<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PARACELSUS HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 8062 95-3565943
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
155 NORTH LAKE AVENUE, SUITE 1100
PASADENA, CALIFORNIA 91101
(818) 792-8600
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
JAMES T. RUSH
VICE PRESIDENT, FINANCE, AND CHIEF FINANCIAL OFFICER
155 NORTH LAKE AVENUE, SUITE 1100
PASADENA, CALIFORNIA 91101
(818) 792-8600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
Thomas C. Janson, Jr. Wayne M. Whitaker, Esq. Alison S. Ressler, Esq.
Skadden, Arps, Slate, Meagher & Flom Michener, Larimore, Swindle, Whitaker, Sullivan & Cromwell
300 South Grand Avenue, Suite 3400 Flowers, Sawyer, Reynolds & Chalk, L.L.P. 444 South Flower Street
Los Angeles, California 90071 3500 City Center Tower II Los Angeles, California 90071
(213) 687-5000 301 Commerce Street (213) 955-8000
Fort Worth, Texas 76102
(817) 335-4417
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no stated value per share... 8,050,000 shares(2) $11.50 $92,575,000 $31,923
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Includes 1,050,000 shares that the Underwriters have the option to purchase
from certain shareholders to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CROSS REFERENCE SHEET
REQUIRED BY ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Available Information.
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors.
4. Use of Proceeds...................................... Use of Proceeds.
5. Determination of Offering Price...................... Underwriting.
6. Dilution............................................. Not applicable.
7. Selling Security Holders............................. Selling Shareholders.
8. Plan of Distribution................................. Underwriting.
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Capital Stock.
10. Interests of Named Experts and Counsel............... Validity of Common Stock.
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Merger and
Financing; Use of Proceeds; Dividend Policy;
Capitalization; Company Unaudited Pro Forma
Condensed Combining Financial Statements; Paracelsus
Selected Historical Consolidated Financial Data;
Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Champion Selected Historical Consolidated Financial
Data; Champion Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Executive Compensation;
Certain Relationships and Related Transactions;
Principal Shareholders; Description of Capital
Stock; Available Information; Financial Statements.
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not applicable.
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses; one to be
used in connection with an offering in the U.S. and Canada and one to be used in
a concurrent international offering. The two prospectuses will be identical in
all respects except for the front and back cover pages. The front and back cover
pages to be included in the international prospectus and not in the U.S.
prospectus are marked "Alternate Page for International Prospectus."
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE
IN WHICH SUCH OFFER TO SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 28, 1996
PROSPECTUS
, 1996
7,000,000 SHARES
[LOGO]
PARACELSUS HEALTHCARE CORPORATION
COMMON STOCK
Of the 7,000,000 shares of Common Stock being offered, 5,600,000 shares are
initially being offered hereby for sale in the United States and Canada by the
U.S. Underwriters (the "U.S. Offering") and 1,400,000 shares are being offered
for sale outside of the United States and Canada by the International Managers
(the "International Offering"). See "Underwriting." Of the 7,000,000 shares of
Common Stock being offered, 1,800,000 shares are being sold by the Selling
Shareholders. See "Selling Shareholders." Paracelsus Healthcare Corporation (the
"Company") will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. The price to the public and aggregate underwriting
discounts and commissions per share will be identical for both the U.S. Offering
and the International Offering.
The shares of Common Stock offered hereby are being offered concurrently
with the Merger pursuant to which Champion Healthcare Corporation will become a
wholly owned subsidiary of the Company. Prior to the Merger, there has been no
public market for the Common Stock. Upon consummation of the Merger, there will
be 54,647,167 shares of Common Stock outstanding, 19,675,425 of which will have
been issued in the aggregate to the holders of Champion common stock on a
one-for-one basis and the holders of Champion preferred stock on a two-for-one
basis. Champion's common stock is traded on the American Stock Exchange under
the symbol "CHC." The last reported trading price for Champion Common Stock on
June 27, 1996 was $10 3/8 per share. See "Underwriting."
Application will be made to have the Common Stock of the Company listed on
the New York Stock Exchange upon consummation of the Merger under the symbol
" ."
Concurrently with the Equity Offering, the Company is offering $250,000,000
aggregate principal amount of % Senior Subordinated Notes due 2006.
Consummation of each of the Equity Offering and the Notes Offering is contingent
upon the consummation of the Merger; however, neither the Equity Offering nor
the Notes Offering is contingent upon the consummation of the other.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $ .
(3) THE SELLING SHAREHOLDERS HAVE GRANTED TO THE U.S. UNDERWRITERS AN OPTION,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 1,050,000 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO THE
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS, SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
THE SELLING SHAREHOLDERS WILL BE $ , $ AND $ , RESPECTIVELY.
SEE "UNDERWRITING."
The shares of Common Stock are being offered by the several U.S.
Underwriters when, as and if delivered to and accepted by the U.S. Underwriters
and subject to various prior conditions, including their right to reject orders
in whole or in part. It is expected that delivery of the share certificates will
be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
[INSERT MAP HERE]
DESCRIPTION OF THE MAP ON THE INSIDE FRONT COVER PAGE UNDER THE TITLE OF
"PARACELSUS HEALTHCARE CORPORATION"
The map depicts the United States showing the locations of the Company's
facilities.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY OR OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO HEREIN. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "PARACELSUS" REFER TO
PARACELSUS HEALTHCARE CORPORATION PRIOR TO THE MERGER OF CHAMPION HEALTHCARE
CORPORATION ("CHAMPION") WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF PARACELSUS
(THE "MERGER"). REFERENCES TO THE "COMPANY" REFER TO PARACELSUS AFTER THE MERGER
AND INCLUDE THE COMBINED OPERATIONS OF PARACELSUS AND CHAMPION. CERTAIN
STATEMENTS UNDER THIS CAPTION "PROSPECTUS SUMMARY" CONSTITUTE "FORWARD-LOOKING
STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT (THE "REFORM
ACT"). SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS."
THE COMPANY
Paracelsus is a leading healthcare company that owns and operates acute care
and specialty hospitals and related healthcare businesses serving selected
markets in the United States. Paracelsus owns and operates 18 acute care
hospitals with a total of 1,685 licensed beds in seven states: California, Utah,
Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care
hospitals provide a broad array of general medical and surgical services on an
inpatient, outpatient and emergency basis. In addition, certain hospitals and
their related facilities offer rehabilitative medicine, substance abuse
treatment, psychiatric care and Acquired Immune Deficiency Syndrome ("AIDS")
care. Paracelsus also owns and operates in California three psychiatric
hospitals with 218 licensed beds, four skilled nursing facilities with 232
licensed beds and a 60-bed rehabilitative hospital. In addition, Paracelsus owns
and operates eight home health agencies and thirteen medical office buildings
adjacent to certain of its hospitals. For the twelve months ended March 31, 1996
on a pro forma basis after giving effect to the acquisitions and dispositions
made by Paracelsus since April 1, 1995, Paracelsus would have had total
operating revenues of $516.9 million, Adjusted EBITDA (as defined below) of
$55.8 million and a net loss of $3.1 million. The net loss includes an unusual
charge recorded in March 1996 of $22.4 million related to the settlement of two
lawsuits. See "Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements."
On April 12, 1996, Paracelsus entered into an Agreement and Plan of Merger,
as amended and restated on May 29, 1996 (the "Merger Agreement"), with Champion
pursuant to which Champion will become a wholly owned subsidiary of the Company.
Champion owns and operates five acute care hospitals with a total of 722
licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and
operates, a partnership that owns two additional acute care hospitals with a
total of 341 licensed beds in North Dakota under the name "Dakota Heartland
Health System" ("DHHS"). Champion's acute care hospitals generally offer the
same types of services provided by Paracelsus' acute care hospitals. Champion
also owns and operates two psychiatric hospitals with a total of 219 licensed
beds in Missouri and Louisiana. For the twelve months ended March 31, 1996 on a
pro forma basis after giving effect to the acquisitions and dispositions made by
Champion since April 1, 1995, Champion would have had net revenue of $198.2
million, Adjusted EBITDA of $32.2 million and net income of $3.9 million. See
"Champion Unaudited Pro Forma Condensed Combining Statements of Income and
Unaudited Historical Condensed Balance Sheet."
Following the Merger, the Company will operate 31 hospitals in 11 states
including 25 acute care hospitals with 2,748 licensed beds, five psychiatric
hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed
beds. On a pro forma combined basis for the twelve months ended March 31, 1996,
the Company would have had total operating revenues of $714.8 million, Adjusted
EBITDA of $88.1 million and a net loss of $6.7 million (which includes the
unusual charge related to the settlement of two lawsuits). These pro forma
combined results do not give effect to any cost savings that management believes
will be realized as a result of the Merger due to the combination of
3
<PAGE>
the corporate operations of Paracelsus and Champion and the elimination of
certain corporate consulting contracts of Paracelsus. See "Company Unaudited Pro
Forma Condensed Combining Financial Statements" and "Paracelsus and Champion
Unaudited Pro Forma Condensed Combining Financial Statements."
The Company believes that the Merger represents a unique opportunity to
integrate the operations of two companies that have a complementary portfolio of
hospitals. Upon completion of the Merger, 22 of the Company's 31 hospitals will
be located in markets where a hospital or hospital network owned by the Company
is a preeminent provider. On a pro forma combined basis (excluding PHC Salt Lake
Hospital and the two hospitals owned by DHHS), these hospitals would have
accounted for approximately 71% and 89% of the total operating revenues and
Adjusted EBITDA, respectively, of the Company's hospitals for the twelve months
ended March 31, 1996.
Following the Merger, the Company believes that it will be better positioned
to implement its business strategy due to its greater scale and diversity of
operations, expanded geographic presence and enhanced access to the public
capital markets and other financing sources. In addition, the combined entity
should benefit from economies of scale in such areas as purchasing, marketing,
information systems, risk management, accounting, reimbursement, corporate
finance and quality assurance.
The Company also believes that it will benefit from the addition to
Paracelsus' management team of three key Champion executives who, following the
Merger, will have primary responsibility for day to day management of the
Company. These Champion executives have an average of 29 years of hospital
industry experience and a proven track record in operating and growing publicly
held hospital companies. Over the past five years, these executives grew
Champion's net revenue at a compounded annual growth rate of 62.0%, from $24.3
million in 1991 to $167.5 million in 1995, while improving its Adjusted EBITDA
margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended
March 31, 1996.
After the Merger, the Company's principal executive offices will be located
at 515 West Greens Road, Suite 800, Houston, Texas 77067. Its telephone number
will be (713) 873-6623.
BUSINESS STRATEGY
The Company's strategic objective is to establish each of its hospitals or
hospital networks as the provider of choice in its market. To accomplish this,
the Company first seeks to establish a presence in geographic locations that are
best suited to developing a preeminent market position. These locations
primarily include small to mid-sized markets with more favorable demographics
and lower levels of penetration by managed care plans and alternative niche
competitors than larger metropolitan areas. Moreover, the competing hospitals in
the Company's target markets frequently will be not-for-profit facilities which
the Company believes have higher cost structures than its hospitals. Second, the
Company focuses on implementing operating strategies developed by the Company
for positioning each of its hospitals or hospital networks as providers of
measurably higher quality and lower cost healthcare services than competing
providers. The key elements of the Company's operating strategies are as
follows:
EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS
The Company plans to continue to pursue expansion opportunities through the
strategic acquisition of hospitals and complementary healthcare businesses in
existing or new markets. The Company has demonstrated this strategy most
recently by the acquisition of four hospitals and a home health agency in the
Salt Lake City market. The Company believes that its primary sources of
acquisitions will be unaffiliated not-for-profit hospitals and facilities being
divested by hospital systems for strategic, regulatory or performance reasons.
4
<PAGE>
INCREASE MARKET PENETRATION
The Company seeks to increase the market penetration of its hospitals by
offering a full range of hospital and related healthcare services and by
shifting market share from local competitors by providing measurably higher
quality and lower cost services. This strategy has been successfully
demonstrated by the addition of obstetrics programs at each of The Medical
Center of Mesquite and Westwood Medical Center during the past twelve months. In
addition, over the past twenty-four months the Company has acquired or
established a total of five home health agencies that cover 26 counties in
Tennessee and provide a large referral base for the Company's four hospitals in
that market.
ESTABLISH A COMPETITIVE COST ADVANTAGE
The Company seeks to position each of its hospitals as the low cost provider
in its market by monitoring and controlling fixed and variable operating
expenses. Champion's executives have demonstrated an ability to reduce costs as
indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in
1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. Labor
costs are a primary focus of such efforts, and Champion's executives have
reduced salaries, wages and benefits as a percentage of net revenue at
Champion's hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and
35.4% for the three months ended March 31, 1996. The Company believes that a low
cost provider is better able to succeed in the current healthcare environment by
aggressively pricing its managed care contracts and direct employer arrangements
and by maintaining profitability under fixed payment systems.
IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE
The Company believes that preventing errors in the treatment process can
improve quality and lower the cost of care by reducing the risk of adverse
events to patients and the consequential costs of such events. For the past two
years, the Company has piloted a proprietary program in four of its hospitals
designed to identify and measure the incidence of patient treatment errors in
225 separate clinical categories. The Company believes the capability to
quantify data regarding the quality of care in its hospitals will enable the
Company to reduce the cost of care and will enhance the ability of its hospitals
to win and profit from managed care contracts.
DEVELOP A COMPETITIVE SERVICE ADVANTAGE
The Company believes that bureaucratic and impersonalized customer service
is a historical structural deficiency within the hospital industry caused by
service systems, policies and procedures which are designed for the convenience
of physicians and hospitals rather than patients, payors and employers. The
Company is developing a proprietary customer service system that it believes
will differentiate its hospitals and facilities from those of its competitors
and provide a competitive advantage.
REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY
The provision of high quality healthcare services is primarily a local
business, and the Company's business strategy and operating programs emphasize
local management initiative, responsibility and accountability combined with
corporate support and oversight.
REFINANCINGS IN CONNECTION WITH THE MERGER
The Company has filed a registration statement with respect to $250,000,000
aggregate principal amount of % Senior Subordinated Notes due 2006 (the
"Notes") that it plans to offer (the "Notes Offering") concurrently with the
offering of the shares of the Company's common stock, no stated value per share
(the "Common Stock"), pursuant to the U.S. Offering and the International
Offering (collectively, the "Equity Offering" and, together with the Notes
Offering, the "Offerings").
The Company currently intends that a portion of the estimated aggregate net
proceeds to the Company from the Offerings of $297.2 million (consisting of
$55.9 million from the Equity Offering and $241.3 million from the Notes
Offering) will be used by Champion to prepay an estimated
5
<PAGE>
$159.2 million of outstanding Champion indebtedness (plus $6.6 million of
prepayment premiums) as of May 31, 1996. The remaining net proceeds to the
Company from the Offerings will be used to reduce outstanding indebtedness under
the existing Paracelsus credit facility (the "Existing Paracelsus Credit
Facility") or the new credit facility (the "New Credit Facility") that the
Company intends to establish as soon as practicable after the effective time of
the Merger (the "Effective Time"), as applicable. Neither the Equity Offering
nor the Notes Offering is contingent upon the consummation of the other. See
"Risk Factors -- Significant Leverage," "The Merger and Financing" and "Use of
Proceeds."
The Company currently intends to refinance as soon as practicable after the
Effective Time, through borrowings under the New Credit Facility, all amounts
outstanding under the Existing Paracelsus Credit Facility (the "Credit Facility
Refinancing"). The New Credit Facility will provide for borrowings of up to
$400.0 million, of which $ million is expected to be outstanding after giving
effect to the Offerings and the Credit Facility Refinancing and the application
of the net proceeds therefrom. See "Capitalization" and "The Merger and
Financing -- Credit Facility Refinancing."
