------- ----------- ----------- -------
Income (loss) before
income taxes....... (768) (4,549) 731 (4,586) 1,715 1,947 285
Income taxes
(benefit).......... 70 (274) 274(7) 70 635 731 (1,366)(7)
------------- ------------- --------------- --------------- ----------- ----------- -------
Net income (loss)... (838) (4,275) 457 (4,656) 1,080 1,216 1,651
Preferred dividends
accrued............ 2,727 2,727
------------- ------------- --------------- --------------- ----------- ----------- -------
Income (loss)
applicable to
common stock....... $ (3,565) $ (4,275) $ 457 $ (7,383) $ 1,080 $ 1,216 $ 1,651
------------- ------------- --------------- --------------- ----------- ----------- -------
------------- ------------- --------------- --------------- ----------- ----------- -------
Loss per share...... $ (1.10) $ (0.25) $ (1.74)
------------- ------------- ---------------
------------- ------------- ---------------
Weighted average
number of common
and common
equivalent shares
outstanding........ 3,244 16,924 (15,924)(14) 4,244
------------- ------------- --------------- ---------------
------------- ------------- --------------- ---------------
Ratio of earnings to
fixed charges
(15)............... --
-------------
-------------
<CAPTION>
CHAMPION
PRO FORMA
<S> <C>
Net revenue......... $ 97,109
Cost and expenses:
Salaries and
benefits......... 42,168
Supplies.......... 13,703
Purchase
services......... 12,113
Provision for bad
debts............ 7,943
Other operating
expenses......... 12,823
Depreciation and
amortization..... 4,413
Interest.......... 6,948
Equity in earnings
of DHHS.......... (2,363)
-----------
Total costs and
expenses........... 97,748
-----------
Income (loss) before
income taxes....... (639)
Income taxes
(benefit).......... 70
-----------
Net income (loss)... (709)
Preferred dividends
accrued............ 2,727
-----------
Income (loss)
applicable to
common stock....... $ (3,436)
-----------
-----------
Loss per share...... $ (0.81)
-----------
-----------
Weighted average
number of common
and common
equivalent shares
outstanding........ 4,244
-----------
-----------
Ratio of earnings to
fixed charges
(15)............... --
-----------
-----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-24
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JORDAN
CHAMPION VALLEY PRO FORMA CHAMPION
HISTORICAL(1) HOSPITAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net revenue.............................................. $ 100,366 $ 8,830 $ (6,107)(2) $ 103,089
Cost and expenses:
Salaries and benefits.................................. 43,296 3,472 (2,828)(2) 43,940
Supplies............................................... 12,730 1,174 (791)(2) 13,113
Purchased services..................................... 13,079 1,288 (610)(2) 13,757
Provision for bad debts................................ 6,701 362 (205)(2) 6,858
Other operating expenses............................... 12,560 2,380 (1,805)(2)(4) 13,135
Depreciation and amortization.......................... 6,335 303 267 (2)(5 6,905
Interest............................................... 8,799 -- 388(6) 9,187
Equity in earnings of DHHS............................. (6,609) -- (6,609)
------------ --------- -------- -----------
Total costs and expenses................................. 96,891 8,979 (5,584) 100,286
------------ --------- -------- -----------
Income (loss) before income taxes........................ 3,475 (149) (523) 2,803
Income taxes (benefit)................................... 447 (55) 645(7) 1,037
------------ --------- -------- -----------
Net income (loss)........................................ 3,028 (94) (1,168) 1,766
Preferred dividends accrued.............................. 6,899 -- 6,899
------------ --------- -------- -----------
Loss applicable to common stock.......................... $ (3,871) $ (94) $ (1,168) $ (5,133)
------------ --------- -------- -----------
------------ --------- -------- -----------
Loss per share........................................... $ (0.48) $ (0.63)
------------ -----------
------------ -----------
Weighted average number of common and common equivalent
shares outstanding...................................... 8,121 8,121
------------ -----------
------------ -----------
Ratio of earnings to fixed charges(15)................... 1.4x 1.3x
------------ -----------
------------ -----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-25
<PAGE>
CHAMPION UNAUDITED HISTORICAL CONDENSED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents...................................................... $ 5,670
Accounts receivable, less allowance for uncollectibles......................... 36,407
Supplies....................................................................... 3,872
Deferred income taxes.......................................................... 2,521
Other current assets........................................................... 3,769
---------
Total current assets......................................................... 52,239
Property and equipment, net of accumulated depreciation and amortization......... 166,997
Investment in DHHS............................................................... 52,118
Other assets..................................................................... 36,668
---------
Total assets................................................................. $ 308,022
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities................................. $ 33,655
Current maturities of long-term debt and capital lease obligations............. 2,834
---------
Total current liabilities.................................................... 36,489
Long-term debt and capital lease obligations..................................... 181,212
Deferred income taxes............................................................ 7,394
Other long-term liabilities...................................................... 3,051
Redeemable preferred stock....................................................... 46,078
Stockholders' equity............................................................. 33,798
---------
Total liabilities and stockholders' equity................................... $ 308,022
---------
---------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
There are no pro forma adjustments to the Champion unaudited condensed balance
sheet.
