<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report ( Date of earliest event reported):
August 16, 1996
PARACELSUS HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
California 1-12055 95-3565943
(State or other ( Commission (IRS Employer
Jurisdiction File Number) Identification No.)
515 W. Greens Road, Suite 800, Houston, Texas 77067
(Address of principal executive offices)
Registrant's telephone number, including area code:
(713) 873-6623
155 North Lake Avenue, Suite 1100, Pasadena, California 91101
(Former name or former address, if changed since last report
This report contains 44 pages.
The exhibit index is included at page 12 of this report.
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 16, 1996, Paracelsus Healthcare Corporation (the
"Company") completed its acquisition of Champion Healthcare
Corporation ("Champion) and all its subsidiaries, pursuant
to an Amended and Restated Agreement and Plan of Merger,
dated as of May 29, 1996, by and among the Company, PC
Merger Sub, Inc., a wholly owned subsidiary of the Company,
and Champion. The acquisition was effected through the
merger (the "Merger") of PC Merger Sub, Inc. with and into
Champion, pursuant to which Champion, as the successor
company, became a wholly owned subsidiary of the Company,
and the shares of Champion's common and preferred stock were
converted into an aggregate of approximately 19,755,009
shares of the Company's common stock. In addition, the
Company assumed all of Champion's outstanding stock options,
subscription rights, warrants and convertible securities,
which as of August 16, 1996, represented the right to
acquire approximately 1,337,204 shares, 80,000 shares,
422,286 shares and 60,067 shares of the Company's common
stock, respectively. As a result of the Merger, the Company
also assumed approximately $173.9 million in debt,
consisting primarily of $94.3 million of Champion's 11%
Senior Subordinated Notes and $59.7 million of amount
borrowed under Champion's Revolving Credit Facility.
For additional information concerning the business and
acquisition of Champion, see the Company's Registration
Statement on Form S-4 (Commission File No. 333-8521) filed
on July 19, 1996.
ITEM 5. OTHER EVENTS.
On August 16, 1996, simultaneously with the consummation of
the merger transaction as described under Item 2, the
Company completed its public equity offering of 5,200,000
shares of its common stock, including 600,000 over-alloted
shares, at $8.50 per share, realizing net proceeds to the
Company of approximately $41.6 million. On such date, the
Company also completed a public debt offering of $325.0
million of its 10% Senior Subordinated Notes due 2006,
realizing net proceeds to the Company of approximately
$316.9 million. The Company has also commenced a tender
offer to purchase up to $75.0 million aggregate principal
amount of the outstanding 9.875% Senior Subordinated Notes
(the "Notes") for $1,027.50 per $1,000 principal amount. The
debt tender offer expired on August 22, 1996, with all Notes
having been tendered.
For additional information concerning the equity and debt
offerings and the tender offer, see the Company's
Registration Statements on Form S-1 (Commission File No.
333-07289 and 333-06713).
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
The following financial statements of Champion are incorporated
herein by reference to the Company's Registration Statement on
Form S-4 (Commission File No. 333-8521):
- Report of independent public accountants, dated
February 27, 1996
- Consolidated balance sheet at December 31, 1994 and
1995
- Consolidated statement of operations for the years
ended December 31, 1993, 1994 and 1995
- Consolidated statement of stockholders' equity for the
years ended December 31, 1993, 1994 and 1995
- Consolidated statement of cash flows for the years
ended December 31, 1993, 1994 and 1995
- Notes to consolidated financial statements
The following financial statements of Champion are filed with
this report:
- Condensed consolidated balance sheet as of June 30,
1996 (Unaudited)
- Condensed consolidated statement of operations for the
six months ended June 30, 1996 and 1995 (Unaudited)
- Condensed consolidated statement of cash flows for the
six months ended June 30, 1996 and 1995 (Unaudited)
- Notes to condensed consolidated financial statements
(Unaudited)
(b) Pro forma financial information.
As of the date of filing this Current Report on Form 8-K, it
is impracticable for the Company to provide the pro forma
financial information required by this Item 7(b). Such
financial statements shall be filed by amendment to this
Form 8-K no later than 60 days after August 31, 1996.
(c) Exhibits.