THE EQUITY OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED BY THE COMPANY:
U.S. OFFERING..................................... 4,160,000 shares
INTERNATIONAL OFFERING............................ 1,040,000 shares
COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS(1):
U.S. OFFERING..................................... 1,440,000 shares
INTERNATIONAL OFFERING............................ 360,000 shares
TOTAL........................................... 7,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE EQUITY
OFFERING(2)........................................ 54,647,167 shares
USE OF PROCEEDS BY THE COMPANY...................... The aggregate net proceeds to the Com-
pany from the Offerings are estimated
to be $297.2 million (consisting of
$55.9 million from the Equity Offering
and $241.3 million from the Notes
Offering). The Company intends that a
portion of the net proceeds from the
Offerings will be used by Champion to
prepay an estimated $159.2 million of
outstanding Champion indebtedness
(plus $6.6 million of prepayment
premiums) as of May 31, 1996. The
remaining estimated net proceeds of
$131.4 million will be used to reduce
outstanding indebtedness under the
Existing Paracelsus Credit Facility or
the New Credit Facility, as appli-
cable. See "Risk Factors --
Significant Leverage," "The Merger and
Financing" and "Use of Proceeds."
NEW YORK STOCK EXCHANGE SYMBOL...................... " "
</TABLE>
- ------------------------
(1) Does not include up to 1,050,000 shares of Common Stock subject to the U.S.
Underwriters' over-allotment option.
(2) Does not include 7,515,740 shares of Common Stock issuable upon conversion
or exercise of options, warrants, subscription rights or convertible
securities outstanding as of June 27, 1996.
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The Summary Unaudited Pro Forma Financial and Operating Data set forth below
have been derived from the Company Unaudited Pro Forma Condensed Combining
Financial Statements included elsewhere in this Prospectus. The Summary
Unaudited Pro Forma Financial and Operating Data reflect the effect of the
consummation of the Offerings, in each case as if such transactions had occurred
at the beginning of each period presented for purposes of the pro forma income
statement and operating data and on March 31, 1996 for purposes of the pro forma
balance sheet data. The Summary Unaudited Pro Forma Financial and Operating Data
set forth below also give effect to the Merger and certain acquisitions and
dispositions by each of Paracelsus and Champion completed since the beginning of
each of the periods presented.
The Summary Unaudited Pro Forma Financial and Operating Data set forth below
and the Company Unaudited Pro Forma Condensed Combining Financial Statements
included elsewhere herein do not purport to present the financial position or
results of operations of the Company had the transactions and events assumed
therein occurred on the dates specified, nor are they necessarily indicative of
the results of operations that may be expected in the future. The Summary
Unaudited Pro Forma Financial and Operating Data set forth below is qualified in
its entirety by reference to, and should be read in conjunction with, the
Company Unaudited Pro Forma Condensed Combining Financial Statements included
elsewhere in this Prospectus.
Paracelsus reports its financial information on the basis of a September 30
fiscal year. Champion reports its financial information on the basis of a
December 31 year. The Summary Unaudited Pro Forma Financial and Operating Data
for the fiscal year ended September 30, 1995 includes Paracelsus' historical
results of operations for the fiscal year ended September 30, 1995 and
Champion's historical results of operations for the year ended December 31,
1995. The Company currently intends to adopt a December 31 year end. The Summary
Unaudited Pro Forma Financial and Operating Data for the six months ended March
31, 1995 and 1996 includes Paracelsus' and Champion's historical results of
operations for the same six month periods. The Summary Unaudited Pro Forma
Balance Sheet Data includes the historical balance sheets of Paracelsus and
Champion as of March 31, 1996. See "The Merger and Financing," "Company
Unaudited Pro Forma Condensed Combining Financial Statements," "Paracelsus and
Champion Unaudited Pro Forma Condensed Combining Financial Statements,"
"Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements" and
"Champion Unaudited Pro Forma Condensed Combining Statements of Income and
Unaudited Historical Condensed Balance Sheet."
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED ------------------------------
SEPTEMBER 30, 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues (1)..................................... $ 696,899 $ 347,240 $ 368,555
Costs and expenses:
Salaries and benefits.......................................... 288,075 148,207 155,927
Supplies....................................................... 70,828 35,785 34,717
Purchased services............................................. 85,990 39,615 47,543
Provision for bad debts........................................ 55,616 27,004 27,845
Other operating expenses....................................... 117,911 57,419 59,328
Depreciation and amortization.................................. 32,510 15,776 17,575
Interest expense............................................... 37,895 19,263 19,219
Equity in earnings of DHHS (2)................................. (8,881) (2,363) (6,609)
Restructuring and unusual charges (3).......................... 4,177 -- --
Settlement costs (4)........................................... -- -- 22,356
---------- --------------- -------------
Total costs and expenses..................................... 684,121 340,706 377,901
---------- --------------- -------------
Income (loss) before minority interests and income taxes......... 12,778 6,534 (9,346)
Minority interests............................................... 1,927 1,204 1,072
---------- --------------- -------------
Income (loss) before income taxes................................ 10,851 5,330 (10,418)
Income taxes (benefit)........................................... 4,540 3,170 (3,730)
---------- --------------- -------------
Net income (loss)................................................ $ 6,311 $ 2,160 $ (6,688)
---------- --------------- -------------
---------- --------------- -------------
Earnings (loss) per share........................................ $ 0.11 $ 0.04 $ (0.13)
---------- --------------- -------------
---------- --------------- -------------
Weighted average number of shares of common stock and common
equivalents outstanding......................................... 55,524 55,527 52,201
---------- --------------- -------------
---------- --------------- -------------
OPERATING DATA:
Adjusted EBITDA (5).............................................. $ 85,433 $ 40,369 $ 48,732
Adjusted EBITDA margin........................................... 12.3% 11.6% 13.2%
Capital expenditures (6)......................................... $ 62,553 $ 18,170 $ 20,998
Ratio of Adjusted EBITDA to net interest expense................. 2.4x 2.3x 2.7x
Ratio of net debt to Adjusted EBITDA (7)......................... -- -- 4.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 8,819
Working capital........................................... 109,658
Total assets.............................................. 840,621
Total debt................................................ 377,562
Shareholders' equity...................................... 269,884
</TABLE>
- ------------------------------
(1) Includes pro forma interest income of $2,742, $1,677 and $1,400 for the
fiscal year ended September 30, 1995 and the six months ended March 31, 1995
and 1996, respectively.
(2) Champion operates DHHS pursuant to an operating agreement and accounts for
its investment in DHHS under the equity method. DHHS began operations on
December 31, 1994.
(3) Restructuring and unusual charges consisted of special bonuses of $4,177 (or
$0.04 per share, net of taxes) paid to certain executive officers.
(4) Settlement costs of $22,356 (or $0.24 per share, net of taxes) consisted of
settlement payments, legal fees and the write-off of certain accounts
receivable in connection with the settlement of two lawsuits.
(5) "Adjusted EBITDA" represents income before income taxes, depreciation and
amortization, interest expense, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
(6) Includes capital expenditures for special construction projects at BayCoast
Medical Center and Westwood Medical Center of $38,047, $9,449 and $10,496
for the fiscal year ended September 30, 1995 and the six months ended March
31, 1995 and 1996, respectively.
(7) Represents pro forma total debt outstanding less cash and cash equivalents
as of March 31, 1996 divided by pro forma Adjusted EBITDA of $88,104 for the
twelve months ended March 31, 1996.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE MAKING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. CERTAIN STATEMENTS UNDER THIS
CAPTION "RISK FACTORS" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE REFORM
ACT. SEE "-- FORWARD-LOOKING STATEMENTS."
COMPETITION
The healthcare industry has been characterized in recent years by increased
competition for patients and quality staff physicians, excess inpatient capacity
at hospitals, a shift from inpatient to outpatient settings and increased
consolidation. The principal factors contributing to these trends are advances
in medical technology, cost-containment efforts by managed care plans, employers
and traditional health insurers, changes in regulations and reimbursement
policies, increases in the number and type of physicians and competing
healthcare providers and changes in physician practice patterns.
The Company's future success will depend, in part, on the ability of the
Company's hospitals to continue to attract quality physicians, to enter into
managed care contracts and to organize and structure integrated healthcare
delivery systems with other healthcare providers and physician practice groups.
Most of the Company's hospitals compete with other hospitals which provide
comparable services. Some of these hospitals may have significantly greater
financial resources than the Company and some offer a wider range of services
than those offered by the Company's hospitals. Some of these hospitals are owned
by governmental agencies that may be supported by Federal and/or state funding
and others by tax exempt entities supported by endowments and charitable
contributions, which support is not available to the Company's hospitals. The
competitive position of the Company is also affected by the growth of managed
care organizations, including health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs") and other purchasers of group
healthcare services. Such managed care organizations negotiate with hospitals
and other healthcare providers to obtain discounts from established charges. The
Company's ability to compete for managed care business in the future will
depend, in part, on its ability to operate profitably in a capitated payment or
negotiated price environment. There can be no assurance that the Company's
hospitals will be able, on terms favorable to the Company, to attract quality
physicians to their staffs, to enter into managed care contracts or to organize
and structure integrated healthcare delivery systems for which other healthcare
companies (including those with greater financial resources or a wider range of
services) may be competing.
Payor organizations have changed their payment methodologies and have
increased their monitoring of the utilization of services, which has resulted
in, among other things, a significant shift from inpatient to outpatient care.
This shift from inpatient to outpatient care, which typically results in more
cost effective care, has also resulted in substantial unused inpatient hospital
capacity and a concurrent increase in the utilization of outpatient services and
outpatient revenues. Partially as a result of these changes in the industry,
there has been significant consolidation in the hospital industry over the past
decade and many hospitals have closed, merged with a competitor or reduced their
services. While the Company has added to its outpatient services, there can be
no assurance that such additions will adequately compensate for the shift away
from inpatient services. Although the occupancy rates and facility utilization
for the Company's acute care facilities have remained fairly stable over the
last three fiscal years, a number of the foregoing factors could cause the
Company to experience a decrease in occupancy rates or overall facility
utilization. The Company cannot predict with any degree of certainty the effect
such changes or reforms or further changes or reforms might have on the business
of the Company, and no assurance can be given that such changes or reforms will
not have a material adverse effect on the Company's financial condition or
results of operations.
BUSINESS EXPANSION
The Company's ability to compete successfully for managed care contracts or
to form or participate in integrated healthcare delivery systems may depend
upon, among other things, the Company's
9
<PAGE>
ability to increase the number of its facilities and services offered. Part of
the Company's business strategy is to expand its facilities and services through
the acquisition of hospitals, other healthcare businesses and ancillary
healthcare providers and recruitment of additional physicians. There can be no
assurance that suitable acquisitions, for which other healthcare companies
(including those with greater financial resources than the Company) may be
competing, can be accomplished on terms favorable to the Company or that
financing, if necessary, can be obtained for such acquisitions. See "--
Significant Leverage." In addition, there can be no assurance that the Company
will be able to operate profitably any hospital, facility, business or other
asset it may acquire, effectively integrate the operations of such acquisitions
or otherwise achieve the intended benefits of such acquisitions.
LIMITS ON REIMBURSEMENT
The Company's hospitals are licensed under applicable state law and
certified as providers under the Federal Medicare program and state Medicaid
programs, from which the Company derived in total approximately 45% and 13% of
its combined historical gross operating revenues for the fiscal year ended
September 30, 1995, and the six months ended March 31, 1996, respectively. Such
programs are highly regulated and subject to frequent and substantial changes.
In recent years, basic changes in Medicare reimbursement programs have resulted,
and are expected to continue to result, in reduced levels of reimbursement for a
substantial portion of hospital procedures and costs. In addition, further
changes are anticipated which are likely to result in further limitations on
reimbursement levels. There can be no assurance that reimbursement will continue
to be available for those procedures and costs of the Company currently
reimbursed by Medicare and Medicaid. See "Business -- Medicare, Medicaid and
Other Revenue."
In addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures or the assumption by healthcare providers of
all or a portion of the financial risk of delivering healthcare to their members
through prepaid capitation arrangements. Inpatient utilization, admissions and
occupancy rates continue to be negatively affected by payor-required pre-
admission authorization and utilization review and by payor pressure to
substitute less expensive outpatient and alternative healthcare services for
inpatient procedures for less acutely ill patients. See "-- Competition." In
addition, efforts to impose reduced allowances, greater discounts and more
stringent cost controls by government and other payors are expected to continue.
These changes could adversely affect the Company's financial condition and
results of operations. In particular, as the number of patients covered by
managed care payors increases, significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on the Company's financial condition and results of operations.
EXTENSIVE REGULATION
The healthcare industry is subject to extensive Federal, state and local
regulation relating to licensing, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services. In
particular, Medicare and Medicaid antifraud and abuse amendments codified under
Section 1128B(b) of the Social Security Act (the "Antifraud Amendments")
prohibit certain business practices and relationships that might affect the
provision and cost of healthcare services reimbursable under Medicare and
Medicaid. Sanctions for violating the Antifraud Amendments include criminal
penalties and civil sanctions, including fines and possible exclusion from the
Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid Patient
and Program Protection Act of 1987, the Department of Health and Human Services
("HHS") has issued regulations that describe some of the conduct and business
relationships permissible under the Antifraud Amendments (the "Safe Harbors").
The fact that a given business does not fall within a Safe Harbor does not
render the arrangement PER SE illegal. Business arrangements of healthcare
service providers that fail to satisfy the applicable Safe Harbor criteria,
however, risk increased scrutiny by enforcement authorities.
The Company has joint ventures with physician investors that are subject to
regulation under the Antifraud Amendments. None of such joint ventures falls
within any of the Safe Harbors. Under the
10
<PAGE>
Company's joint venture arrangements, physician investors are not and will not
be under any obligation to refer or admit their patients, including Medicare or
Medicaid beneficiaries, to receive services at the Company's facilities, nor are
distributions to those physician investors contingent upon or calculated with
reference to referrals by the investors. On the basis thereof, the Company does
not believe the ownership of interests in or receipt of distributions from the
Company's joint ventures would be construed to be knowing and willful payments
to the physician investors to induce them to refer patients in violation of the
Antifraud Amendments. There can be no assurance, however, that government
officials charged with responsibility for enforcing the prohibitions of the
Antifraud Amendments will not assert that one or more of the Company's joint
ventures is in violation of such provisions. To date, none of the Company's
current joint ventures has been reviewed by any governmental authority for
compliance with the Antifraud Amendments. See "Business -- Regulation and Other
Factors -- Other Federal Statutes and Regulations."
In addition, Section 1877 of the Social Security Act was amended effective
January 1, 1995 (such amendments being hereinafter referred to as "Stark II") to
broaden significantly the scope of prohibited physician referrals under the
Medicare and Medicaid programs to providers with which they have financial
arrangements. Many states have adopted or are considering legislative proposals
similar to Stark II, some of which extend beyond the Medicaid program to all
healthcare services. The Company's participation in and development of joint
ventures and other financial arrangements with physicians could be adversely
affected by these amendments and similar state enactments. See "Business --
Regulation and Other Factors -- Other Federal Statutes and Regulations" and "--
State Statutes and Regulations."
Certificates of need ("CONs"), which are issued by certain state
governmental agencies with jurisdiction over healthcare facilities, are at times
required for the construction of new facilities, the expansion of old
facilities, capital expenditures exceeding a prescribed amount, changes in bed
capacity or services and certain other matters. The Company operates facilities
in seven states that require state approval under CON programs. No assurance can
be given that the Company will be able to obtain additional CONs in any
jurisdiction where such CONs are required. See "Business -- Regulation and Other
Factors -- 'Certificate of Need' Requirements."
The Company is unable to predict the future course of Federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the Company's financial condition and results of operations.
HEALTHCARE REFORM LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the healthcare system, either nationally or at the state level.
Among the proposals under consideration are price controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a government health insurance
plan or plans that would cover all citizens. There continue to be efforts at the
Federal level to introduce various insurance market reforms, expanded fraud and
abuse and anti-referral legislation and further reductions in Medicare and
Medicaid reimbursement. A broad range of both similar and more comprehensive
healthcare reform initiatives is likely to be considered at the state level. In
an effort to reduce the Federal budget deficit, Congress is considering
reductions to Medicaid spending that could reduce payments to the Company's
hospitals for services provided to Medicaid recipients, including, among others,
payments to teaching hospitals and hospitals providing a disproportionate amount
of care to indigent patients. A reduction in these payments could adversely
affect the Company's total operating revenues and operating margins. It is
uncertain what action Congress or state legislatures may take or if any such
action would become law.