PF-26
<PAGE>
NOTES TO CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENTS OF INCOME
(1) Summarized from Champion's historical financial statements.
(2) To remove the historical operating results of Autauga.
(3) To reflect a decrease in interest earnings for the pro forma decrease in
cash. This adjustment assumes that approximately $26,248,000 of SLRMC
acquisition costs were paid from available cash at January 1, 1995. Interest
earnings are computed at 3.35% for the six months ended March 31, 1995 and
5.63% for the period January 1, 1995 through April 13, 1995. Such
percentages represent Champion's average investment rate for the period.
(4) To record a pro forma decrease of approximately $1,091,000 and $1,255,000 in
management fees charged to Jordan Valley by Columbia for the year ended
December 31, 1995, and the six months ended March 31, 1996, respectively.
Champion does not believe that overhead and other costs allocable to the
facility will be materially different from costs incurred historically by
Champion with respect to its management of Autauga.
(5) To adjust depreciation expense for the step up in basis for the depreciable
assets of Jordan Valley and SLRMC. The allocation with respect to SLRMC was
based on an independent appraisal obtained by Champion and resulted in a pro
forma decrease in depreciation expense of approximately $665,000 for the
year ended December 31, 1995 and $1,150,000 for the six months ended March
31, 1995. With respect to Jordan Valley, 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 five-year life,
respectively. Based on this preliminary allocation, depreciation expense
increased approximately $190,000 and $244,000 on a pro forma basis for the
year ended December 31, 1995 and the six months ended March 31, 1996,
respectively and decreased approximately $59,000 for the six months ended
March 31, 1995.
(6) To record interest expense on the pro forma increase in the Champion Credit
Facility, the Champion Notes and notes payable as a result of its
acquisitions' of Jordan Valley and SLRMC.
With respect to Jordan Valley, the Pro Forma Condensed Combining Statement
of Income assumes Champion increased the principal amount outstanding under
its revolving credit facility by $10,750,000 as of January 1, 1995 and
October 1, 1995. Such amount is comprised of $7,000,000 in cash
consideration attributable to property and equipment and approximately
$3,750,000 for certain net working capital components, which are subject to
adjustment and final settlement by the parties. The average interest rates
in effect under the Champion Credit Facility were 9.33% for the year ended
December 31, 1995 and 8.91% and 8.81% for the six months ended 1995 and
1996, respectively.
With respect to SLRMC, the Pro Forma Condensed Combining Statement of Income
for the year ended December 31, 1995 assumes Champion financed the
acquisition of SLRMC through (i) the issuance of $30,000,000 principal
amount of Series E Notes at an effective annual interest rate of 11.35% and
(ii) a note payable to Columbia in the amount of approximately $1,767,000
bearing interest at an effective annual rate of 10%. Such debentures and
notes are assumed to have been issued on January 1, 1995.
Interest expense with respect to the above increased approximately
$2,094,000 on a pro forma basis for the year ended December 31, 1995 and
approximately $2,270,000 and $393,000 for the six months ended March 31,
1995 and 1996, respectively, less $19,000, $19,000 and $5,000, respectively,
associated with Autauga capital lease obligations.
(7) To reflect the pro forma provision for income taxes due to the inclusion of
the acquired operations and, for the six months ended March 31, 1996, to
eliminate the effect of fiscal 1995 net operating loss utilization on the
fiscal 1996 annual period. For the year ended December 31, 1995, loss
carryovers of Champion can be utilized to reduce the provision for income
taxes.
(8) To reflect a decrease in interest earnings of approximately $229,000 for the
pro forma decrease in cash as a result of Champion's $20,000,000 capital
contribution to DHHS, its $2,000,000 contribution to DHHS working capital
and with respect to the AmeriHealth Merger, the retirement of
PF-27
<PAGE>
NOTES TO CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENTS OF INCOME (CONTINUED)
an $8,516,000 loan held by the Resolution Trust Corporation (the "RTC
Loan"), net of a discount of approximately $384,000 obtained by Champion
concurrent with the AmeriHealth Merger. Such funds were assumed expended on
of October 1, 1994. Interest earnings are computed at 3.35%, Champion's
average investment rate for the period.