2.1(a) Amended and Restated Agreement and Plan of Merger,
dated as of May 29, 1996, by and among Paracelsus,
PC Merger Sub, Inc. and Champion.
99.1 Audited financial statements of Champion for the three
years ended December 31, 1995.
___________________
(a) Incorporated herein by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4( Commission
File No. 333-8521).
<PAGE> 4
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
As of June 30, 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,273
Patient accounts receivable, net of
allowance for doubtful accounts 34,725
Supplies 3,906
Other current assets 7,741
------
Total current assets 59,645
Property and equipment 182,014
Less: Accumulated depreciation and amortization (14,272)
------
Net property and equipment 167,742
Investment in Dakota Heartland Health System 52,469
Other assets 34,983
------
Total assets $ 314,839
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 2,581
Accounts payable 10,216
Other current liabilities 22,045
-----
Total current liabilities 34,842
Long-term debt and capital lease obligations 175,710
Other long-term liabilities 10,135
Redeemable preferred stock 46,127
Stockholders' equity:
Common stock 144
Common stock subscribed 40
Common stock subscription receivable (40)
Paid in capital 61,403
Accumulated deficit (13,522)
------
Total stockholders' equity 48,025
Total liabilities and stockholders' equity $314,839
=======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1996 1995
------ ----
<S> <C> <C>
Net patient service revenue $ 99,968 $ 69,561
Other revenue 1,525 2,485
------- ------
Net revenue 101,493 72,046
------- ------
Cost and expenses:
Salaries and benefits 43,693 31,260
Other operating expenses 37,849 28,316
Provision for bad debts 6,886 5,753
Interest 9,164 5,917
Depreciation and amortization 6,290 3,614
Equity in earnings of Dakota Heartland
Health System (7,762) (3,745)
Merger costs 1,122 -
------ ------
Total costs and expenses 97,242 71,115
------ ------
Income before income taxes and extraordinary loss 4,251 931
Provision (benefit) for income taxes 1,880 (75)
------ ------
Income before extraordinary loss 2,371 1,006
Extraordinary loss on early extinguishment of debt - (1,118)
------ -----
Net income (loss) $ 2,371 $ (112)
====== =====
Income (loss) applicable to common stock $ 2,273 $(3,092)
====== =====
Income (loss)per common share:
Primary -
Before extraordinary loss $ 0.16 $ (0.47)
Extraordinary loss - (0.26)
------ -----
$ 0.16 $ (0.73)
====== =====
Fully Diluted -
Before extraordinary loss $ 0.12 n/a
Extraordinary loss - n/a
------ -----
$ 0.12 n/a
====== =====
Weighted average common and common equivalent shares outstanding:
Primary 13,778 4,236
Fully Diluted 19,089 n/a
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1996 1995
------- -----
<S> <C> <C>
Operating activities:
Net income $ 2,371 $ (112)
Equity in Dakota Heartland Health System's
earnings, net of partnership distributions (4,324) (3,745)
Non-cash expenses and changes in operating
assets and liabilities (194) 11,383
------- ------
Net cash provided by (used in)
operating activities (2,147) 7,526
------- -----
Investing activities:
Additions to property and equipment,
net of disposition (5,937) (17,389)
Purchase of facilities (10,746) (58,768)
Investment in Dakota Heartland Health System - (2,000)
Other (624) (1,252)
------- -------
Net cash used in investing activities (17,307) (79,409)
------- -------
Financing activities:
Proceeds from exercise of stock
warrants and options 9,034 696
Proceeds from issuance of long-term debt 29,900 117,905
Payments on long-term debt and capital
lease obligations (13,489) (93,096)
Release of restricted funds - 5,000
Other (301) -
------ ------
Net cash provided by financing activities 25,144 30,505
------ ------
Increase (decrease) in cash and cash equivalents 5,690 (41,378)
Cash and cash equivalents at beginning of year 7,583 48,424
------ ------
Cash and cash equivalents at end of period $ 13,273 $ 7,046
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 7
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The Company's business is seasonal in nature and subject to
general economic conditions and other factors. Accordingly, operating results
for the six months ended June 30, 1996, are not indicative of the results
that may be expected for the year ended December 31, 1996. 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 such
period.
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.
The Company's adoption of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be disposed of" on January 1, 1996 did not have a material effect
on its financial statements.