11
<PAGE>
The Company cannot predict whether any of the above proposals or any other
proposals will be adopted, and, if adopted, no assurance can be given that the
implementation of such legislation will not have a material adverse effect on
the Company's financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS
The Company's operations are dependent on the efforts, ability and
experience of its key executive officers. In addition, the Company's continued
growth depends on its ability to attract and retain skilled employees, on the
ability of its officers and key employees to manage growth successfully and on
the Company's ability to attract and retain quality physicians and management
teams at its facilities. Further, since physicians generally control the
majority of hospital admissions, the success of the Company is, in part,
dependent upon the number, specialties and quality of physicians on its
hospitals' medical staffs, most of whom have no long-term contractual
relationship with the Company and may terminate their association with the
Company's hospitals at any time. No assurance can be given that the loss of some
or all of these key executive officers or an inability to attract or retain
sufficient numbers of qualified physicians or hospital management teams will not
have a material adverse effect on the Company's financial condition or results
of operations.
CONCENTRATION OF OPERATIONS
Of the 31 hospital facilities to be operated by the Company after
consummation of the Merger, five will be located in the Salt Lake City
metropolitan area. On a pro forma combined basis, excluding the effect of the
Company's acquisition of assets relating to FHP Hospital, a 125-bed acute care
hospital, and its surrounding campus, in Salt Lake City (the "PHC Salt Lake
Hospital"), these hospitals would have accounted for 25% and 34% of the total
operating revenues and Adjusted EBITDA, respectively, of the Company's hospitals
for the twelve months ended March 31, 1996. The Company expects that the total
operating revenues and Adjusted EBITDA anticipated to be received by the Company
in connection with the operation of PHC Salt Lake Hospital will further increase
the contribution of the Utah operations to the Company's total operating
revenues and Adjusted EBITDA. See "Business -- Recent Transactions." The
Company's management believes that its strategy of acquiring hospitals in the
Salt Lake City area will enhance its ability to compete for managed care
contracts and organize and structure an integrated healthcare delivery system in
that market, although there can be no assurance that such strategy will be
successful. In addition, the Company has eight hospitals in the Los Angeles
metropolitan area, a competitive and overbedded environment. On a pro forma
combined basis, these hospitals would have accounted for 23% and 9% of the
Company's total operating revenues and Adjusted EBITDA , respectively, of the
Company's hospitals for the twelve months ended March 31, 1996. The Company may
be particularly sensitive to economic, competitive and regulatory conditions in
these metropolitan areas, and the future success of the Company may be
substantially affected by its ability to compete effectively in these markets.
PRINCIPAL SHAREHOLDER
Following consummation of the Equity Offering, Dr. Manfred George Krukemeyer
("Dr. Krukemeyer") will, through his ownership of Park Hospital GmbH, a German
corporation (the "Paracelsus Shareholder"), beneficially own 54.5% of the
outstanding shares of Common Stock. Upon the consummation of the Merger, the
Paracelsus Shareholder will enter into a shareholder agreement (the "Shareholder
Agreement") pursuant to which the Paracelsus Shareholder will agree, among other
things; (i) to certain "standstill" provisions; (ii) to certain transfer
restrictions with respect to the Company's voting securities; (iii) not to
acquire additional voting securities of the Company if, after giving effect to
such acquisition, such shareholder would beneficially own more than 66 2/3% of
the total voting power of the Company, except under certain circumstances; and
(iv) to sell in, tender into and vote in favor of, as the case may be, certain
acquisition proposals involving the Company. The Shareholder Agreement will also
provide the Paracelsus Shareholder with the right to designate four nominees to
the Company's Board of Directors (the "Board") and a right of first refusal in
connection with certain acquisition proposals for the Company. Dr. Krukemeyer
also has a right of first refusal to acquire the Common Stock of the four most
senior officers of the Company. See "Certain Relationships and Related
Transactions -- Shareholder Agreement."
12
<PAGE>
Given Dr. Krukemeyer's level of beneficial ownership of the Common Stock and
his right to designate four nominees to the Board, Dr. Krukemeyer will have the
ability to influence the policies and affairs of the Company to a greater extent
than other shareholders of the Company. In addition, Dr. Krukemeyer's level of
beneficial ownership, as well as his right of first refusal in connection with
certain acquisition proposals for the Company, could have the effect of delaying
or making more difficult a change of control of the Company.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and the Company's Amended and Restated Bylaws
(the "Bylaws") may have the effect of making an unsolicited acquisition of
control of the Company more difficult or expensive. Furthermore, it is
anticipated that prior to the Effective Time the Board will adopt a Stockholder
Protection Rights Agreement (the "Rights Agreement"), which could have the
effect of making an unsolicited acquisition of the Company more difficult or
more expensive. Dr. Krukemeyer's level of beneficial ownership, as well as his
right of first refusal in connection with certain acquisition proposals for the
Company, could also have the effect of delaying or making more difficult a
change of control of the Company.
SIGNIFICANT LEVERAGE
As of May 31, 1996, as adjusted on a pro forma basis to give effect to the
Merger and the Offerings, the Company's total indebtedness, including the
current portion of capital lease obligations, would have been $ million,
which represents % of its total capitalization. See "Capitalization." In
addition, upon consummation of the Offerings and the Credit Facility
Refinancing, the Company expects to have $ million available for borrowing
under the New Credit Facility before reduction of approximately $9.7 million for
commitments outstanding under letters of credit, all of which will be permitted
to be borrowed under the Indenture governing the Notes (the "New Indenture"). On
a pro forma basis, after giving effect to the Merger and the Offerings and the
application of the net proceeds therefrom, the Company's earnings would have
been insufficient to cover fixed charges by $9.3 million for the six months
ended March 31, 1996. The pro forma earnings deficiency is primarily the result
of an unusual charge recorded in March 1996 of $22.4 million related to the
settlement of two lawsuits. See "Company Unaudited Pro Forma Condensed Combining
Financial Statements." The Company believes that cash flows from operations will
be sufficient to meet debt service requirements for interest and scheduled
payments of principal under the Company's indebtedness, including the New Credit
Facility and the Notes. However, there can be no assurance that the Company will
be able to generate the cash flows necessary to permit the Company to meet such
debt service requirements.
The Company expects that the New Credit Facility will include covenants that
prohibit or limit, among other things, the sale of assets, the making of
acquisitions and other investments, the incurrence of additional debt and liens
and the payment of dividends, and that require the Company to maintain a minimum
consolidated net worth and to comply with certain financial ratio tests. In
addition, the New Indenture will include covenants that limit, among other
things, the ability of the Company and its subsidiaries to incur additional
indebtedness, make prepayment of certain indebtedness, pay dividends or redeem
capital stock, create certain liens, sell certain assets, engage in certain
transactions with affiliates, engage in certain mergers and enter a new line of
business. The Company's failure to comply with any of these covenants could
result in an event of default, thereby permitting acceleration of such
indebtedness as well as indebtedness under other instruments that contain
cross-acceleration, or cross-default provisions, including the New Credit
Facility, the indenture pursuant to which $75.0 million aggregate principal
amount of outstanding 9 7/8 Senior Subordinated Notes due 2003 of Paracelsus
(the "Existing Senior Subordinated Notes") was issued (the "Existing Indenture")
and the New Indenture, which in turn could have a material adverse effect on the
Company's financial condition and results of operations.
The degree to which the Company is leveraged and the covenants described
above may adversely affect the Company's ability to finance its future
operations and could limit its ability to pursue
13
<PAGE>
business opportunities that may be in the interest of the Company and its
securityholders. In particular, changes in medical technology, existing,
proposed and future legislation, regulations and the interpretation thereof, and
the increasing importance of managed care contracts and integrated healthcare
delivery systems may require significant investment in facilities, equipment,
personnel or services. Although the Company expects that cash generated from
operations and amounts available under the New Credit Facility will be
sufficient to allow it to make such investments, there can be no assurance that
the Company will be able to obtain the funds necessary to make such investments.
Furthermore, tax-exempt or government-owned competitors have certain financial
advantages such as endowments, charitable contributions, tax-exempt financing
and exemption from sales, property and income taxes not available to the
Company, providing them with a potential competitive advantage in making such
investments.
PROFESSIONAL LIABILITY INSURANCE
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business. In
the past, the Company established self-insurance programs and related trust
funds for the settlement of claims not covered by third-party insurance. In
October 1992, the Company established an insurance subsidiary to insure the
Company and its other subsidiaries against liability for future general
liability and malpractice claims. Such subsidiary insures the Company's
hospitals for the first $500,000 per occurrence of general and professional
liability risks occurring after October 1, 1987 and the first $250,000 per
occurrence of workers' compensation liability risks occurring after October 1,
1992. Although management expects that the Company's self-insurance and
related-party insurance, together with its third-party insurance coverage, will
be adequate to provide for liability claims, there can be no assurance that such
insurance will prove to be adequate.
SHARES ELIGIBLE FOR FUTURE ISSUANCE AND SALE
Sales of substantial amounts of Common Stock in the open market or the
availability of such shares for sale could adversely affect prevailing market
prices for the Common Stock. See "Shares Eligible for Future Sale" and "--
Registration Rights."
Upon consummation of the Merger, 54,647,167 shares of Common Stock will be
outstanding. In addition, 7,515,740 shares of Common Stock are currently
expected to be reserved for issuance to holders of options (the "Options") and
warrants (the "Warrants") to purchase shares of Common Stock, securities
convertible into Common Stock and other rights to acquire shares of Common
Stock. Following the Merger, certain holders of shares of Common Stock and of
Warrants will have certain rights to require the Company to register Common
Stock under the Securities Act of 1933 (the "Securities Act") under registration
rights agreements with the Company. Upon consummation of the Equity Offering,
the shares of Common Stock covered by these registration rights will include
29,771,742 shares beneficially owned by the Paracelsus Shareholder,
approximately shares beneficially owned by certain Champion stockholders
and warrant holders prior to the Merger (the "Champion Investors") and an
aggregate of 414,690 shares issuable upon the exercise of Warrants held by the
Champion Investors. In addition, the Company currently intends to register up to
million shares of Common Stock to be issued in connection with certain
employee benefit programs. The Company, the Selling Shareholders, the Company's
executive officers and directors and certain other shareholders of the Company
have agreed that for a period of days from the date of this Prospectus, they
will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or in any other
manner transfer all or a portion of the economic consequences associated with
the ownership of any such Common Stock (other than the granting by the Company
of stock options pursuant to the Company's existing stock option plans and the
issuing by the Company of shares of Common Stock upon the exercise of an Option,
Warrant or subscription right outstanding on the date of this Prospectus) except
for the shares of Common Stock offered and sold in connection with the Equity
Offering. See "Shares Eligible for Future Issuance and Sale."
14
<PAGE>
LACK OF PUBLIC MARKET
Prior to the Merger, the Company has been wholly owned by the Paracelsus
Shareholder and there has been no public trading market for the Common Stock.
The public offering price of the Common Stock will be determined by negotiations
between the Company and the Representatives (as defined below) and may not be
indicative of the market price for shares of the Common Stock after the Equity
Offering. For a description of factors to be considered in determining the
public offering price, see "Underwriting." Application will be made to list the
Common Stock on the New York Stock Exchange (the "NYSE") upon consummation of
the Merger. However, there can be no assurance as to the liquidity of any market
that may develop for the Common Stock, the ability of holders to sell their
Common Stock or the price at which holders would be able to sell their Common
Stock.
DIVIDEND RESTRICTIONS
The terms of the Existing Paracelsus Credit Facility and the New Credit
Facility, as applicable, the New Indenture and the Existing Indenture restrict
the ability of the Company to pay dividends on the Common Stock. The Company
does not expect to pay dividends on the Common Stock in the foreseeable future,
other than the Dividend (as defined below) payable to the Paracelsus
Shareholder. See "The Merger and Financing -- Paracelsus Dividend Prior to
Effective Time" and "Dividend Policy."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation statements containing the words "believes," "anticipates,""intends,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Reform Act. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
nationally and in the regions in which the Company operates; industry capacity;
demographic changes; existing government regulations and changes in, or the
failure to comply with, government regulations; legislative proposals for
healthcare reform; the ability to enter into managed care provider arrangements
on acceptable terms; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition; the loss
of any significant customers; changes in business strategy or development plans;
the ability to attract and retain qualified personnel, including physicians; the
significant indebtedness of the Company after the Merger; the availability and
terms of capital to fund the expansion of the Company's business, including the
acquisition of additional facilities; and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including without limitation under the captions "Prospectus
Summary," "Risk Factors," "Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Champion Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
15
<PAGE>
THE MERGER AND FINANCING
THE MERGER; PARACELSUS STOCK SPLIT
On April 12, 1996, Paracelsus, PC Merger Sub, Inc., a Delaware corporation
and a newly formed wholly owned subsidiary of Paracelsus, and Champion entered
into the Merger Agreement pursuant to which Champion will become a wholly owned
subsidiary of Paracelsus. Prior to the Effective Time, each of the 450 issued
and outstanding shares of Paracelsus Common Stock will be split into, and each
share will become and thereafter represent, 66,159.426 shares of Common Stock
(the "Paracelsus Stock Split"). At the Effective Time, as a result of the
Merger, (i) each share of Champion common stock (the "Champion Common Stock")
will automatically be converted into the right to receive one share of Common
Stock and (ii) each share of Champion preferred stock (the "Champion Preferred
Stock" and, together with the Champion Common Stock, the "Champion Capital
Stock") will automatically be converted into the right to receive two shares of
Common Stock. Approval of the Merger requires (i) the affirmative vote of the
holders of a majority of the total voting power represented by the outstanding
shares of Champion Capital Stock, voting together as a single class, (ii) the
affirmative vote of the holders of at least 90% of the outstanding shares of
Champion Series C Cumulative Convertible Preferred Stock, voting as a separate
class and (iii) the affirmative vote of the holders of at least 90% of the
outstanding shares of Champion Series D Cumulative Convertible Preferred Stock,
voting together as a separate class. The holders of 92.5% of the outstanding
shares of Champion Preferred Stock, which in the aggregate represent
approximately 26% of the total voting power of the outstanding shares of
Champion Capital Stock, have entered into an agreement with Champion to vote all
shares of Champion Preferred Stock beneficially owned by them in favor of the
Merger.
PARACELSUS DIVIDEND PRIOR TO EFFECTIVE TIME
Prior to the Effective Time, Paracelsus will declare a dividend (the
"Dividend") in the amount of $21.1 million, plus $3,574 for each day from and
including July 31, 1996 to the date the Dividend is paid, payable to the
Paracelsus Shareholder, to be paid on a date not later than 60 days after the
Effective Time.
Pursuant to the dividend and note agreement between the Paracelsus
Shareholder and Paracelsus (the "Dividend and Note Agreement") to be entered
into immediately prior to the Effective Time, the Paracelsus Shareholder will
agree to purchase promptly after receipt of the Dividend a 6.51% subordinated
note due 2006 of Paracelsus (the "Shareholder Subordinated Note") for $7.2
million. The Shareholder Subordinated Note will have a term of ten years, will
bear interest at the rate of 6.51% per year and will provide for payments of
principal and accrued interest in an aggregate annual amount of $1.0 million.
The Shareholder Subordinated Note will be generally subordinated in right of
payment to: (i) all "senior indebtedness" as defined in the Existing Indenture
(including without limitation the New Credit Facility); (ii) the Existing Senior
Subordinated Notes; (iii) the Notes and any other indebtedness ranking PARI
PASSU with the Notes and/or refinancing indebtedness; and (iv) any other
indebtedness for borrowed money with an initial principal amount in excess of
$50.0 million that is designated by the Company as ranking senior to the
Shareholder Subordinated Note.