(9)To remove the historical operating results of HMC for the three months ended
December 31, 1994. Champion contributed Heartland to DHHS effective December
31, 1994.
(10)To remove approximately $1,074,000 in merger related expenses incurred by
AmeriHealth.
(11)Reflects a $42,000 pro forma increase to depreciation expense based upon the
step up in basis for the depreciable assets of AmeriHealth.
(12)Reflects a pro forma reduction in interest expense of approximately $136,000
related to the retirement of the RTC Loan concurrent with the AmeriHealth
Merger. The Champion Unaudited Pro Forma Condensed Combining Statement of
Income assumes the RTC Loan was retired from available funds on October 1,
1994.
(13)To record Champion's equity in the pro forma earnings of DHHS for the three
months ended December 31, 1994. DHHS began operations effective January 1,
1995.
(14)To adjust common and common equivalent shares used to calculate loss per
share. The pro forma adjustment reflects the following events:
(a) The exchange of each 5.70358 shares of AmeriHealth common and common
equivalent shares into one share of the Champion Common Stock. For the
two months ended November 31, 1994, AmeriHealth's weighted average common
and common equivalent shares would have decreased from 16,924,000 shares
to 2,967,000 shares of the Champion Common Stock.
(b) Champion purchased 880,000 shares of the AmeriHealth's common stock in a
private transaction, which were retired concurrent with the AmeriHealth
Merger, resulting in a reduction of 154,000 shares of Champion Common
Stock that would have otherwise been issued.
The common shareholders of Champion's predecessor received one share of
Champion Common Stock for each predecessor share of common stock
outstanding prior to the AmeriHealth Merger. The preferred shareholders
of Champion's predecessor received one share of Champion preferred stock
for each predecessor share of preferred stock outstanding prior to the
the AmeriHealth Merger.
The following table summarizes the adjustment to shares used in the
calculation of loss per share:
<TABLE>
<S> <C>
Adjustment to AmeriHealth's common and common equivalent shares
for the exchange ratio (a)...................................... (13,957)
AmeriHealth common shares canceled (b)........................... 726
Effect of shares of (i) AmeriHealth common stock issued in
exchange for shares of AmeriHealth preferred stock during the
period and (ii) Champion Common Stock issued in connection with
the AmeriHealth Merger.......................................... (2,693)
---------
(15,924)
---------
---------
</TABLE>
(15)For purposes of computing the ratio of earnings to fixed charges, earnings
include income before fixed charges, provision for Federal and state income
taxes and minority interests. Fixed charges consist of interest expense,
including amortization of financing costs and the interest component of
capitalized leases and that portion of operating lease expense which
management believes is representative of the interest component of rental
expenses. Historical and pro forma earnings were inadequate to cover fixed
charges by $768,000 and $639,000, respectively, for the six months ended
March 31, 1995.
PF-28
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, CHAMPION OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION OF AN
OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON IN ANY CIRCUMSTANCE IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
CHAMPION SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
Prospectus Summary............................. 3
Risk Factors................................... 10
The Merger and Financing....................... 17
Use of Proceeds................................ 19
Capitalization................................. 20
Company Unaudited Pro Forma Condensed Combining
Financial Statements.......................... 21
Paracelsus Selected Historical Consolidated
Financial and Operating Data.................. 28
Paracelsus Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 30
Champion Selected Historical Consolidated
Financial and Operating Data.................. 35
Champion Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 37
Business....................................... 43
Management..................................... 59
Executive Compensation......................... 63
Certain Relationships and Related
Transactions.................................. 70
Security Ownership of Management and Certain
Beneficial Owners............................. 74
Description of the Notes....................... 76
Description of the New Credit Facility......... 95
Underwriting................................... 96
Validity of Notes.............................. 97
Experts........................................ 97
Available Information.......................... 98
Index to Financial Statements and Certain Pro
Forma Financial Statements.................... F-1
</TABLE>
$250,000,000
[LOGO]
PARACELSUS HEALTHCARE
CORPORATION
% SENIOR SUBORDINATED
NOTES DUE 2006
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BA SECURITIES, INC.
NATIONSBANC CAPITAL MARKETS, INC.