NOTE 2 -- PARACELSUS MERGER
On August 9, 1996, the Company's stockholders, at a special meeting of
stockholders (the "Special Meeting"), adopted and approved an Amended and
Restated Agreement and Plan of Merger dated May 29, 1996 (the "Merger
Agreement") between the Company and Paracelsus Healthcare Corporation
("Paracelsus"), pursuant to which a wholly owned subsidiary of Paracelsus
will be merged into the Company, resulting in the Company becoming a wholly
owned subsidiary of Paracelsus. The Company expects the merger to be
consummated on or about August 16, 1996, after satisfying certain other terms
and conditions of the Merger Agreement. The Company expensed approximately
$1.1 million in merger costs during the second quarter of 1996.
Upon the consummation of the merger, each share of the Company's common stock
and preferred stock will convert into one share and two shares of Paracelsus'
common stock, respectively. 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 combined company,
with current Company's security holders owning the remaining 40%.
<PAGE> 8
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 -- 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. The Company accounts for its investment in DHHS under the equity
method. The following table summarizes certain income statement information
of DHHS (in thousands).
Six Months Ended June 30,
-----------------------------
1996 1995
------- ------
Net revenue $55,204 $ 53,665
Operating margin 16,258 8,719
Net income 14,113 6,810
NOTE 4 -- LONG-TERM DEBT
On April 12, 1996, in contemplation of the merger between the Company and
Paracelsus, holders of the Company's 11% Senior Subordinated Notes (the
"Notes") entered into an agreement with the Company, among other things, to
(i) waive any rights to cause the Company to purchase the Notes from such
holders as a result of a change in control caused by the merger and
(ii) tender the Notes to the Company for prepayment at certain specified
premium amounts.
NOTE 5 -- ACQUISITIONS
On March 1, 1996, the Company acquired the 50-bed Jordan Valley Hospital
("Jordan") in West Jordan, Utah, from Columbia/HCA Healthcare Corporation
("Columbia"). In exchange, Columbia received the Company's 85-bed Autauga
Medical Center and adjacent skilled nursing facility in Prattville, Alabama,
plus approximately $10,750,000 in cash. Cash consideration included
approximately $3,750,000 for a net working capital differential, which is
subject to final settlement, and reimbursement of certain capital expenditures
made previously by Columbia.
The following unaudited pro forma consolidated results of operations for
the six months ended June 30, 1996 and 1995, assumes that the acquisition of
Jordan and Salt Lake Regional Medical Center ("SLRMC"), which was acquired
on April 13, 1995, occurred on January 1, 1995. The pro forma financial
information does not purport to be indicative of the results that would have
been attained had the transactions described above occurred on January 1, 1995.
<PAGE> 9
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six months ended
--------------------
June 30
----------
1996 1995
------ -----
(Dollars in thousands,
except per share data)
Net revenue $102,731 $97,890
Income before extraordinary loss 2,291 2,031
Net income 2,291 913
Income (loss) applicable to common stock 2,193 (2,067)
Income (loss) per common share:
Primary-
Before extraordinary loss $ 0.16 $(0.23)
Extraordinary loss - (0.26)
----- -----
$ 0.16 $(0.49)
===== =====
Fully diluted-
Before extraordinary loss $ 0.12 n/a
Extraordinary loss - n/a
----- -----
$ 0.12 n/a
===== =====
NOTE 6 -- INCOME (LOSS) PER SHARE
Primary income (loss) per common share is computed by dividing income (loss)
applicable 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. Fully
diluted income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common and common equivalent shares
outstanding, including additional shares of common stock resulting from the
assumed conversion of shares of convertible preferred stock.
NOTE 7 -- STOCKHOLDERS' EQUITY
During the six months ended June 30, 1996, warrants were exercised to
purchase approximately 2,458,000 shares of common stock, resulting in cash
proceeds to the Company of approximately $8,717,000 and the tender of
approximately $4,895,000 of the Notes in lieu of cash.