CREDIT FACILITY REFINANCING
In connection with the Merger and the Credit Facility Refinancing, the
Company currently intends to arrange for the New Credit Facility with Bank of
America National Trust and Savings Association ("Bank of America NT&SA"), as
agent, and a syndicate of other lenders at or as soon as practicable after the
Effective Time. The New Credit Facility will provide for borrowings of up to
$400.0 million. The Company currently intends to refinance, through borrowings
under the New Credit Facility, all amounts outstanding under the Existing
Paracelsus Credit Facility. At May 31, 1996, the balance outstanding under the
Existing Paracelsus Credit Facility was approximately $189.0 million. Although
the Merger is not conditioned upon the closing of the Credit Facility
Refinancing, if the Credit Facility Refinancing is not consummated Champion and
Paracelsus will be required to obtain certain consents and waivers under their
respective existing credit facilities in
16
<PAGE>
order to consummate the Merger. The failure to obtain such consents and waivers
may be deemed to give rise to a default thereunder and perhaps cause other
defaults under the outstanding obligations of Champion and Paracelsus. There can
be no assurance that such consents and waivers, if required, would be obtained.
See "Risk Factors -- Significant Leverage."
FINANCING PLAN
The following sets forth as of May 31, 1996 the pro forma sources and uses
of funds raised by the Company in the Offerings, assuming (i) 5,200,000
newly-issued shares of Common Stock are offered and sold by the Company in the
Equity Offering at a public offering price of $11.50 per share and (ii)
$250,000,000 aggregate principal amount of Notes are sold by the Company in the
Notes Offering at 100% of their principal amount.
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
SOURCES OF FUNDS
Equity Offering..................................................................................... $ 59,800
Notes Offering...................................................................................... 250,000
------------
Total....................................................................................... $ 309,800
------------
------------
USE OF FUNDS
Champion Credit Facility (as defined below)......................................................... $ 54,200
Existing Paracelsus Credit Facility/New Credit Facility............................................. 131,449
Champion Series D Notes (as defined below).......................................................... 59,258
Champion Series E Notes (as defined below).......................................................... 35,000
Certain other Champion indebtedness................................................................. 10,701
Prepayment premiums on Champion Notes and other Champion indebtedness............................... 6,555
Estimated fees and expenses (1)..................................................................... 12,637
------------
Total....................................................................................... $ 309,800
------------
------------
</TABLE>
- ------------------------
(1) Includes underwriting discounts and commissions of $3,887 and $7,500 for the
Equity Offering and Notes Offering, respectively, and a total of $1,250 for
other estimated expenses of the Company in connection with the Offerings.
USE OF PROCEEDS
The Company intends that a portion of the estimated aggregate net proceeds
to the Company of $55.9 million from the Equity Offering and $241.3 million from
the Notes Offering, in each case after deducting estimated expenses and
underwriting discounts and commissions, will be loaned or contributed to
Champion to be used to prepay the following Champion indebtedness as of May 31,
1996: (i) $54.2 million outstanding under Champion's existing credit facility
(the "Champion Credit Facility") (which currently bears interest at the weighted
average rate of 8.6% per annum and matures on March 31, 1999); (ii) $59.3
million outstanding principal amount of Champion's 11% Series D Subordinated
Notes due December 31, 2003 (the "Champion Series D Notes"), plus prepayment
premiums equal to 6% of the face value of such notes; (iii) $35.0 million
outstanding principal amount of Champion's 11% Series E Senior Subordinated
Notes due December 31, 2003 (which currently bears interest at the rate of 11.5%
per annum) (the "Champion Series E Notes" and, together with the Champion Series
D Notes, the "Champion Notes"), plus prepayment premiums equal to 6% of the face
value of such notes; and (iv) $10.7 million principal amount of certain other
outstanding Champion indebtedness (which currently bears interest at the rate of
13.05% per annum and matures on November 1, 2008), plus aggregate prepayment
penalties equal to approximately $900,000. The estimated remaining aggregate net
proceeds to the Company from the Offerings of $131.4 million will be used to
reduce outstanding indebtedness under the Existing Paracelsus Credit Facility or
the New
17
<PAGE>
Credit Facility, as applicable. Consummation of the Equity Offering is not
contingent upon the Notes Offering, and there can be no assurance as to whether
or when the Notes Offering will be consummated.
DIVIDEND POLICY
After the Merger, the Company currently intends to retain any earnings to
fund future growth and the operation of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. Certain debt
instruments, including the New Credit Facility, the Existing Paracelsus Credit
Facility, the Existing Indenture and the New Indenture, contain covenants which
restrict the ability of the Company to pay cash dividends on the Common Stock.
The payment of future dividends on the Common Stock will be a business decision
to be made by the Board from time to time based upon the results of operations
and financial condition of the Company, restrictions under debt agreements,
capital requirements and such other factors as the Board considers relevant.
Prior to the Effective Time, Paracelsus will declare the Dividend payable to the
Paracelsus Shareholder on a date not later than 60 days after the consummation
of the Merger. See "The Merger and Financing -- Paracelsus Dividend Prior to
Effective Time."
18
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company at March 31, 1996 (i) as adjusted to give
effect to the Merger and (ii) as further adjusted to give effect to the
Offerings and the application of the net proceeds therefrom to the Company, in
each case as if such transactions had occurred on March 31, 1996. The Equity
Offering is not contingent upon the consummation of the Notes Offering. See "The
Merger and Financing" and "Use of Proceeds."
<TABLE>
<CAPTION>
ADJUSTED
FOR
ADJUSTED THE MERGER
FOR AND THE
THE MERGER OFFERINGS
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 8,819 $ 8,819
----------- -----------
----------- -----------
Short-term debt (including current maturities of long-term debt)....................... $ 3,292 $ 2,464
----------- -----------
----------- -----------
Long-term debt and capital lease obligations (net of current maturities):
Existing Paracelsus Credit Facility (1).............................................. $ 137,109 $ 22,582
Champion Credit Facility (2)......................................................... 66,200 --
Mortgages payable, notes and capitalized leases...................................... 37,596 27,516
Existing Senior Subordinated Notes................................................... 75,000 75,000
Notes offered hereby................................................................. -- 250,000
Champion Series D Notes (3).......................................................... 63,705 --
Champion Series E Notes (4).......................................................... 34,371 --
----------- -----------
Total long-term debt............................................................... 413,981 375,098
----------- -----------
Shareholders' equity:
Preferred Stock, $0.01 par value (5)................................................. -- --
Common stock, no stated value (6).................................................... 173,370 229,283
Common stock subscribed (80,000 shares).............................................. 40 40
Common stock subscription receivable................................................. (40) (40)
Additional paid-in capital........................................................... 390 390
Unrealized gains on marketable securities............................................ 42 42
Retained earnings.................................................................... 44,566 40,169
----------- -----------
Total shareholders' equity......................................................... 218,368 269,884
----------- -----------
Total capitalization............................................................. $ 632,349 $ 644,982
----------- -----------
----------- -----------
</TABLE>
- --------------------------
(1) Does not reflect an aggregate of $86,750 of additional borrowings by the
Company since March 31, 1996 under the Existing Paracelsus Credit Facility
that were incurred to fund a portion of the $22,356 in settlement costs and
the acquisition of the PHC Salt Lake Hospital assets for $70,000 in cash,
which additional borrowings will be refinanced as part of the Credit
Facility Refinancing. See "Paracelsus Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations"
and "Business -- Recent Transactions."
(2) Does not reflect net payments of $12,000 made through May 31, 1996.
(3) Does not reflect a $4,447 reduction in borrowings as a result of certain
warrant holders tendering notes to exercise their rights under warrant
agreements.
(4) Net of discount of $629.
(5) As adjusted for the Merger, 25,000,000 shares authorized and shares
designated as "Participating Preferred Stock."
(6) As adjusted for the Merger, 150,000,000 shares authorized and 49,447,167
shares issued; and as further adjusted for the Equity Offering, 150,000,000
shares authorized and 54,647,167 shares issued.
19
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
The Company Unaudited Pro Forma Condensed Combining Financial Statements set
forth below have been derived from the Paracelsus and Champion Unaudited Pro
Forma Condensed Combining Financial Statements included elsewhere in this
Prospectus. The Company Unaudited Pro Forma Condensed Combining Financial
Statements reflect the effect of the consummation of each of the Offerings, in
each case as if such transactions had occurred at the beginning of each period
presented for purposes of the pro forma income statements and on March 31, 1996
for purposes of the pro forma balance sheet data. The Company Unaudited Pro
Forma Condensed Combining Financial Statements also give effect to the Merger
and certain acquisitions and dispositions by each of Paracelsus and Champion
completed since the beginning of each of the periods presented.
Paracelsus reports its financial information on the basis of a September 30
fiscal year. Champion reports its financial information on the basis of a
December 31 year. The Summary Unaudited Pro Forma Financial and Operating Data
for the fiscal year ended September 30, 1995 includes Paracelsus' historical
results of operations for the fiscal year ended September 30, 1995 and
Champion's historical results of operations for the year ended December 31,
1995. The Company currently intends to adopt a December 31 year end. The Summary
Unaudited Pro Forma Financial and Operating Data for the six months ended March
31, 1995 and 1996 includes Paracelsus' and Champion's historical results of
operations for the same six month periods. The Summary Unaudited Pro Forma
Balance Sheet Data includes the historical balance sheets of Paracelsus and
Champion as of March 31, 1996.
The Company Unaudited Pro Forma Condensed Combining Financial Statements set
forth below and the Paracelsus and Champion Unaudited Pro Forma Condensed
Combining Financial Statements, the Paracelsus Unaudited Pro Forma Condensed
Combining Financial Statements and the Champion Unaudited Pro Forma Condensed
Combining Statements of Income included elsewhere herein do not purport to
present the financial position or results of operations of Paracelsus and
Champion had the transactions and events assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be expected in the future. The Company Unaudited Pro Forma Condensed
Combining Financial Statements set forth below are qualified in their entirety
by reference to, and should be read in conjunction with, the Paracelsus and
Champion Unaudited Pro Forma Condensed Combining Financial Statements, the
Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements and the
Champion Unaudited Pro Forma Condensed Combining Statements of Income and
Unaudited Historical Condensed Balance Sheet included elsewhere in this
Prospectus. See "Risk Factors -- Significant Leverage," "The Merger and
Financing," "Paracelsus Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Champion Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -- Recent
Transactions," "Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Financial Statements," "Paracelsus Unaudited Pro Forma Condensed Combining
Financial Statements" and "Champion Unaudited Pro Forma Condensed Combining
Statements of Income and Unaudited Historical Condensed Balance Sheet."
20
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE FOR THE
PRO FORMA ADJUSTMENTS MERGER ADJUSTMENTS MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues....................... $ 696,899 $ 696,899 $ 696,899
Costs and expenses:
Salaries and benefits........................ 288,075 288,075 288,075
Supplies..................................... 70,828 70,828 70,828
Purchased services........................... 85,990 85,990 85,990
Provision for bad debts...................... 55,616 55,616 55,616
Other operating expenses..................... 117,911 117,911 117,911
Depreciation and amortization................ 31,635 $ 875(1) 32,510 32,510
Interest..................................... 36,803 1,631(2) 38,434 $ (539)(4) 37,895
Equity in earnings of DHHS................... (8,881) (8,881) (8,881)
Restructuring and unusual charges............ 4,177 4,177 4,177
----------- ------------- ------------- ------ -------------
Total costs and expenses....................... 682,154 2,506 684,660 (539) 684,121
----------- ------------- ------------- ------ -------------
Income before minority interests and income
taxes......................................... 14,745 (2,506) 12,239 539 12,778
Minority interests............................. 1,927 1,927 1,927
----------- ------------- ------------- ------ -------------
Income before income taxes..................... 12,818 (2,506) 10,312 539 10,851
Income taxes................................... 5,346 (1,027)(3) 4,319 221(3) 4,540
----------- ------------- ------------- ------ -------------
Net income..................................... $ 7,472 $ (1,479) $ 5,993 $ 318 $ 6,311
----------- ------------- ------------- ------ -------------
----------- ------------- ------------- ------ -------------
Income per share............................... $ 0.15 $ 0.12 $ 0.11
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding................. 50,324 50,324 5,200(4) 55,524
----------- ------------- ------ -------------
----------- ------------- ------ -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
21
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE FOR THE
PRO FORMA ADJUSTMENTS MERGER ADJUSTMENTS MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues....................... $ 347,240 $ 347,240 $ 347,240
Costs and expenses:
Salaries and benefits........................ 148,207 148,207 148,207
Supplies..................................... 35,785 35,785 35,785
Purchased services........................... 39,615 39,615 39,615
Provision for bad debts...................... 27,004 27,004 27,004
Other operating expenses..................... 57,419 57,419 57,419
Depreciation and amortization................ 15,338 $ 438(1) 15,776 15,776
Interest..................................... 17,099 2,164(2) 19,263 19,263
Equity in earnings of DHHS................... (2,363) (2,363) (2,363)
----------- ------------- ------------- -------------
Total costs and expenses....................... 338,104 2,602 340,706 340,706
----------- ------------- ------------- -------------
Income before minority interests
and income taxes.............................. 9,136 (2,602) 6,534 6,534
Minority interests............................. 1,204 1,204 1,204
----------- ------------- ------------- -------------
Income before income taxes..................... 7,932 (2,602) 5,330 5,330
Income taxes................................... 4,237 (1,067)(3) 3,170 3,170
----------- ------------- ------------- -------------
Net income..................................... $ 3,695 $ (1,535) $ 2,160 $ 2,160
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
Income per share............................... $ 0.07 $ 0.04 $ 0.04
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding................. 50,327 50,327 5,200(4) 55,527
----------- ------------- ------ -------------
----------- ------------- ------ -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements
22
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE ADJUSTMENTS FOR THE
PRO FORMA ADJUSTMENTS MERGER FOR THE MERGER
FOR THE FOR THE NOTES AND THE NOTES EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
Total operating revenues............................. $ 368,555 $ 368,555 $ 368,555
Costs and expenses:
Salaries and benefits.............................. 155,927 155,927 155,927
Supplies........................................... 34,717 34,717 34,717
Purchased services................................. 47,543 47,543 47,543
Provision for bad debts............................ 27,845 27,845 27,845
Other operating expenses........................... 59,328 59,328 59,328
Depreciation and amortization...................... 17,137 $ 438(1) 17,575 17,575
Interest........................................... 19,686 1,378(2) 21,064 $ (1,845)(4) 19,219
Equity in earnings of DHHS......................... (6,609) (6,609) (6,609)
Settlement costs................................... 22,356 22,356 22,356
----------- ------------- ------------- ------------- -------------
Total costs and expenses............................. 377,930 1,816 379,746 (1,845) 377,901
----------- ------------- ------------- ------------- -------------
Loss before minority interests and income taxes...... (9,375) (1,816) (11,191) 1,845 (9,346)
Minority interests................................... 1,072 1,072 1,072
----------- ------------- ------------- ------------- -------------
Loss before income taxes............................. (10,447) (1,816) (12,263) 1,845 (10,418)
Income tax benefit................................... (3,741) (745)(3) (4,486) 756(3) (3,730)
----------- ------------- ------------- ------------- -------------
Net loss............................................. $ (6,706) $ (1,071) $ (7,777) $ 1,089 $ (6,688)
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Loss per share....................................... $ (0.14) $ (0.17) $ (0.13)
----------- ------------- -------------
----------- ------------- -------------
Weighted average number of common and common
equivalent shares outstanding....................... 47,001 47,001 5,200(4) 52,201
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
23
<PAGE>
COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS FOR THE MERGER ADJUSTMENTS FOR THE MERGER
FOR THE FOR THE NOTES AND THE NOTES FOR THE EQUITY AND THE
MERGER OFFERING OFFERING OFFERING OFFERINGS
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 8,819 $ 250,000(5) $ 8,819 $ 55,913(4) $ 8,819
(250,000)(5) (55,913)(4)
Marketable securities....................... 10,051 10,051 10,051
Accounts receivable, less provision for bad
debts...................................... 136,422 136,422 136,422
Supplies.................................... 13,524 13,524 13,524
Deferred income taxes....................... 47,630 3,055(6) 50,685 50,685
Other current assets........................ 7,687 7,687 7,687
----------- ----------------- -------------- -------------- --------------
Total current assets...................... 224,133 3,055 227,188 -- 227,188
Property and equipment, net of accumulated
depreciation................................. 400,828 400,828 400,828
Investment in DHHS............................ 52,118 52,118 52,118
Other assets.................................. 151,737 8,750(1) 160,487 160,487
----------- ----------------- -------------- -------------- --------------
Total assets.............................. $ 828,816 $ 11,805 $ 840,621 $ -- $ 840,621
----------- ----------------- -------------- -------------- --------------
----------- ----------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities................................ $ 115,066 $ 115,066 $ 115,066
Current maturities of long-term debt........ 3,292 $ (828)(5) 2,464 2,464
----------- ----------------- -------------- --------------
Total current liabilities................. 118,358 (828) 117,530 117,530
Long-term debt and capital lease
obligations.................................. 413,981 17,030(5) 431,011 $ (55,913)(4) 375,098
Deferred income taxes......................... 47,590 47,590 47,590
Other long-term liabilities................... 30,519 30,519 30,519
Shareholders' equity.......................... 218,368 (4,397)(6) 213,971 55,913(4) 269,884
----------- ----------------- -------------- -------------- --------------
Total liabilities and shareholders'
equity................................... $ 828,816 $ 11,805 $ 840,621 $ -- $ 840,621
----------- ----------------- -------------- -------------- --------------
----------- ----------------- -------------- -------------- --------------
</TABLE>
See notes to Company unaudited pro forma condensed combining financial
statements.