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the Notes to be registered hereby are as follows:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 94,828
NASD filing fees............................................... 28,000
Printing and engraving expenses................................ *
Legal fees and expenses........................................ *
Accounting fees and expenses................................... *
Blue Sky expenses.............................................. 20,000
Trustee fees and expenses...................................... *
Miscellaneous.................................................. *
-----------
Total...................................................... $ *
-----------
-----------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article IV of the Registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) and Article
V of the Registrant's Amended and Restated Bylaws (Exhibit 3.2 hereto) provide
for indemnification of its directors, officers, employees and other agents to
the maximum extent permitted by the California Corporations Code. In addition,
the Registrant has entered into Indemnification Agreements (Exhibit 10.56
hereto) with certain of its officers and directors. Reference is also made to
Section 7 of the Underwriting Agreement (Exhibit 1.1 hereto) which provides for
the indemnification of officers, directors and controlling persons of the
Registrant against certain liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement with respect to the Notes Offering between
Paracelsus and the underwriters named therein
2.1 Amended and Restated Agreement and Plan of Merger dated as of May 29, 1996, by and
among Paracelsus, Champion and PC Merger Sub, Inc. (filed as Exhibit 2.1 to
Champion's Current Report on Form 8-K dated June 13, 1996 and incorporated herein
by reference)
3.1* Amended and Restated Articles of Incorporation of Paracelsus
3.2* Amended and Restated Bylaws of Paracelsus
4.1* Form of Indenture between the Company and AmSouth Bank of Alabama, as Trustee
(including the form of certificate representing the % Senior Subordinated Notes
due 2006)
4.2 Indenture, dated as of October 15, 1993, between Paracelsus and NationsBank of
Tennessee, N.A., as Trustee (filed as an exhibit to Paracelsus' Annual Report on
Form 10-K on December 23, 1993 and incorporated herein by reference)
4.3* Form of Shareholder Protection Rights Agreement between Paracelsus and the Rights
Agent
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.4 Series D Note and Stock Purchase Agreement, dated December 31, 1993, as amended,
between Champion and the parties listed therein (filed as Exhibit 10.5 to
Champion's Current Report on Form 8-K dated December 6, 1994 and incorporated
herein by reference)
4.5 Series E Note Purchase Agreement dated May 1, 1995, as amended, between Champion
and the parties listed therein (filed as Exhibit 4.01(d) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference)
4.6 Form of Warrant issued pursuant to Champion Series E Note Purchase Agreement,
dated May 1, 1995, as amended (filed as Exhibit 10.23(g) to Champion's Annual
Report on Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference)
4.7 Form of Warrant issued pursuant to Champion Series D Note and Stock Purchase
Agreement dated December 31, 1993, as amended (filed as Exhibit 10.23(f) to
Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference)
4.8 Amended and Restated Loan Agreement dated as of May 31, 1995, among Champion,
Banque Paribas, as agent, and the banks named therein (filed as Exhibit 4.01(c) to
Champion's Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom
10.1 Promissory Note Agreement, dated May 1, 1994, between Paracelsus and Dr. Hartmut
Krukemeyer in the amount of $5,000,000 (filed as Exhibit 4.1 to Paracelsus'
Quarterly Report on Form 10-Q filed by Paracelsus on May 16, 1994 and incorporated
herein by reference)
10.2 Indenture, dated as of October 15, 1993, between Paracelsus and NationsBank of
Tennessee, N.A., as Trustee (filed as Exhibit 4.2 to the Registration Statement on
Form S-1 filed by Paracelsus on August 5, 1993 (Commission File No. 33-67040) and
incorporated herein by reference)
10.3 Note, dated as of August 23, 1994, by Dr. Manfred George Krukemeyer in favor of
INC Capital Corporation (filed as Exhibit 4.2 to Paracelsus' Current Report on
Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by
reference)
10.4 Pledge Agreement, dated as of August 23, 1994, by and between Dr. Manfred George
Krukemeyer and INC Capital Corporation (filed as Exhibit 4.2 to Paracelsus'
Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and
incorporated herein by reference)
10.5 Agreement and Consent, dated as of August 23, 1994, by and between Paracelsus and
INC Capital Corporation (filed as Exhibit 4.3 to Paracelsus' Current Report on
Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein by
reference)
10.6 Agreement, dated as of August 23, 1994, by and among Dr. Manfred George
Krukemeyer, Paracelsus, Bank of America and NationsBank (filed as Exhibit 4.4 to
Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6, 1994
and incorporated herein by reference)
10.7 Second Amended and Restated Guaranty and Pledge Agreement, dated as of August 23,
1994, by and among Dr. Manfred George Krukemeyer and Bank of America (filed as
Exhibit 4.6 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on