At the Special Meeting held on August 9, 1996, the Company's stockholders
approved certain amendments to the various stock option plans. With respect
to the Directors' Stock Option Plan, the authorized shares for issuance was
increased from 60,000 to
<PAGE> 10
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
100,000. The plan provisions now allow options held by directors whose
services cease after a merger of the Company to remain exercisable until the
date specified in such options, rather than expiring 90 days following such
merger. With respect to the Selected Executive Stock Option Plan No. 5, the
plan was amended to allow stock options or rights granted thereunder to be
assumed by the surviving company to a merger or consolidation with the
Company. With respect to certain stock option agreements between the Company
and each of Messrs. Charles R. Miller and James G. VanDevender, a cashless
exercise procedure was added to allow the Company to withhold shares issuable
upon exercise of options outstanding thereunder as a means for such option
holder to pay the option exercise price and/or any tax withholding
obligations incurred upon such exercise.
NOTE 8 -- SUBSEQUENT EVENT
On July 23, 1996, the Company's common stock commenced trading on the New
York Stock Exchange ("NYSE") under the symbol "CHC". Prior to that, its
shares had been traded on the American Stock Exchange. Upon the consummation
of the merger with Paracelsus (see Note 2), the Company will delist from the
NYSE and cease to be a separate public reporting entity.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
Paracelsus Healthcare Corporation
(Registrant)
/s/ JAMES G. VANDENDER
Dated: August 29, 1996 By: ____________________________
James G. VanDevender
Executive Vice President,
Chief Financial Officer
& Director
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
2.1(a) Amended and Restated Agreement and Plan of
Merger, dated as of May 29, 1996, by and among
Paracelsus, PC Merger Sub, Inc. and Champion.
99.1 Audited financial statements of Champion for the
three years ended December 31, 1995.
_________________
(a) Incorporate herein by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (Commission File
No. 333-8521).
<PAGE> 13
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
<PAGE> 14
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
---------- -------
---------- -------
</TABLE>
<PAGE> 15
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
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.
<PAGE> 16
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.
<PAGE> 17
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDI-
--------------- ------------- TIONAL ACCUM-
SUBS- RECEI- PAID-IN ULATED
SHARES AMOUNT CRIBED VABLE 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.
<PAGE> 18
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)
</TABLE>
<PAGE> 19
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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.
<PAGE> 20
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 healthcare 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 ofthe
Company'scapital 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.
<PAGE> 21
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," 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 obligation.
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.
<PAGE> 22
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
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.
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 dividend 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 oftemporary 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
<PAGE> 23
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 ("P&S") in Midland,
Texas on May 1,1993 for approximately $5,800,000 in cash and the assumption of
$1,200,000 in debt. The acquisition was accounted for as a purchase transaction
with operations reflectedin 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 freestanding psychiatric hospitals with a combined total
of 219 beds located in Springfield, Missouri and Alexandria, Louisiana, and
owned a third freestanding psychiatric hospital located in Sherman, Texas, that
<PAGE> 24
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On December 6, 1994, the Company merged with AmeriHealth, Inc. ("AHH"), a
Delaware corporation,with AHH being the surviving corporation resulting from
the merger (the "Combined Company"). The merger was accounted for as a
recapitalization of the Company with the Company as
the acquiror (a reverse acquisition). Concurrent with the merger, the name of
the Combined Company was changed to Champion Healthcare Corporation, and the
Combined Company adopted the Company's certificate of incorporation provisions.
Pursuant to the merger, the Combined Company: (a) paid a cash distribution
of $0.085 cents per share to all common stockholders of AHH,(b) issued one
share of its Combined Company common stock for each 5.70358 shares of the
approximately 17.2 million outstanding shares of AHH's Common Stock,(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, the
outstanding shares of AHH's $2.125 Increasing Rate Cumulative Convertible
Preferred Stock were canceled inexchange 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
<PAGE> 25
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199bed 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 DHHSto 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
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 DHHSunder 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.
<PAGE> 26
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <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 clinicsand 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.
<PAGE> 27
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
<PAGE> 28
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1994 and 1995
(dollars in thousands):
<TABLE>
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
<PAGE> 29
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 obligation 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 underthe 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
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
<PAGE> 30
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ofthe
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
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.
<PAGE> 31
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
<PAGE> 32
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 ofa 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 tothe number of common shares
into which each Series is convertible at the time of any shareholders'vote. The
<PAGE> 33
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance of a new class of stock or the increase of shares within an existing
class of stock that either ranks on parity with oris 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 of 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.