24
<PAGE>
NOTES TO COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
(1) To record the pro forma increase in amortization of deferred financing
costs as a result of the $250,000,000 Notes Offering. The Notes are assumed
to have a term of ten years, with deferred financing costs equal to
approximately 3.5% of the principal amount, or $8,750,000. Deferred
financing costs are assumed capitalized in long-term assets and amortized
over the term of the Notes. See "Risk Factors -- Significant Leverage" and
"The Merger and Financing."
(2) To record a pro forma increase in interest expense in connection with the
Notes Offering. The Unaudited Pro Forma Condensed Combining Statements of
Income assume that the Notes have an annual interest rate of 10% and that
net proceeds from the Notes Offering are used to pay the following: (i) the
Champion Notes, including prepayment premiums equal to 6% of the face value
of the Champion Notes; (ii) amounts outstanding under the Champion Credit
Facility; (iii) the pro forma increases in the Champion Credit Facility as
reflected in Champion Unaudited Pro Forma Condensed Combining Statements of
Income included elsewhere herein; (iv) amounts outstanding under certain
other Champion indebtedness; and (v) to the extent funds are available,
actual and pro forma amounts outstanding under the Existing Paracelsus
Credit Facility as reflected in the Paracelsus Unaudited Pro Forma
Condensed Combining Financial Statements and the Paracelsus and Champion
Unaudited Pro Forma Condensed Combining Financial Statements included
elsewhere herein (items (i) through (v), the "Old Debt Amounts"). The Old
Debt Amounts averaged approximately $248,074,000 for the fiscal year ended
September 30, 1995, and approximately $229,428,000 and $303,144,000 for the
six months ended March 31, 1995 and 1996, respectively. If the assumed
interest rates increased by 0.25%, interest expense would increase by
$625,000 for the fiscal year ended September 30, 1995 and $312,500 for the
six months ended March 31, 1995 and 1996.
(3) To reflect the pro forma provision for income taxes at the effective rate
of 41%.
(4) Assumes the consummation of the Equity Offering and the application of the
estimated net proceeds of $55,913,000 therefrom to reduce outstanding
indebtedness under the Existing Paracelsus Credit Facility. On a pro forma
basis, after application of estimated net proceeds of $241,250,000 from the
issuance of the Notes, amounts outstanding under the Existing Paracelsus
Credit Facility averaged approximately $6,824,000 and $61,894,000 for the
fiscal year ended September 30, 1995 and the six months ended March 31,
1996, respectively. No amounts were assumed outstanding for the six months
ended March 31, 1995 on a pro forma basis.
25
<PAGE>
NOTES TO COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(5) To reflect the pro forma sources and uses of cash in connection with the
Notes Offering as of March 31, 1996, summarized as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
TO CASH TO DEBT
<S> <C> <C>
Notes.............................................................. $ 250,000 $ 250,000
----------- -----------
----------- -----------
Uses:
Existing Paracelsus Credit Facility, including pro forma
amounts......................................................... $ 58,614 $ 58,614
Champion Credit Facility......................................... 66,200 66,200
Champion Series D Notes.......................................... 63,705 63,705
Champion Series E Notes.......................................... 35,000 35,000
Certain other Champion indebtedness.............................. 10,908 10,908
Financing cost -- Notes.......................................... 8,750
Prepayment premiums on Champion Notes and other Champion
indebtedness.................................................... 6,823
Less discount on Champion Notes.................................. (629)
----------- -----------
Pro forma adjustment -- total uses........................... $ 250,000 $ 233,798
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENT
TO DEBT
<S> <C>
Components of net pro forma adjustment to debt:
Net pro forma adjustments to debt.............................................. $ 17,030
Less adjustments to current maturities of long-term debt....................... (828)
-----------
Net pro forma adjustment to long-term debt................................. $ 16,202
-----------
-----------
</TABLE>
(6) To record the effect on shareholders' equity of the loss on the early
retirement of debt and the related deferred tax assets at the effective
rate (41%) resulting from the following Notes Offering-related events (in
thousands):
<TABLE>
<S> <C>
Prepayment penalties on Champion Notes and other Champion debt.... $ 6,823
Unamortized discount on Champion Notes............................ 629
---------
Total........................................................... 7,452
Income tax benefit at the effective rate of 41%................... 41%
---------
Pro forma adjustment to current deferred tax assets............. $ 3,055
---------
---------
Total Notes Offering-related charges (see above).................. $ 7,452
Less deferred tax benefit......................................... (3,055)
---------
Pro forma adjustment to shareholders' equity.................... $ 4,397
---------
---------
</TABLE>
The Unaudited Pro Forma Condensed Combining Statements of Income for the
fiscal year ended September 30, 1995 and the six months ended March 31, 1995 and
1996 exclude the effects of the following charges resulting from the Notes
Offering (in thousands):
<TABLE>
<S> <C>
Total charges excluded from the Unaudited Pro Forma Condensed
Combining Statements of Income (see above)........................ $ 7,452
Income tax benefit at the effective rate of 41%.................... (3,055)
---------
Net reduction to income (loss) applicable to common stock.......... $ 4,397
---------
---------
</TABLE>
26
<PAGE>
NOTES TO COMPANY UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
Income (loss) per share would have been the following if the impact of such
charges were reflected in the Company Unaudited Pro Forma Condensed Combining
Statements of Income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
------------------- --------- ---------
<S> <C> <C> <C>
Income (loss) per share............................... $ 0.03 $ (0.05) $ (0.26)
----- --------- ---------
----- --------- ---------
</TABLE>
27
<PAGE>
PARACELSUS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for Paracelsus for each of the fiscal years in the five
year period ended September 30, 1995 and for the six months ended March 31, 1995
and 1996. The selected historical financial data for the five year period ended
September 30, 1995 has been derived from the audited consolidated financial
statements of Paracelsus and from the underlying accounting records of
Paracelsus. The selected historical financial information for the six months
ended March 31, 1995 and 1996 has been derived from the unaudited condensed
consolidated financial statements of Paracelsus and reflects all adjustments
(consisting of normal recurring adjustments) that, in the opinion of the
management of Paracelsus, are necessary for a fair presentation of such
information. Operating results for the six months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for fiscal 1996. All
information set forth below should be read in conjunction with "Paracelsus
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and related notes of
Paracelsus included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues (1)..................... $ 366,959 $ 411,211 $ 435,102 $ 507,864 $ 509,729 $ 252,356 $ 260,590
Costs and expenses:
Salaries and benefits.......................... 150,053 163,970 174,849 209,772 209,672 108,575 113,162
Supplies....................................... 26,229 31,110 34,245 42,890 40,780 21,432 19,363
Purchased services............................. 43,657 50,801 48,951 55,078 58,113 28,118 34,174
Provision for bad debts........................ 19,493 25,784 26,629 33,110 39,277 19,283 20,191
Other operating expenses....................... 83,088 95,438 100,287 114,096 99,777 46,730 46,906
Depreciation and amortization.................. 11,808 12,833 14,587 16,565 17,276 8,734 7,972
Interest....................................... 12,043 10,496 10,213 12,966 15,746 7,652 7,685
Restructuring and unusual charges (2).......... -- -- -- -- 5,150 -- --
Settlement costs (3)........................... -- -- -- -- -- -- 22,356
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses......................... 346,371 390,432 409,761 484,477 485,791 240,524 271,809
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interests, income
taxes, cumulative effect of accounting change
and extraordinary loss.......................... 20,588 20,779 25,341 23,387 23,938 11,832 (11,219)
Minority interests (4)........................... (2,697) (3,393) (2,683) (2,517) (1,927) (1,204) (1,072)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative
effect of accounting change and extraordinary
loss............................................ 17,891 17,386 22,658 20,870 22,011 10,628 (12,291)
Income taxes (benefit)........................... 7,337 7,128 10,196 8,567 9,024 4,357 (5,040)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change and extraordinary loss........ 10,554 10,258 12,462 12,303 12,987 6,271 (7,251)
Cumulative effect of accounting change (5)....... 4,377 -- -- -- -- -- --
Extraordinary loss (6)........................... -- -- -- (497) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ 14,931 $ 10,258 $ 12,462 $ 11,806 $ 12,987 $ 6,271 $ (7,251)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OPERATING DATA:
Adjusted EBITDA (7).............................. $ 41,205 $ 42,025 $ 47,458 $ 50,401 $ 51,157 $ 27,014 $ 25,722
Adjusted EBITDA margin........................... 11.2% 10.2% 10.9% 9.9% 10.0% 10.7% 9.9%
Capital expenditures............................. $ 12,398 $ 15,695 $ 14,676 $ 14,342 $ 15,835 $ 5,322 $ 7,123
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,972 $ 773 $ 1,204 $ 1,452 $ 2,949 $ 2,107 $ 3,149
Working capital............................ 30,040 67,381 41,355 62,860 60,381 67,649 73,415
Total assets............................... 267,785 288,924 296,097 330,001 344,632 342,113 368,216
Total debt................................. 122,306 120,004 104,548 117,718 121,728 125,940 144,661
Shareholder's equity....................... 68,039 77,466 88,714 97,515 104,949 102,149 96,365
</TABLE>
28
<PAGE>
(1) Total operating revenues were comprised of patient revenue (net of
contractual adjustments) and other revenue, including gains (losses) from
disposal of facilities of $537, $(1,310) and $9,026 for the fiscal years
ended September 30, 1991, 1992 and 1995, respectively.
(2) Restructuring and unusual charges in 1995 consisted of (i) a $973 charge for
employee severance benefits and contract termination costs related to the
closure of Bellwood Health Center psychiatric facility and (ii) special
bonuses of $4,177 paid to certain executive officers for services provided.
(3) Settlement costs of $22,356 in the six months ended March 31, 1996 consisted
of settlement payments, legal fees and the write-off of certain accounts
receivable in connection with the settlement of two lawsuits.
(4) Represents the participation of physicians or physician groups in the
profits of Paracelsus' majority-owned joint venture arrangements.
(5) Paracelsus adopted the liability method of accounting for income taxes in
its financial statements for the fiscal year ended September 30, 1991. The
cumulative effect of adopting the liability method for periods prior to
October 1, 1991 resulted in a benefit of $4,377.
(6) Represents an extraordinary loss of $497 (net of income tax benefit) as a
result of the early extinguishment of debt.
(7) Adjusted EBITDA represents income before income taxes, depreciation and
amortization, interest expense, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
29
<PAGE>
PARACELSUS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THIS CAPTION "PARACELSUS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS --
FORWARD-LOOKING STATEMENTS."
The following should be read in conjunction with the Consolidated Financial
Statements of Paracelsus and the related notes thereto included elsewhere in
this Prospectus.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
The results of operations discussed below compare the operating results for
the six months ended March 31, 1996 to the operating results for the six months
ended March 31, 1995. Paracelsus closed Bellwood Health Center on April 24, 1995
(the "Closed Facility"). All Paracelsus healthcare facilities outside California
are referred to as the "Eastern Region Facilities."
Operating revenues increased 3.3% to $260,590,000 for the six months ended
March 31, 1996 from $252,356,000 for the comparable period in the prior year.
After excluding operating revenues of the Closed Facility, operating revenues on
a same-hospital basis increased $13,574,000, or 5.5%. This increase was
principally due to an increase of $7,856,000 in the home health agency operating
revenues generated by the Eastern Region Facilities, resulting from an increase
of 125,953, or 52.2%, in home health agency visits. The remaining increase in
operating revenues is attributed to the increase in outpatient visits,
principally in the Eastern Region Facilities.
Salaries and benefits increased 4.2% to $113,162,000 for the six months
ended March 31, 1996 from $108,575,000 for the comparable period in the prior
year. After excluding salaries and benefits of the Closed Facility, salaries and
benefits increased $6,289,000, or 5.9%, offset by decreased salaries and
benefits relating to the subcontracting of pharmacy purchases and management
activities described below. This increase was principally due to an 11.1%
increase in the employee workforce at the Eastern Region Facilities to service
the expansion of the home health agency programs. In addition, the employee
workforce was increased at the Easter Region Facilities to service the increased
volume of outpatient services. As a percentage of operating revenues, salaries
and benefits increased to 43.4% for the six months ended March 31, 1996 from
43.0% for the comparable period in the prior year.
Supplies decreased 9.7% to $19,363,000 for the six months ended March 31,
1996 from $21,432,000 for the comparable period in the prior year. The decrease
was principally due to a reduction in pharmacy supplies expense for the six
months ended March 31, 1996 of $2,835,000 as a result of the subcontracting in
June 1995 of Paracelsus' pharmacy purchases and management activities to a
pharmacy management company. Paracelsus also reduced its non-pharmacy supplies
expense due to improved purchasing terms and price reductions received under its
group purchasing contract. As a percentage of operating revenues, supplies
decreased to 7.4% for the six months ended March 31, 1996 from 8.5% for the
comparable period in the prior year.
Purchased services increased 21.5% to $34,174,000 for the six months ended
March 31, 1996 from $28,118,000 for the comparable period in the prior year due
to the pharmacy management company contract, which increased purchased services
by $3,665,000, and an increase in the home health agency programs' purchased
services of $927,000 in the Eastern Region Facilities. As a percentage of
operating revenues, purchased services increased to 13.1% for the six months
ended March 31, 1996 from 11.1% for the comparable period in the prior year.
Provision for bad debts increased 4.7% to $20,191,000 for the six months
ended March 31, 1996 from $19,283,000 for the comparable period in the prior
year, due primarily to an increase in provision for bad debts at two of the
psychiatric facilities as a result of reductions in payments received for
psychiatric services. As a percentage of operating revenues, provision for bad
debts increased to 7.7% for the six months ended March 31, 1996 from 7.6% for
the comparable period in the prior year.
30
<PAGE>
During March 1996, Paracelsus recognized a charge for the settlement of two
lawsuits totaling $22,356,000. The charge included the settlement payments, the
payment of legal fees associated with the lawsuits and the write-off of certain
psychiatric accounts receivable.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
The results of operations discussed below compare the operating results for
the fiscal year ended September 30, 1995 to the operating results for the fiscal
year ended September 30, 1994. Paracelsus sold Womans Hospital on September 30,
1995 and Advanced Healthcare Diagnostics Services, a mobile diagnostics
business, in August 1995 (collectively, the "Sold Facilities"), and acquired
Jackson County Hospital on September 5, 1995 and Keith Medical Group on August
1, 1995 (collectively referred to as the "Acquired Facilities").
Operating revenues increased to $509,729,000 in 1995 from $507,864,000 in
1994, an increase of $1,865,000, or 0.4%. Included in the $509,729,000 operating
revenues in 1995 is a net gain from the sale of the Sold Facilities of
$9,026,000. After excluding the operating revenues of the Acquired Facilities,
the Closed Facility and the Sold Facilities, and the net gain from the sale of
the Sold Facilities, operating revenues on a same-hospital basis increased to
$478,659,000 in 1995 from $471,808,000 in 1994, an increase of $6,851,000 or
1.5%. This increase in operating revenues was caused by growth in same-hospital
outpatient volume. On a same-hospital basis, outpatient visits increased by 7.6%
in 1995, while inpatient admissions decreased by 1.0% in 1995. The significant
increase in outpatient visits in 1995 was primarily a result of Paracelsus'
expansion into the home health services business, especially in its Eastern
Region Facilities, and also the further introduction of additional outpatient
services at several of Paracelsus' facilities. The decrease in admissions was
primarily a result of the effect of managed care contracts and the shifting of
inpatient care to outpatient services, especially at the California hospitals,
where admissions, on a same-hospital basis, decreased by 4.9%.