September 6, 1994 and incorporated herein by reference)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.8 Pooling Agreement, dated as of April 16, 1993, among PHC Funding Corp. II ("PFC
II"), Sheffield Receivables Corporation and Bankers Trust Company, as trustee (the
"Trustee") (filed as Exhibit 10.1 to the Registration Statement on Form S-1 filed
by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated
herein by reference)
10.9 Servicing Agreement, dated as of April 16, 1993, among PFC II, Paracelsus and the
Trustee (filed as Exhibit 10.2 to the Registration Statement on Form S-1 filed by
Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated
herein by reference)
10.10 Guarantee, dated as of April 16, 1993, by Paracelsus in favor of PFC II (filed as
Exhibit 10.3 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
10.11 Form of Sale and Servicing Agreement between subsidiaries of Paracelsus (the
"Hospitals") and PFC II (filed as Exhibit 10.4 to the Registration Statement on
Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040)
and incorporated herein by reference)
10.12 Form of Subordinate Note by PFC II in favor of Hospitals (filed as Exhibit 10.5 to
the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.13 Lease, dated as of March 1, 1993, between AHP of New Orleans, Inc., as lessor, and
Paracelsus Elmwood Medical Center, Inc., as lessee (filed as Exhibit 10.6 to the
Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.14 Lease, dated as of June 30, 1993, between AHP of New Orleans, Inc., as lessor, and
Paracelsus Halstead Hospital, Inc., as lessee (filed as Exhibit 10.7 to the
Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.15 Service and Consulting Agreement, dated as of July 4, 1983, between Paracelsus and
European Investors Inc. and Incofinas Limited (filed as Exhibit 10.14 to the
Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.16* The Restated Paracelsus Healthcare Corporation Supplemental Executive Retirement
Plan
10.17* Form of Amendment No. 1 to the Supplemental Executive Retirement Plan
10.18 Paracelsus Healthcare Corporation Phantom Equity Long-Term Incentive Plan (filed
as Exhibit 10.16 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
10.19 Paracelsus Healthcare Corporation Annual Incentive Plan (filed as Exhibit 10.17 to
the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.20 Promissory Note, dated as of December 1, 1993, of Dr. Hartmut Krukemeyer d/b/a
Paracelsus Klinik in favor of Paracelsus in the amount of $3,200,000 (filed as
Exhibit 4.11 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.21 Facility Lease dated as of June 7, 1991, between Bell Atlantic Tricon Leasing
Corporation (Landlord) and Chico Rehabilitation Hospital, Inc. (Tenant) (filed as
Exhibit 10.1 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on
August 11, 1994 and incorporated herein by reference)
10.22 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and
Chico Rehabilitation Hospital, Inc. (Tenant)(filed as Exhibit 10.2 to Paracelsus'
Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994 and
incorporated herein by reference)
10.23 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and
Beaumont Rehab Associates Limited Partnership (Tenant) (filed as Exhibit 10.3 to
Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994
and incorporated herein by reference)
10.24 Amended and Restated Know-How Contract, dated as of October 1, 1994, between
Paracelsus Klinik and Paracelsus (filed as Exhibit 10.35 to Paracelsus' Annual
Report on Form 10-K filed by Paracelsus on December 23, 1994 and incorporated
herein by reference)
10.25* Asset Purchase Agreement, dated as of March 29, 1996, between Paracelsus and FHP,
Inc.
10.26 Stock Purchase Agreement by and between Paracelsus and General Hospitals of Galen,
Inc., dated as of November 28, 1995 (filed as Exhibit 10.40 to Paracelsus' Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated
herein by reference)
10.27 Asset Exchange Agreement by and between Paracelsus Halstead Hospital Inc.,
Paracelsus Elmwood Medical Center, Inc., Paracelsus Peninsula Medical Center,
Inc., and Paracelsus Real Estate Corporation and Pioneer Valley Hospital, Inc. and
Medical Center of Santa Rosa, Inc., dated November 28, 1995 (filed as Exhibit
10.41 to Paracelsus' Annual Report on Form 10-K for the fiscal year ended December
31, 1995 and incorporated herein by reference)
10.28 Amended and Restated Partnership Agreement of Dakota/Champion Partnership dated
December 21, 1994 (filed as Exhibit 10 to Champion's Form 8-K dated December 21,
1994 and incorporated herein by reference)
10.29 Operating Agreement between Dakota/Champion Partnership and Champion, dated
December 21, 1994 (filed as Exhibit 10.1 to Champion's Current Report on Form 8-K
filed by Champion on January 5, 1995 and incorporated herein by reference)
10.30 Asset Purchase Agreement, dated January 25, 1995, as amended, among Medical
Services of Salt Lake City, Inc., HealthTrust, Inc. -- The Hospital Company, CHC
-- Salt Lake City, Inc. and Champion (filed as Exhibit 10.1 to Champion's Current
Report on Form 8-K dated April 13, 1995 and incorporated herein by reference)
10.31 Second Amended and Restated Credit Agreement, dated as of December 8, 1995, among
Paracelsus, Bank of America National Trust and Savings Association ("B of A"),
NationsBank of Texas, N.A., The Bank of New York, Mellon Bank, N.A., Toronto-