The Series BB cumulative convertible redeemable preferred stock ("Series
BB") was convertible, at the holder's option, into common stock at a price of
$5.90per share until redemption date and was 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 $11.80per 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 one share of common stock for each four shares of Series A-1preferred 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 defined, subject to the Company's existing
agreement with senior secured lenders and the approval of two-thirds of all
outstanding Series BB, C and D preferred stock. 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
one 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.
<PAGE> 34
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
-------------------- ----------------------
SHARES AMOUNTS SHARES AMOUNT
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993........
Exercise of stock warrants......
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
--------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1993...... 1,269,144 22,008 448,811 8,089
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
--------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1994..... 2,105,258 38,754 448,811 8,740
Issuance of preferred stock --
Series D...... 51,645 930
Preferred dividends accrued, including
accretion of issuance costs... 3,222 653
Dividends declared pursuant to the
Recapitalization.............. 3,610 751
Recapitalization............... (8,534) (2,097)
---------- --------- ---------- ------------
BALANCE, DECEMBER 31, 1995..... 2,156,903 $ 37,982 448,811 $ 8,047
---------- --------- ---------- -----------
---------- --------- ---------- ------------
<CAPTION>
SERIES BB SERIES A-1
--------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993....... 1,287,597 $ 15,272 2,769,109 $ 2,876
Exercise of stock warrants.... 289,950 3,422
Issuance of preferred stock--
Series C (net of $46 in
issue costs)................
Issuance of preferred stock--
Series D (net of $837 in
issue costs)................
</TABLE>
<PAGE> 35
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SERIES BB SERIES A-1
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Preferred dividends accrued,
including accretion of
issuance costs............. 1,301 128
---------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1993... 1,577,547 19,995 2,769,109 3,004
Issuance of preferred stock--
Seried D (net of $327 in
issue cost)................
Preferred dividends accrued,
including accretion of
issuance costs............. 1,556 202
---------- -------- ------------ ---------
BALANCE, DECEMBER 31, 1994.... 1,557,547 21,551 2,769,109 3,206
Issuance of preferred stock--
Series D...................
Preferred dividends accrued,
including accretion of
issuance costs............. 1,559 234
Dividends declared pursuant to
the Recapitalization....... 739 110
Recapitalization............. (1,557,547) (23,849)(2,769,109) (3,550)
----------- -------- ---------- ---------
BALANCE, DECEMBER 31, 1995 -- $ -- -- $ --
----------- ------- ---------- ---------
----------- ------- ---------- ---------
</TABLE>
<PAGE> 36
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SERIES A
------------------------
SHARES AMOUNTS
----------- -----------
<S> <C> <C>
BALANCE, JANUARY 1, 1993..................... 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................. 167
----------- -----------
BALANCE, DECEMBER 31, 1993................... 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................. 278
----------- -----------
BALANCE, DECEMBER 31, 1994................... 3,500,000 4,043
Issuance of preferred stock -- Series D......
Preferred dividends accrued, including
accretion of issuance costs................. 314
Dividends declared pursuant to the
Recapitalization............................ 139
Recapitalization............................. (3,500,000) (4,496)
----------- -----------
BALANCE, DECEMBER 31, 1995................... -- $ --
----------- -----------
----------- -----------
</TABLE>
<PAGE> 37
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1,006,783shares 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 680,104from $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 follows: (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 one 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
<PAGE> 38
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("Plan No. 5"), 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.
At the Company's annual stockholders meeting on May 25, 1995, the
stockholders approved the adoption of 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'spreferred stockholders
pursuant to a voting agreement.
With the exception of Plan No.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 No.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 one 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>
<PAGE> 39
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $9.00 per share. Such warrants expire
December 31, 1997 through December 31, 2003. Pursuant to the Recapitalization
approved by the shareholders on February 12, 1996, the exercise prices on
certain of the warrants were reduced until May 13, 1996, after which the
exercise prices revert to their prior amounts (see Recapitalization above).
NOTE 9. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal. ...................................$ 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>
<PAGE> 40
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation ofthe 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>
<PAGE> 41
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
<PAGE> 42
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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'sfinancial 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).
<PAGE> 43
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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.
<PAGE> 44
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of cash and cash equivalents approximate 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.