Total costs and expenses as a percentage of operating revenues, after
excluding the net gain from the sale of the Sold Facilities from operating
revenues, increased to 97.0% in 1995 from 95.4% in 1994. The primary reasons for
this increase were the effect of the 1995 restructuring and an unusual charge of
$5,150,000, which included severance benefits and contract termination costs of
$973,000 for the closure of the Closed Facility and certain executives' special
bonuses of $4,177,000 for services provided to Paracelsus. The closure costs and
special bonuses increased operating costs and expenses as a percentage of
operating revenues by 1.0%.
Salaries and benefits decreased to $209,672,000 in 1995 from $209,772,000 in
1994, a decrease of $100,000. As a percentage of operating revenues, after
excluding the net gain from the sale of the Sold Facilities, salaries and
benefits increased to 41.9% in 1995 from 41.3% in 1994. This increase was mainly
a result of annual merit pay increases, offset in part by reductions in staffing
at several of the facilities.
Supplies decreased to $40,780,000 in 1995 from $42,890,000 in 1994, a
decrease of $2,110,000, or 5.2%. The decrease in supplies is mainly a result of
Paracelsus' emphasis on reducing inventory levels, more favorable terms
resulting from Paracelsus' group purchasing contract and price reductions
negotiated directly with vendors.
Purchased services increased to $58,113,000 in 1995 from $55,078,000 in
1994, an increase of $3,035,000, or 5.5%, and as a percentage of operating
revenues, after excluding the net gain from the sale of the Sold Facilities,
increased to 11.6% in 1995 from 10.9% in 1994. Of the $3,035,000 increase,
$2,349,000, or 77.4%, was caused by increases in purchased medical services
mainly resulting from the increase in outpatient volume.
The provision for bad debts increased to $39,277,000 in 1995 from
$33,110,000 in 1994, an increase of $6,167,000, or 18.6%, and increased as a
percentage of operating revenues, after excluding the net gain from the sale of
the Sold Facilities, to 7.8% in 1995 from 6.5% in 1994. Of the $6,167,000
31
<PAGE>
increase in 1995, $5,037,000, or 81.7%, was attributed to the three psychiatric
facilities. The increase in the provision for bad debts at the three psychiatric
facilities is attributed to the reductions in payments received for psychiatric
services.
Other operating expenses as a percentage of operating revenues decreased to
19.9% in 1995 from 22.5% in 1994. This reduction is mainly a result of lower
medical malpractice liability costs and reductions in non-medical supplies,
property insurance, rental/lease expense and consulting expenses.
Depreciation and amortization increased to $17,276,000 in 1995 from
$16,565,000 in 1994, an increase of $711,000, or 4.3%. This increase is mainly
the result of capital expenditures made during 1995. Interest expense increased
to $15,746,000 in 1995 from $12,966,000 in 1994, an increase of $2,780,000, or
21.4%. This increase was mainly caused by an increase in Paracelsus' average
outstanding borrowings under the then existing credit facility and an increase
in interest rates on the then existing credit facility and the commercial paper
program.
Minority interests decreased to $1,927,000 in 1995 from $2,517,000 in 1994,
a decrease of $590,000, or 23.4%. This decrease was caused mainly by a decrease
in the volume of business at two of Paracelsus' podiatry joint ventures, one of
which was terminated during 1995, and an obesity surgery joint venture that was
also terminated during 1995.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
The results of operations discussed below compare the operating results for
the fiscal year ended September 30, 1994 to the operating results for the fiscal
year ended September 30, 1993. Paracelsus acquired Desert Palms Community
Hospital on August 31, 1993, Halstead Hospital on June 30, 1993 and Elmwood
Medical Center on March 1, 1993 (collectively referred to as the "1993
Acquisitions").
Operating revenues increased to $507,864,000 in 1994 from $435,102,000 in
1993, an increase of $72,762,000 or 16.7%. Of this increase, $57,694,000 or
79.3% was attributable to the 1993 Acquisitions for which there was a full
twelve months of operations in 1994. Excluding the 1993 Acquisitions, operating
revenues on a same-hospital basis increased $15,068,000 or 3.7%. This increase
in operating revenues was due primarily to an increase in gross outpatient
revenues to $209,849,000 in 1994 from $187,646,000 in 1993, an increase of
$22,203,000, or 11.8%. The growth in outpatient services continues to result in
part from the introduction of additional outpatient services at several of
Paracelsus' facilities. Paracelsus' management believes the decline in inpatient
occupancy rates to 42.6% in 1994 from 42.9% in 1993 resulted primarily from
increased efforts by payors to reduce inpatient hospitalization, and to shift
medical services to lower cost outpatient settings whenever possible. However,
the reduction in occupancy rates between 1994 and 1993 is not as significant as
was experienced between 1993 and 1992.
Total costs and expenses as a percentage of operating revenues increased to
95.4% in 1994 from 94.2% in 1993. Through a continued effort to reduce other
operating expenses, Paracelsus made reductions during 1994 in its insurance
costs, including malpractice and workers' compensation. As a percentage of
operating revenues, other operating expenses decreased to 22.5% in 1994 from
23.1% in 1993. Purchased services increased to $55,078,000 in 1994 from
$48,951,000 in 1993, an increase of $6,127,000, or 12.5%. However, as a
percentage of operating revenues, purchased services decreased to 10.9% in 1994
from 11.3% in 1993. The provision for bad debts increased to $33,110,000 in 1994
from $26,629,000 in 1993, an increase of $6,481,000, or 24.3%. After excluding
the 1993 Acquisitions, the provision for bad debts increased by $2,574,000, or
10.1%. The increase was due primarily to higher provisions for bad debts at the
three psychiatric facilities. As a percentage of operating revenues, the
provision for bad debts increased to 6.5% in 1994 from 6.1% in 1993.
Salaries and benefits increased to $209,772,000 in 1994 from $174,849,000 in
1993, an increase of $34,923,000, or 20.0%. Salaries and benefits as a
percentage of operating revenues increased to 41.3% in 1994 from 40.2% in 1993.
This increase was due primarily to additional staffing requirements at
32
<PAGE>
certain existing facilities and increases in Paracelsus' self-insured health
insurance program. Effective October 1, 1994, Paracelsus replaced the
self-insurance program at its California facilities, where health insurance
costs are the highest, with an outside HMO/PPO program.
Depreciation and amortization increased to $16,565,000 in 1994 from
$14,587,000 in 1993, an increase of $1,978,000, or 13.6%. This increase is due
primarily to having a full year of depreciation in 1994 for the 1993
Acquisitions and capital expenditures Paracelsus made in 1994. Interest expense
increased to $12,966,000 in 1994 from $10,213,000 in 1993, an increase of
$2,753,000, or 27.0%. This increase was attributable to interest on the Existing
Senior Subordinated Notes issued in October 1993, and increases in interest
rates applicable to Paracelsus' borrowings under its then existing credit
facility and the commercial paper program.
LIQUIDITY AND CAPITAL RESOURCES
Paracelsus' working capital as of March 31, 1996 was $73,415,000, an
increase of $13,034,000 from September 30, 1995. The increase in working capital
is primarily attributable to decreases in current maturities of long-term debt
obligations and capital lease obligations, and an increase in accounts
receivable. The increase in accounts receivable is attributable mainly to an
increase in psychiatric and home healthcare services, which take longer to
collect than Paracelsus' acute care receivables. The decrease in current
maturities of long-term debt and capital lease obligations is attributable to
the refinancing of mortgage debt on one of Paracelsus' partnerships. Other
significant changes in working capital included an increase in deferred tax
assets and accrued expenses related to the settlement of two lawsuits.
On December 8, 1995, Paracelsus entered into the Existing Paracelsus Credit
Facility, which provides up to $230,000,000 of revolving credit. The Existing
Paracelsus Credit Facility has been used to finance acquisitions, refinance
existing credit facility borrowings and for general corporate purposes,
including working capital and capital expenditures. Credit facility borrowings
were increased from $27,500,000 at September 30, 1995 to $51,000,000 at March
31, 1996. The additional borrowings were used to refinance mortgage debt on one
of Paracelsus' partnerships, finance acquisitions of property and equipment and
for working capital purposes. Paracelsus anticipates that existing capital
resources and internally generated cash flows will be sufficient to fund capital
expenditures, debt service and working capital requirements.
The accounts receivable financing program (the "Accounts Receivable
Program") implemented in 1993 provides Paracelsus with up to $65,000,000 in
accounts receivable financing. Pursuant to the Accounts Receivable Program,
Paracelsus' hospitals sell accounts receivable that meet certain requirements
specified under the Accounts Receivable Program ("Eligible Receivables") to a
special purpose subsidiary of Paracelsus, which in turn resells the Eligible
Receivables to an unaffiliated trust (the "Trust") at a discount to reflect
reserves for uncollectible receivables and interest expense. A special purpose
subsidiary of a major lending institution provides the Trust with up to
$65,000,000 in commercial paper financing to purchase the Eligible Receivables,
secured by an interest in certain of the Eligible Receivables held by the Trust.
Interest expense related to commercial paper and investment participations
issued under the Accounts Receivable Program is passed through to Paracelsus and
included as interest expense on Paracelsus' consolidated financial statements.
At March 31, 1996, the maximum financing of $65,000,000 available under the
program was outstanding.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Paracelsus will adopt SFAS 121 on October
1, 1996, and, based on current circumstances, does not believe the effect of the
adoption will be material.
33
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
A significant portion of Paracelsus' operating expenses are subject to
inflationary increases, the impact of which Paracelsus has historically been
able to substantially offset through price increases, by expanding services and
by increasing operating efficiencies. However, price increases alone have not
kept up with increases in costs. To the extent that inflation occurs in the
future, Paracelsus may not be able to pass on the increased costs associated
with providing healthcare services to patients with government or managed care
payors unless such payors correspondingly increase reimbursement rates.
EFFECT OF PROPOSED LEGISLATION
Federal and state legislators continue to consider legislation that could
significantly impact Medicare, Medicaid and other government funding of
healthcare costs. Initiatives currently before Congress, if enacted, would
significantly reduce payments under various government programs, including,
among others, payments to teaching hospitals and hospitals providing a
disproportionate amount of care to indigent patients. A reduction in these
payments would adversely affect operating revenues and operating margins at
certain of Paracelsus' hospitals. Paracelsus is unable to predict what
legislation, if any, will be enacted at the Federal and state level in the
future or what effect such legislation might have on Paracelsus' financial
position, results of operations or liquidity.
34
<PAGE>
CHAMPION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for Champion for the five years ended December 31, 1995
and for the three months ended March 31, 1995 and 1996. The selected historical
financial data for the five years ended December 31, 1995 has been derived from
the audited consolidated financial statements of Champion and from the
underlying accounting records of Champion. The selected historical financial
information for the three months ended March 31, 1995 and 1996 has been derived
from the unaudited condensed consolidated financial statements of Champion and
reflects all adjustments (consisting of normal recurring adjustments) that, in
the opinion of the management of Champion, are necessary for a fair presentation
of such information. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for 1996. All
information set forth below should be read in conjunction with "Champion
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the consolidated financial statements and related notes of
Champion included elsewhere in this Prospectus. Certain amounts derived from the
consolidated statements of operations have been reclassified to conform with the
presentation below.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue (1)................................. $24,307 $45,073 $ 89,832 $104,193 $167,520 $28,727 $50,681
Expenses:
Salaries and benefits......................... 9,875 19,642 36,698 41,042 72,188 12,762 22,006
Supplies...................................... 2,884 6,022 11,641 12,744 21,113 3,237 6,368
Purchased services............................ 3,092 5,671 9,606 15,190 23,595 3,897 6,534
Provision for bad debts....................... 2,489 3,520 5,669 7,812 12,016 2,073 3,670
Other operating expenses...................... 3,687 7,682 14,427 14,277 20,999 3,779 6,330
Depreciation and amortization................. 725 1,361 3,524 4,010 9,290 1,532 3,016
Interest...................................... 723 1,404 2,725 6,375 13,618 2,630 4,587
Equity in earnings of DHHS.................... -- -- -- -- (8,881) (1,478) (3,973)
Restructuring and unusual charges............. -- 1,300(2) 15,456(3) 300(4) -- -- --
------- ---------- ----------- ----------- -------- ------- -------
Total expenses.................................. 23,475 46,602 99,746 101,750 163,938 28,432 48,538
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) before income taxes............... 832 (1,529) (9,914) 2,443 3,582 295 2,143
Income tax expense.............................. 326 63 1,009 200 150 118 750
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) before extraordinary items........ 506 (1,592) (10,923) 2,243 3,432 177 1,393
Extraordinary items (5)......................... 200 -- (1,230) -- (1,118) -- --
------- ---------- ----------- ----------- -------- ------- -------
Net income (loss)............................... $ 706 $(1,592) $(12,153) $ 2,243 $ 2,314 $ 177 $ 1,393
------- ---------- ----------- ----------- -------- ------- -------
------- ---------- ----------- ----------- -------- ------- -------
Income (loss) applicable to common stock........ $ 343 $(2,451) $(13,805) $ (2,467) $ (9,017) $(1,312) $ 1,344
------- ---------- ----------- ----------- -------- ------- -------
------- ---------- ----------- ----------- -------- ------- -------
OPERATING DATA:
Adjusted EBITDA (6)............................. $ 2,280 $ 2,536 $ 11,791 $ 13,128 $ 26,490 $ 4,457 $ 9,746
Adjusted EBITDA margin.......................... 9.4% 5.6% 13.1% 12.6% 15.8% 15.5% 19.2%
Capital expenditures............................ $ 1,422 $ 1,637 $ 4,726 $ 12,561 $ 42,822 $ 7,060 $ 2,697
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 919 $ 6,204 $ 66,686 $ 48,424 $ 7,583 $ 32,908 $ 5,670
Working capital....................... 1,665 9,420 69,138 51,275 9,841 40,772 15,750
Total assets.......................... 15,444 57,574 118,947 216,553 291,260 212,839 308,022
Total debt............................ 7,431 26,246 62,084 107,751 167,228 108,807 184,046
Redeemable preferred stock............ 3,726 21,746 56,861 76,294 46,029(7) 77,918 46,078
Stockholders' equity (deficit)........ 293 (2,352) (16,157) (2,167) 31,869(7) (3,450) 33,798
</TABLE>
35
<PAGE>
(1) Net revenue was comprised of patient revenue (net of contractual
adjustments) and other revenue.
(2) In 1992, Champion expensed approximately $1,300 in fees and other costs
related to its unsuccessful attempt to acquire twelve hospitals from Humana,
Inc.
(3) On September 1, 1992, Champion acquired Gulf Coast Hospital ("GCH"), a
competing hospital located approximately three miles from Champion's
Baytown, Texas facility. Subsequent to the purchase, Champion consolidated
the operations of GCH onto the campus of its existing Baytown hospital and,
in June 1994, sold the former GCH property with restrictions limiting its
use to non-competitive activities without Champion's permission. As a result
of the consolidation, Champion incurred a charge of approximately $15,456
against earnings in 1993.
(4) In 1994, Champion incurred approximately $300 in fees and other costs
related to its efforts to acquire Methodist Medical Center ("MMC") in
Jacksonville, Florida. On March 6, 1995, Champion notified MMC's management
that it would cease all actions related to this transaction; accordingly,
such amounts were expensed in the fourth quarter of 1994.
(5) The extraordinary gain in 1991 relates to the utilization of net income tax
benefits arising from the carryforward of net operating losses. Champion
recognized extraordinary losses of $1,230 and $1,118 in 1993 and 1995,
respectively, on early extinguishment of debt. The extraordinary loss for
1993 was net of a tax benefit of $634, and no tax benefit was allocated to
the extraordinary loss in 1995.