Diminion (Texas), Inc., Wells Fargo Bank, N.A., and the Bank of California, N.A.,
as lenders, B of A, as lead agent for lenders, and NationsBank, as co-agent (filed
as Exhibit 4.1 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on
December 12, 1995 and incorporated herein by reference)
10.32 Agreement in Contemplation of Merger, dated April 12, 1996, between Champion and
the Champion investors listed therein (filed as Exhibit 10.1 to Champion's Current
Report on Form 8-K dated April 15, 1996 and incorporated herein by reference)
10.33* Form of Restated Champion Healthcare Corporation Founders' Stock Option Plan
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.34* Form of License Agreement between Dr. Manfred George Krukemeyer and Paracelsus
10.35 Asset Exchange Agreement dated November 9, 1995, by and between Champion
Healthcare Holdings, Inc., CHC-Prattville, Inc. and CHC-Nursing Center, Inc. and
West Jordan Hospital Corporation (filed as Exhibit 10.1 to Champion's Current
Report on Form 8-K dated March 1, 1996 and incorporated herein by reference)
10.36* Form of Registration Rights Agreement between the Company and Park Hospital GmbH
10.37* Form of Voting Agreement between Park Hospital GmbH and Messrs. Miller and
VanDevender
10.38* Form of Services Agreement between the Company and Dr. Manfred George Krukemeyer
10.39* Form of Insurance Agreement between the Company and Dr. Manfred George Krukemeyer
10.40* Form of Non-Compete Agreement between the Company and Dr. Manfred George
Krukemeyer
10.41* Form of Shareholders Agreement between the Company and Park Hospital GmbH, as
guaranteed by Dr. Manfred George Krukemeyer
10.42* Form of Dividend and Note Agreement between the Company and Park Hospital GmbH
10.43* Form of Employment Agreement between Charles R. Miller and the Company
10.44* Form of Employment Agreement between R.J. Messenger and the Company
10.45* Form of Employment Agreement between James G. VanDevender and the Company
10.46* Form of Employment Agreement between Ronald R. Patterson and the Company
10.47* Form of Employment Agreement between Robert C. Joyner and the Company
10.48* Form of Paracelsus Healthcare Corporation 1996 Stock Incentive Plan
10.49* Form of Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan
10.50* Form of Right of First Refusal Agreement Among Park Hospital GmbH, Dr. Manfred
George Krukemeyer, R.J. Messenger, Charles R. Miller, James G. VanDevender and
Ronald R. Patterson
10.51* Form of Champion Healthcare Corporation 1996 Annual Bonus Plan
10.52 Subscription Agreement between Champion and James G. VanDevender dated February
10, 1990, as amended (filed as Exhibit 10.13 to Champion's Annual Report on Form
10-K for the year ended December 31, 1994 and incorporated herein by reference)
10.53* Clarification Letter to the Subscription Agreement between Champion and James G.
VanDevender dated July 12, 1996
10.54* Form of Registration Rights Agreement among Paracelsus and certain Champion
Investors
10.55* Donaldson, Lufkin & Jenrette Securities Corporation Engagement Letter with
Champion, dated July 15, 1996
10.56* Form of Indemnity and Insurance Coverage Agreement
10.57 AmeriHealth Amended and Restated 1988 Non-Qualified Stock Option Plan (filed as
Exhibit 10.06 to AmeriHealth's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference)
10.58 Champion Employee Stock Option Plan dated December 31, 1991, as amended (filed as
Exhibit 10.14 to Champion's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
10.59 Champion Employee Stock Option Plan No. 2 dated May 27, 1992, as amended (filed as
Exhibit 10.15 to Champion's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference)
10.60 Champion Employee Stock Option Plan No. 3, dated September 1992, as amended (filed
as Exhibit 10.16 to Champion's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference)
10.61 Champion Employee Stock Option Plan No. 4, dated January 5, 1994, as amended
(filed as Exhibit 10.17 to Champion's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference)
10.62 Champion Selected Executive Stock Option Plan No. 5, dated May 25, 1995 (filed as
Exhibit 4.12 to Champion's Current Report on Form S-8 filed on or about August 3,
1995 and incorporated herein by reference)
10.63 Champion Directors' Stock Option Plan, dated 1992 (filed as Exhibit 10.18 to
Champion's Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference)
10.64 Champion Healthcare Corporation Physicians Stock Option Plan (filed as Exhibit 4.2
to Champion's Current Report on Form S-8 filed on or about August 3, 1995 and
incorporated herein by reference)
10.65* Form of Paracelsus' 6.51% Subordinated Note Due 2006
11.1* Statement re computation of per share earnings
12.1 Statement re computation of ratios
21.1* List of Subsidiaries of Paracelsus
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit 5.1 hereto)
23.4* Consent of James A. Conroy
23.5* Consent of Charles R. Miller
23.6* Consent of James G. VanDevender
23.7* Consent of Angelo R. Mozilo
23.8* Consent of Daryl J. White
24.1** Power of Attorney
25.1* Statement of Eligibility of AmSouth Bank of Alabama on Form T-1
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules
Report of Independent Auditors
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other
II-6
<PAGE>
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on this 17th day of July, 1996.
PARACELSUS HEALTHCARE CORPORATION
By: /s/ JAMES T. RUSH
-----------------------------------------
Name: James T. Rush
Title: Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
*
------------------------------------------- Chairman of the Board and Director July 17, 1996
Dr. Manfred George Krukemeyer
* President, Chief Executive Officer,
------------------------------------------- Secretary and Director (principal July 17, 1996
R.J. Messenger executive officer)
/s/ JAMES T. RUSH Vice President, Finance and Chief
------------------------------------------- Financial Officer (principal financial July 17, 1996
James T. Rush officer)
*
------------------------------------------- Assistant Vice President and Corporate July 17, 1996
Scott Barton Controller (controller)
*
------------------------------------------- Director July 17, 1996
Michael D. Hofmann
*
------------------------------------------- Director July 17, 1996
Christian A. Lange
*By:/s/ JAMES T. RUSH
James T. Rush
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Paracelsus
Healthcare Corporation as of September 30, 1994 and 1995, and for each of the
three years in the period ended September 30, 1995, and have issued our report
thereon dated December 14, 1995 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 21(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
December 14, 1995
S-1
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS(2) END OF YEAR
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1993:
Allowance for doubtful accounts...... $ 18,867 $ 26,629 $ 10,034 $ (25,103) $ 30,427
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Year ended September 30, 1994:
Allowance for doubtful accounts...... $ 30,427 $ 33,110 $ 342 $ (33,041) $ 30,838
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Year ended September 30, 1995:
Allowance for doubtful accounts...... $ 30,838 $ 39,277 $ (2,585) $ (42,305) $ 25,225
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Reflects recoveries of amounts previously written off.
(2) Reflects write-offs of uncollectible accounts.
S-2
<PAGE>
EXHIBIT 12.1
PARACELSUS HEALTHCARE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO AND UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
HISTORICAL PRO FORMA(1) PRO FORMA(2)
---------------------------------------------------------- ------------- -------------
1991 1992 1993 1994 1995 1995 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before minority
interests, income taxes,
cumulative effect of accounting
change and extraordinary
loss........................... $ 20,588 $ 20,779 $ 25,341 $ 23,387 $ 23,938 $ 19,013 $ 14,745
Interest expense -- debt
borrowings and capitalized
leases......................... 12,043 10,496 10,213 12,966 15,746 17,241 36,803
Interest portion of rental
expense........................ 2,751 3,109 3,970 5,892 6,411 6,932 8,338
---------- ---------- ---------- ---------- ---------- ------------- -------------
Earnings (loss)............. $ 35,382 $ 34,384 $ 39,524 $ 42,245 $ 46,095 $ 43,186 $ 59,886
---------- ---------- ---------- ---------- ---------- ------------- -------------
---------- ---------- ---------- ---------- ---------- ------------- -------------
Fixed charges:
Interest...................... $ 12,043 $ 10,496 $ 10,213 $ 12,966 $ 15,746 $ 17,241 $ 36,803
Interest portion of rental
expense...................... 2,751 3,109 3,970 5,892 6,411 6,932 8,338
---------- ---------- ---------- ---------- ---------- ------------- -------------
Total fixed charges......... $ 14,794 $ 13,605 $ 14,183 $ 18,858 $ 22,157 $ 24,173 $ 45,141
---------- ---------- ---------- ---------- ---------- ------------- -------------
---------- ---------- ---------- ---------- ---------- ------------- -------------
Ratio of earnings to fixed
charges................. 2.4 x 2.5 x 2.8 x 2.2 x 2.1 x 1.8 x 1.3 x
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
PRO FORMA(3) PRO FORMA(4) HISTORICAL PRO FORMA(1) PRO FORMA(2) PRO FORMA(3)
------------- ------------- ----------------------- ------------- ------------- -------------
1995 1995 1995 1996 1995 1995 1995
<S> <C> <C> <C> <C> <C>
Income (loss) before minority
interests, income taxes,
cumulative effect of accounting
change and extraordinary
loss........................... $ 12,239 $ 12,778 $ 11,832 ($ 11,219) $ 13,926 $ 9,136 $ 6,534
Interest expense -- debt
borrowings and capitalized
leases......................... 38,434 37,895 7,652 7,685 8,260 17,099 19,263
Interest portion of rental
expense........................ 8,338 8,338 3,181 3,195 3,389 4,102 4,102