(6) Adjusted EBITDA represents income before income taxes, depreciation and
amortization, interest expense, cumulative effect of accounting change,
restructuring and unusual charges, settlement costs, gains (losses) from
disposal of facilities and extraordinary items. While Adjusted EBITDA is not
a substitute for operating cash flows determined in accordance with
generally accepted accounting principles, it is a commonly used tool for
measuring a company's ability to service debt.
(7) Effective December 31, 1995, Champion entered into a recapitalization
agreement which provided for the conversion of certain redeemable preferred
stock to Champion Common Stock and eliminated the accrual of future
dividends on its remaining Champion Preferred Stock. See "Champion
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
36
<PAGE>
CHAMPION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THIS CAPTION "CHAMPION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONSTITUTE
"FORWARD-LOOKING STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS --
FORWARD-LOOKING STATEMENTS."
The following should be read in conjunction with the Consolidated Financial
Statements of Champion and the related notes thereto included elsewhere in this
Prospectus.
IMPACT OF ACQUISITIONS
Champion was formed to acquire and operate acute care and specialty
hospitals. At March 31, 1996, Champion owned seven hospitals and a 50% interest
in DHHS, a partnership that is operated by Champion and that owns and operates
two acute care hospitals with a total of 341 beds in North Dakota under the name
"Dakota Heartland Health System."
Because of the financial impact of Champion's recent acquisitions and the
formation of DHHS, it is difficult to make meaningful comparisons between
Champion's financial statements for the fiscal periods presented. Furthermore,
each additional hospital acquisition can have a significant impact on Champion's
overall financial performance. After acquiring a hospital, Champion attempts to
implement various operating efficiencies and cost-cutting strategies, including
staffing adjustments. Champion may also incur significant additional costs to
expand the hospital's services and improve its market position. Champion can
give no assurance that these investments and other activities will result in
increases in net revenue or reductions in costs at the acquired facility.
Consequently, an acquired hospital may adversely affect Champion's operating
results in the near-term. Champion believes this effect will be mitigated as
more hospitals are acquired.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1995
Champion had net revenue of $50,681,000 for the quarter ended March 31,
1996, compared to $28,727,000 for same period in 1995, an increase of
$21,954,000, or 76.4%. The increase was due primarily to Champion's acquisition
of the 200-bed Salt Lake Regional Medical Center ("SLRMC") in April 1995, the
acquisition of home healthcare operations in June 1995 and in January 1996, and
the commencement of operations at the 101-bed Westwood Medical Center ("WMC") in
October 1995. WMC replaced the 60-bed Physicians and Surgeons Hospital located
in Midland, Texas ("P&S"), which Champion had acquired in 1993.
Champion's operations are labor intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and benefits
increased 72.4% to $22,006,000 for the quarter ended March 31, 1996, compared to
$12,762,000 in 1995, primarily as a result of Champion's acquisition of SLRMC
and the acquisition of home healthcare operations. As a percentage of net
revenue, salaries and benefits were 43.4% and 44.4% for the quarters ended March
31, 1996 and 1995, respectively. The decline in salaries and benefits as a
percentage of net revenue reflects Champion's ongoing efforts to implement
various operating efficiencies and cost-cutting measures at its hospitals.
The major components of other operating and administrative expenses were
professional fees, taxes (other than income), insurance, utilities and other
services. In absolute terms, other operating and administrative expenses
increased by 76.2% to $19,232,000 for the quarter ended March 31, 1996, compared
to $10,913,000 in 1995, due to Champion's acquisition of SLRMC and the start-up
of WMC. However, overall other operating and administrative expenses were
substantially unchanged at 37.9% and 38.0% of net revenue for the quarters ended
March 31, 1996 and 1995, respectively.
Provision for bad debts was $3,670,000 for the quarter ended March 31, 1996,
or 7.4% of net patient service revenue, compared to $2,073,000, or 7.5%, for the
same period in 1995.
37
<PAGE>
Interest expense increased to $4,587,000 in the first quarter of 1996,
compared to $2,630,000 for the comparable period in 1995, due principally to (i)
the increase in amounts outstanding under the Champion Credit Facility as a
result of its acquisition of SLRMC and Jordan Valley (as defined below) and (ii)
the issuance of the Champion Series E Notes on June 12, 1995. The increase in
interest expense was offset, in part, by a decline in the interest rate
applicable to the Champion Credit Facility (a weighted average of approximately
8.71% and 9.12% for the quarters ended March 31, 1996 and 1995, respectively).
Depreciation and amortization expense was $3,016,000 in 1996, compared to
$1,532,000 in 1995, an increase of $1,484,000, or 96.9%. This increase is due
primarily to Champion's acquisition of SLRMC and the completion of construction
at WMC as well as Champion's ongoing capital improvement programs at its
existing hospitals.
Income before income taxes for the quarter ended March 31, 1996 includes
approximately $3,973,000 attributable to Champions's equity in the earnings of
DHHS, compared to approximately $1,478,000 for the same period a year earlier,
or an increase of 168.8%. The increase was due to (i) a $1,535,000, or 5.9%,
increase in DHHS net revenue for the quarter ended March 31, 1996, compared to
the same period a year earlier, primarily as a result of an expanded and
improved service mix, and (ii) a $3,175,000, or 14.1%, decrease in current
period operating expenses, compared to the prior period. The reduction in
operating expenses is due primarily to the elimination of duplicative services
and overhead costs and reflects Champion's ongoing efforts to integrate the
operations of the two hospitals that comprise DHHS.
1995 COMPARED TO 1994
Champion's net revenue was $167,520,000 for the year ended December 31,
1995, compared to $104,193,000 for 1994, an increase of $63,327,000, or 60.8%.
The increase was due primarily to hospital acquisitions in the fourth quarter of
1994 and the second quarter of 1995 (collectively, the "Champion Acquisitions"),
and was offset, in part, by the contribution of Heartland Medical Center
("Heartland") to DHHS. Net revenue for 1994 included approximately $40,061,000
attributable to Heartland.
The occupancy rate of Champion's consolidated hospitals was substantially
unchanged at 38% in 1995 and 1994, due primarily to the acquisition of two
psychiatric hospitals in the fourth quarter of 1994. In general, psychiatric
hospitals derive a greater percentage of their revenue from inpatient services
than do acute care hospitals. The occupancy rate at Champion's general acute
care hospitals declined to 33% in 1995 compared to 35% in 1994, due primarily to
Champion's contribution of Heartland to DHHS effective December 31, 1994, and
due to an industry-wide trend of decreased inpatient utilization at acute care
hospitals. Champion expects this trend to continue as Medicare, Medicaid, HMOs,
PPOs and other third-party payors continue to exert pressure on healthcare
providers to reduce hospital stays and to provide services, when appropriate, on
a less expensive outpatient basis. Heartland had an occupancy rate of 41% in
1994.
Gross outpatient revenue increased 45.8% from $63,387,000 in 1994 to
$92,392,000 in 1995. Outpatient revenue as a percentage of gross patient service
revenue declined from 38.1% in 1994 to 33.9% in 1995, due to Champion's
acquisition of two psychiatric hospitals in the fourth quarter of 1994.
Excluding these two facilities, outpatient revenue comprised 39.5% of gross
patient revenue in 1995.
Gross patient revenue attributable to Medicare increased to 42% in 1995,
compared to 39% in 1994, due to the inclusion of certain of Champion's
acquisitions for the full twelve-month period ended December 31, 1995. These
facilities generally derived a greater portion of their gross patient revenue
from the Medicare program than did the hospitals owned and consolidated by
Champion for the twelve months ended December 31, 1994. Gross revenue
attributable to Medicaid increased to 19% in
38
<PAGE>
1995 compared to 18% in 1994, due primarily to Champion's acquisition of two
psychiatric hospitals in the fourth quarter of 1994. Approximately 50% of gross
patient revenue at these facilities is attributable to the Medicaid program.
Net patient service revenue is presented in the Consolidated Statement of
Operations net of the provision for contractual allowances. Such provision was
40% in 1995 and 1994. The provision for contractual allowances as a percentage
of gross patient service revenue is likely to increase in the future (i) as rate
increases at Champion's hospitals exceed increases, if any, in fixed
reimbursement rates, (ii) from increased discounts on standard rates due to
pressure from third-party payors, such as HMOs, PPOs and private insurance
companies and (iii) from increased inpatient utilization by Medicare and
Medicaid patients. Payments received under these programs are generally less
than established billing rates. The trend toward managed care may affect
hospitals' ability to maintain their current rate of net revenue growth and
operating margins.
Net revenue for 1995 and 1994 included approximately $744,000 and
$2,196,000, respectively, in interest income earned on cash balances during the
year.
Champion's operations are labor-intensive with salaries and benefits
comprising the single largest item in operating expenses. Salaries and benefits
increased 75.9% to $72,188,000 in 1995, compared to $41,042,000 in 1994, as a
result primarily of the Champion Acquisitions. In addition, corporate salaries
increased due to the increase in hospitals, new public reporting requirements
and preparation for additional acquisitions. As a percentage of net revenue,
salary and benefits increased to 43.1% in 1995, compared to 39.4% in 1994. This
trend is largely a result of Champion's strategy of acquiring underperforming
hospitals that often incur labor and other operating costs in excess of what
Champion believes is necessary for the efficient operation of a facility.
Champion attempts to reduce these costs over time by implementing various
operating efficiencies and cost-cutting strategies. However, Champion can give
no assurance that its efforts will ultimately result in significant cost
reductions at these facilities.
The major components of other operating expenses were professional fees,
taxes (other than income), insurance, utilities and other services. In absolute
terms, other operating and supplies expense increased by 54.6% to $65,707,000 in
1995, compared to $42,511,000 in 1994, as a result of the Champion Acquisitions.
However, overall other operating and supplies expense declined to 39.2% of net
revenue in 1995, compared to 40.8% in 1994.
Provision for bad debts was $12,016,000 in 1995, or 7.3% of net patient
service revenue, compared to $7,812,000, or 7.8%, in 1994. The prior year
included approximately $700,000 in charges due to problems resulting from the
installation of an information management system at one facility. Excluding this
charge, provision for bad debts was approximately 7.1% of net patient service
revenue in 1994.
Interest expense increased from $6,375,000 in 1994 to $13,618,000 in 1995,
due principally to (i) the increase in amounts outstanding under the Champion
Credit Facility as a result of its acquisition of SLRMC and funding of ongoing
construction projects; (ii) the issuance of the Champion Series D Notes on
December 30, 1994 and the Champion Series E Notes on June 12, 1995 and (iii)
debt assumed and/or issued in connection with Champion's acquisition of
AmeriHealth on December 6, 1994, through the AmeriHealth Merger and the
acquisition of Psychiatric Healthcare Corporation ("PHC") in the fourth quarter
of 1994. See "-- Liquidity and Capital Resources." Interest expense also
increased due to an increase in the interest rate applicable to its senior bank
credit facility (a weighted average of approximately 9.3% and 7.7% for the years
ended December 31, 1995 and 1994, respectively).
Depreciation and amortization expense was $9,290,000 in 1995, compared to
$4,010,000 in 1994, an increase of $5,280,000, or 131.7%. This increase is due
primarily to the Champion Acquisitions, the completion of a hospital and medical
office building in Midland, Texas and an ambulatory care center in Baytown,
Texas, as well as Champion's ongoing capital improvement programs at its
existing hospitals.
39
<PAGE>
Champion capitalized approximately $1,462,000 and $294,000 in interest costs
associated with the construction of a hospital and other medical-related
facilities at December 31, 1995 and 1994, respectively. With the completion of
the hospital and medical office building in Midland, Texas and the ambulatory
care center in Baytown, Texas, Champion expects capitalized interest to be
minimal in 1996.
Operating income for 1995 included approximately $8,881,000 attributable to
Champion's equity in the earnings of DHHS. Champion contributed Heartland to
DHHS effective December 31, 1994 and accounts for its investment in DHHS under
the equity method. Previously, Champion had consolidated Heartland for financial
reporting purposes. Operating income for 1994 included approximately $6,201,000
attributable to Heartland.
1994 COMPARED TO 1993
Champion's net revenue was $104,193,000 for the year ended December 31,
1994, compared to $89,832,000 for 1993, an increase of $14,361,000, or 16.0%.
This increase was due primarily to the inclusion of P&S for a full year in 1994,
compared to eight months in 1993 (the year P&S was acquired) and Champion's
acquisition of PHC and the AmeriHealth Merger in the fourth quarter of 1994. On
a same hospital basis, net revenue decreased approximately $2,550,000, or 3.2%,
in 1994 due to the elimination of a psychiatric program at Baycoast Medical
Center ("BMC") and a decline in outpatient surgery cases due to capacity
constraints following the consolidation of the operations of Gulf Coast Hospital
("GCH") onto the BMC campus in December 1993.
The average occupancy rates at Champion's hospitals declined from 40.1% in
1993 to 38.3% in 1994. This decline is consistent with the industry trend of
decreased inpatient utilization at acute care hospitals and is due primarily to
increased pressure from Medicare, Medicaid, HMOs, PPOs and other third-party
payors to reduce hospital stays and to provide services, where possible, on a
less expensive outpatient basis. Gross outpatient revenue increased 6.1% from
$59,738,000 in 1993 to $63,387,000 in 1994. Outpatient revenue as a percent of
gross patient service revenue declined from 41.9% in 1993 to 38.1% in 1994, due
primarily to Champion's acquisition of PHC effective October 1, 1994. In
general, psychiatric hospitals derive a greater percentage of their gross
revenue from inpatient services than do acute care hospitals. Exclusive of
acquisitions, outpatient revenue comprised 41.3% of gross patient revenue in
1994.
Provision for contractual allowances was 40.2% of gross patient service
revenue for 1994, compared to 39.2% in 1993. This increase is consistent with
industry expectations as discussed above.
Approximately 39% of gross patient revenue was attributable to Medicare in
1994 and 1993. Gross revenue attributable to Medicaid increased to 18% in 1994
compared to 12% in 1993, due primarily to Champion's acquisition of PHC, which
derives approximately 53% of its gross patient revenue from the Medicaid
program, and due to a decline in revenue attributable to private and other payor
sources at hospitals owned by Champion for the year ended December 31, 1994.
Salaries and benefits increased 11.8% to $41,042,000 in 1994, compared to
$36,698,000 in 1993, due primarily to the inclusion of P&S for a full year in
1994 and Champion's acquisition of PHC and the AmeriHealth Merger in the fourth
quarter of 1994. As a percent of net revenue, salary and benefits decreased to
39.4% in 1994, compared to 40.9% in 1993, as a result of Champion's ongoing
efforts to improve staffing efficiencies in its acquired hospitals. For
hospitals owned for the year ended December 31, 1994, salary and benefits were
37.7% of net revenues in 1994, compared to 39.4% in 1993.
The major components of other operating expenses were professional fees,
taxes (other than income), insurance, utilities and other services. Other
operating and supplies expense increased by 19.2% to $42,511,000 in 1994,
compared to $35,674,000 in 1993. Other operating and supplies expense increased
to 40.8% of net revenue in 1994, compared to 39.7% in 1993. The increase in the
percentage of net revenue is due primarily to non-capitalizable costs associated
with Champion's acquisition activity.
40
<PAGE>
Provision for bad debts was $7,812,000 in 1994, or 7.8% of net patient
service revenue, compared to $5,669,000, or 6.5%, in 1993. This 37.8% increase
is due in part to the installation of a new computer system at one of Champion's
hospitals that disrupted the hospital's billing procedures and accounts
receivable detail. The hospital determined that approximately $700,000 in
accounts receivable produced by the new system should have been charged to
allowance for uncollectible accounts. Excluding this charge, provision for bad
debts was approximately 7.1% of net patient service revenue in 1994.
Depreciation and amortization expense was $4,010,000 in 1994, compared to $
3,524,000 in 1993, an increase of $486,000, or 13.8%. The increase in
depreciation and amortization expense was due primarily to Champion's
acquisitions in 1994, Champion's ongoing capital improvement programs at its
existing hospitals and the amortization of costs associated with Champion's
issuance of the Champion Series D Notes.