------------- ------------- ---------- ----------- ------------- ------------- -------------
Earnings (loss)............. $ 59,011 $ 59,011 $ 22,665 ($339) $ 25,575 $ 30,337 $ 29,899
------------- ------------- ---------- ----------- ------------- ------------- -------------
------------- ------------- ---------- ----------- ------------- ------------- -------------
Fixed charges:
Interest...................... $ 38,434 $ 37,895 $ 7,652 $ 7,685 $ 8,260 $ 17,099 $ 19,263
Interest portion of rental
expense...................... 8,338 8,338 3,181 3,195 3,389 4,102 4,102
------------- ------------- ---------- ----------- ------------- ------------- -------------
Total fixed charges......... $ 46,722 $ 46,233 $ 10,833 $ 10,880 $ 11,649 $ 21,201 $ 23,365
------------- ------------- ---------- ----------- ------------- ------------- -------------
------------- ------------- ---------- ----------- ------------- ------------- -------------
Ratio of earnings to fixed
charges................. 1.3 x 1.3 x 2.1 x -- 2.2x 1.4 x 1.3 x
<CAPTION>
PRO FORMA(4) PRO FORMA(1) PRO FORMA(2) PRO FORMA(3) PRO FORMA(4)
------------- ------------- ------------- ------------- -------------
1995 1996 1996 1996 1996
Income (loss) before minority
interests, income taxes,
cumulative effect of accounting
change and extraordinary
loss........................... $ 6,534 $( 8,625) $( 9,375) $( 11,191) $( 9,346)
Interest expense -- debt
borrowings and capitalized
leases......................... 19,263 8,863 19,686 21,064 19,219
Interest portion of rental
expense........................ 4,102 3,452 4,162 4,162 4,162
------------- ------------- ------------- ------------- -------------
Earnings (loss)............. $ 29,899 $ 3,690 $ 14,473 $ 14,035 $ 14,035
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Fixed charges:
Interest...................... $ 19,263 $ 8,863 $ 19,686 $ 21,064 $ 19,219
Interest portion of rental
expense...................... 4,102 3,452 4,162 4,162 4,162
------------- ------------- ------------- ------------- -------------
Total fixed charges......... $ 23,365 $ 12,315 $ 23,848 $ 25,226 $ 23,381
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Ratio of earnings to fixed
charges................. 1.3 x -- -- -- --
</TABLE>
(1) Adjusted to give pro forma effect to Paracelsus' acquisition of the Columbia
Hospitals.
(2) Adjusted to give pro forma effect to the Merger.
(3) Adjusted to give pro forma effect to the Merger and the Notes Offering.
(4) Adjusted to give pro forma effect to the Merger and the Offerings.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of (i) our report dated December 14, 1995, with respect to the
consolidated financial statements of Paracelsus Healthcare Corporation as of
September 30, 1994 and 1995 and for each of the three years in the period ended
September 30, 1995, (ii) our report dated December 14, 1995 with respect to the
financial statement schedule of Paracelsus Healthcare Corporation for the years
ended December 31, 1993, 1994 and 1995, and (iii) our report dated May 17, 1996,
with respect to the combined financial statements of Davis Hospital and Medical
Center, Pioneer Valley Hospital and Santa Rosa Medical Center as of December 31,
1994 and 1995 in the registration statement (Form S-1 No. 333-06713) and related
Prospectus of Paracelsus Healthcare Corporation for the registration of
$275,000,000 Senior Subordinated Notes due 2006.
ERNST & YOUNG LLP
Los Angeles, California
July 18, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (No.
333-06713) and related Prospectus of Paracelsus Healthcare Corporation of (i)
our report dated February 27, 1996, with respect to the consolidated financial
statements of Champion Healthcare Corporation as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995, (ii) our
report dated February 16, 1996, with respect to the financial statements of
Dakota Heartland Health System as of December 31, 1994 and 1995 and for the year
ended December 31, 1995, (iii) our report dated December 28, 1995, with respect
to the financial statements of Jordan Valley Hospital as of September 30, 1995
and for the period from January 1, 1995 through September 30, 1995, (iv) our
report dated June 11, 1995, with respect to the financial statements of Salt
Lake Regional Medical Center as of May 31, 1994 and April 13, 1995 and for each
of the two years in the period ended May 31, 1994 and the period from June 1,
1994 through April 13, 1995. We also consent to the reference of our firm under
the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
July 17, 1996