Interest expense increased from $2,725,000 in 1993 to $6,375,000 in 1994,
due principally to Champion's issuance of $37,833,000 of the Champion Series D
Notes effective December 31, 1993 and its establishment of a $20,000,000 senior
bank credit facility on November 3, 1993, as well as interest expense associated
with debt assumed and/or issued in the AmeriHealth Merger and PHC acquisition.
See "-- Liquidity and Capital Resources." Interest expense also increased due to
an increase in the interest rate applicable to its senior bank credit facility
(a weighted average of approximately 7.7% and 6.5% at December 31, 1994 and
1993, respectively).
The net loss for the year ended December 31, 1993, included an extraordinary
loss of approximately $1,230,000 (net of income tax effect of $634,000) from the
early extinguishment of debt. The net loss for 1993 also included an asset
write-down of approximately $15,456,000 pursuant to Champion's decision in
December 1993 to consolidate the operations of GCH onto the campus of BMC.
Champion acquired GCH on September 1, 1992. The write-down was recorded in 1993
to recognize the limited alternative uses of the GCH campus. In June 1994,
Champion sold the former GCH property with restrictions prohibiting its use to
non-competing activities without Champion's consent.
RECENT ACQUISITIONS AND OTHER INVESTMENTS
On March 1, 1996, Champion acquired Jordan Valley Hospital ("Jordan Valley")
from Columbia. Jordan Valley is a 50-bed acute care hospital located in West
Jordan, Utah, a suburb of Salt Lake City. Jordan Valley was acquired in exchange
for Autauga Medical Center, an 85-bed acute care hospital, and Autauga Health
Care Center, a 72-bed skilled nursing facility, both in Prattville, Alabama
(collectively, "Autauga"), plus preliminary cash consideration paid to Columbia
of approximately $10,750,000. Cash consideration included approximately
$3,750,000 for certain net working capital components, which are subject to
further adjustment and final agreement by the parties, and reimbursement for
certain capital expenditures made previously by Columbia. The transaction did
not result in a gain or loss. The Alabama facilities were acquired as a part of
the AmeriHealth Merger on December 6, 1994.
On April 13, 1995, Champion acquired SLRMC from Columbia for approximately
$61,042,000, which included approximately $11,783,000 for certain working
capital components, resulting in a net purchase price of approximately
$49,259,000. Champion funded the asset purchase from available cash and
approximately $30,000,000 in borrowings under its senior bank credit facility.
SLRMC is comprised of a 200-bed tertiary care hospital and five clinics and is
located in Salt Lake City, Utah.
On December 21, 1994, a wholly owned subsidiary of Champion that owned
Heartland entered into the DHHS partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199-bed acute care hospital, in Fargo,
North Dakota. Champion and Dakota contributed their respective hospitals debt
and lien free (except for capitalized lease obligations), including certain
working capital components, and Champion contributed an additional $20,000,000
in cash, each in exchange for 50% ownership in the partnership. Champion will
receive 55% of the net income and distributable cash flow ("DCF") of the
partnership until such time as it has recovered on a cumulative basis an
additional $10,000,000 of DCF in the form of an "excess" distribution. Because
the partners through the partnership
41
<PAGE>
agreement and an operating agreement have delegated substantially all management
of DHHS to Champion, the authority of the partnership's governing board is
limited. Under the terms of the partnership agreement, Champion is obligated to
advance funds to the partnership to cover any and all operating deficits of the
partnership. Beginning July 1996, Dakota has the right to require Champion to
purchase its partnership interest free of debt or liens for a cash purchase
price equal to 5.5 times Dakota's pro rata share of earnings before
depreciation, interest, income taxes and amortization, as defined in the
partnership agreement, less Dakota's pro rata share of the partnership's
long-term debt. DHHS had earnings before depreciation, interest, income taxes
and amortization of approximately $19,000,000 for the year ended December 31,
1995. Beginning January 1998, the purchase price for Dakota's partnership
interest shall not be less than $50,000,000. Should Dakota elect to exercise its
option, Champion would likely finance the purchase through bank or other
borrowings. As of December 31, 1995, Champion has received $825,000 in cash
distributions from DHHS.
INFLATION
The healthcare industry is labor-intensive. Wages and other expenses are
subject to rapid escalation, especially during periods of inflation and when
shortages occur in the marketplace. In addition, suppliers attempt to pass along
increases in their costs by charging Champion higher prices. In general,
Champion's revenue increases through price increases or changes in reimbursement
levels have not kept up with cost increases. However, by expanding services and
by increasing operating efficiencies, Champion has historically been able to
substantially offset increases in such costs. In light of cost containment
measures imposed by government agencies, private insurance companies and
managed-care plans, Champion is likely to experience continued pressure on
operating margins in the future.
42
<PAGE>
BUSINESS
CERTAIN STATEMENTS UNDER THIS CAPTION "BUSINESS" CONSTITUTE "FORWARD-LOOKING
STATEMENTS" UNDER THE REFORM ACT. SEE "RISK FACTORS -- FORWARD-LOOKING
STATEMENTS."
GENERAL
Paracelsus is a leading healthcare company that owns and operates acute care
and specialty hospitals and related healthcare businesses serving selected
markets in the United States. Paracelsus owns and operates 18 acute care
hospitals with a total of 1,685 licensed beds in seven states: California, Utah,
Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care
hospitals provide a broad array of general medical and surgical services on an
inpatient, outpatient and emergency basis. In addition, certain hospitals and
their related facilities offer rehabilitative medicine, substance abuse
treatment, psychiatric care and AIDS care. Paracelsus also owns and operates in
California three psychiatric hospitals with 218 licensed beds, four skilled
nursing facilities with 232 licensed beds and a 60-bed rehabilitative hospital.
In addition, Paracelsus owns and operates eight home healthcare agencies and
thirteen medical office buildings adjacent to certain of its hospitals. For the
twelve months ended March 31, 1996 on a pro forma basis after giving effect to
the acquisitions and dispositions made by Paracelsus since April 1, 1995,
Paracelsus would have had total operating revenues of $516.9 million, Adjusted
EBITDA of $55.8 million and a net loss of $3.1 million. The net loss includes an
unusual charge recorded in March 1996 of $22.4 million related to the settlement
of two lawsuits. See "Paracelsus Unaudited Pro Forma Condensed Combining
Financial Statements" and "Paracelsus Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As a result of the Merger, Champion will become a wholly owned subsidiary of
the Company. Champion owns and operates five acute care hospitals with a total
of 722 licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and
operates, DHHS, a partnership that owns two additional acute care hospitals with
a total of 341 licensed beds in North Dakota. Champion's acute care hospitals
generally offer the same types of services provided by Paracelsus' acute care
hospitals. Champion also owns and operates two psychiatric hospitals with a
total of 219 licensed beds in Missouri and Louisiana. For the twelve months
ended March 31, 1996 on a pro forma basis giving effect to the acquisitions and
dispositions made by Champion since April 1, 1995, Champion would have had net
revenue of $198.2 million, Adjusted EBITDA of $32.2 million and net income of
$3.9 million. See "Champion Unaudited Pro Forma Condensed Combining Statements
of Income and Unaudited Historical Consolidated Balance Sheet."
Following the Merger, the Company will operate 31 hospitals in 11 states
including 25 acute care hospitals with 2,748 licensed beds, five psychiatric
hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed
beds. On a pro forma combined basis for the twelve months ended March 31, 1996,
the Company would have had total operating revenues of $714.8 million, Adjusted
EBITDA of $88.1 million and a net loss of $6.7 million (which includes the
unusual charge related to the settlement of two lawsuits). These pro forma
combined results do not give effect to any cost savings that management believes
will be realized as a result of the Merger due to the combination of the
corporate operations of Paracelsus and Champion and the elimination of certain
corporate consulting contracts of Paracelsus. See "Company Unaudited Pro Forma
Condensed Combining Financial Statements" and "Paracelsus and Champion Unaudited
Pro Forma Condensed Combining Financial Statements."
The Company believes that the Merger represents a unique opportunity to
integrate the operations of two companies which have a complementary portfolio
of hospitals. Upon completion of the Merger, 22 of the Company's 31 hospitals
will be located in markets where a hospital or hospital network, owned by the
Company is a preeminent provider. On a pro forma combined basis, (excluding PHC
Salt Lake Hospital and the two hospitals owned by DHHS), these hospitals would
have accounted for approximately 71% and 89% of the total operating revenues and
Adjusted EBITDA, respectively, of the Company's hospitals for the twelve months
ended March 31, 1996.
43
<PAGE>
Following the Merger, the Company believes that it will be better positioned
to implement its business strategy due to its greater scale and diversity of
operations, expanded geographic presence and enhanced access to the public
capital markets and other financing sources. In addition, the combined entity
should benefit from economies of scale in such areas as purchasing, marketing,
information systems, risk management, acquisitions and development, accounting,
reimbursement, corporate finance and quality assurance.
The Company also believes that it will benefit from the addition to
Paracelsus' management team of three key Champion executives who, following the
Merger, will have primary responsibility for day to day management of the
Company. These Champion executives have an average of 29 years of hospital
industry experience and a proven track record in operating and growing publicly
held hospital companies. Over the past five years, these executives grew
Champion's net revenue at an annual rate of 62.0% from $24.3 million in 1991 to
$167.5 million in 1995 while improving its Adjusted EBITDA margins from 9.4% in
1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996.
BUSINESS STRATEGY
The Company's strategic objective is to establish each of its hospitals or
hospital networks as the provider of choice in its markets. To accomplish this,
the Company first seeks to establish a presence in geographic locations that are
best suited to developing a preeminent market position. These locations
primarily include small to mid-sized markets with more favorable demographics
and lower levels of penetration by managed care plans and alternative niche
competitors than larger metropolitan areas. Moreover, the competing hospitals in
the Company's target markets frequently will be not-for-profit facilities which
the Company believes have higher cost structures than its hospitals. Second, the
Company focuses on implementing operating strategies developed by the Company
for positioning each of its hospitals or hospital networks as providers of
measurably higher quality and lower cost healthcare services than competing
providers. The key elements of the Company's operating strategies are as
follows:
EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS
The Company plans to continue to pursue expansion opportunities through the
strategic acquisition of hospitals and complementary healthcare businesses in
existing or new markets. The Company has demonstrated this strategy most
recently by the acquisition of four hospitals and a home health agency in the
Salt Lake City market. The Company's primary criteria for its target markets
include: (i) a service area population of between 30,000 and 500,000; (ii)
favorable demographics in terms of population growth, age profile, employment
rates, business climate, economic activity and family income levels; (iii) low
levels of managed care penetration; and (iv) limited competition from other
hospitals and alternative healthcare providers. The Company targets for
acquisition those hospitals which have the following characteristics: (a) a
stable market position with potential for improvement; (b) an appropriate range
and depth of medical services or the capacity to add needed services; (c) a
favorable reputation in the community; (d) current financial underperformance
due to an excessive cost structure; (e) a sufficient base of capable, high
quality physicians; and (f) no required extraordinary capital investment. The
Company believes that its primary sources of acquisitions will be unaffiliated
not-for-profit hospitals and facilities being divested by hospital systems for
strategic, regulatory or performance reasons.
INCREASE MARKET PENETRATION
The Company seeks to increase the market penetration of its hospitals by
offering a full range of hospital and related healthcare services and by
shifting market share from local competitors by providing measurably higher
quality and lower cost services. The Company will selectively add new services
such as obstetrics, open-heart surgery and skilled nursing beds at its hospitals
and, when appropriate, invest in new technologies. This strategy has been
sucessfully demonstrated by the addition of obstetrics programs at each of The
Medical Center of Mesquite and Westwood Medical Center during the past twelve
months. The Company will also develop complementary healthcare businesses such
as primary care clinics, home health agencies and rehabilitative clinics to
augment
44
<PAGE>
the service capabilities of its existing hospitals and enable the delivery of
care in the most cost effective and medically appropriate setting. In addition,
over the past 24 months, the Company has acquired or established a total of five
home health agencies that cover 26 counties in Tennessee and provide a large
referral base for the Company's four hospitals in that market. In some cases,
the Company may also acquire or merge with other providers or establish
alliances with such providers through affiliation agreements, joint venture
arrangements or partnerships. Furthermore, since physicians still direct the
majority of hospital admissions, the Company focuses on supporting and retaining
existing physicians and attracting other qualified physicians in existing or
underserved medical specialties. The Company may either affiliate, joint venture
or partner with physician practices or, in selected cases, manage or acquire
such physician practices.
ESTABLISH A COMPETITIVE COST ADVANTAGE
The Company seeks to position each of its hospitals as the low cost provider
in its market by monitoring and controlling fixed and variable operating
expenses. Champion's executives have demonstrated an ability to reduce costs as
indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in
1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. The
Company believes that a low cost provider is better able to succeed in the
current healthcare environment by aggressively pricing its managed care
contracts and direct employer arrangements and by maintaining profitability
under fixed payment arrangements. The Company focuses on the following major
areas for cost control:
LABOR COSTS. Salaries and benefits represent the single largest
component of hospital operating expenses. The Company seeks to reduce
labor costs by (i) implementing staffing standards and adjusting
staffing according to changes in volume and patient needs; (ii)
eliminating unnecessary levels of management; and (iii) increasing the
productivity of skilled employees by shifting certain lower skill tasks
to lower paid personnel. Champion's executives have reduced salaries,
wages and benefits as a percentage of net revenue at Champion's
hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and 35.4%
for the three months ended March 31, 1996.
SUPPLY COSTS. The Company seeks to realize savings on medical supplies,
the second largest component of hospital operating expenses, by (i)
standardizing high volume products; (ii) participating in purchasing
groups; (iii) monitoring supply usage; and (iv) otherwise taking
advantage of volume purchasing to achieve better pricing.
CONTRACTUAL ARRANGEMENTS. The Company evaluates whether savings can be
realized by renegotiating or eliminating existing third-party
management, physician, maintenance, supply and other contracts.
MARGINAL SERVICES. The Company regularly reviews all programs and
services at its hospitals to determine whether any such programs or
services should be discontinued or reduced because they are
underutilized or unprofitable and have no strategic benefit.
UTILIZATION MANAGEMENT. The Company has developed a proprietary
utilization management program designed to help monitor and manage
clinical resources by reviewing both patient lengths of stay and
physician treatment protocols in order to decrease the overall cost of
care. The program, which includes the use of clinical pathways developed
in conjunction with the medical staffs of the Company's hospitals, helps
assure that physicians consistently render the most medically
appropriate and cost effective regimen of care. The program has been
implemented in six of the Company's hospitals and is expected to be
implemented in its remaining hospitals over the next year.
IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE
The Company believes that preventing errors in the treatment process can
improve quality and lower the cost of care by reducing the risk of adverse
events to patients and the consequential costs of such events. For the past two
years, the Company has piloted a proprietary program in four of its hospitals
designed to identify and measure the incidence of patient treatment errors in
225 separate
45
<PAGE>
clinical categories. The Company also believes that the majority of treatment
errors are preventable and often result from systemic problems such as a lack of
standardized policies, procedures and training. The Company believes that its
pilot program in four hospitals has demonstrated that reductions in the
incidence of treatment errors can occur as a result of focusing hospital
employees on monitoring errors, training employees in standardized systems and
procedures and otherwise taking corrective steps to reduce and eliminate
deficiencies in the care process. The Company believes the capability to
quantify data regarding the quality of care in its hospitals will enable the
Company to reduce the cost of care and will enhance the ability of its hospitals
to win and profit from managed care contracts. The Company intends to introduce
its proprietary program in all of its hospitals as soon as possible following
the consummation of the Merger.
DEVELOP A COMPETITIVE SERVICE ADVANTAGE
The Company believes that bureaucratic and impersonalized customer service
is a historical structural deficiency within the hospital industry caused by
service systems, policies and procedures which are designed for the convenience
of physicians and hospitals rather than patients, payors and employers. For the
past year, the Company has assembled a task force of hospital and corporate
personnel who have been devoted to developing a proprietary customer service
system which will become a prototype for all the Company's hospitals. The
Company believes this customer service system will differentiate its hospitals
and facilities from those of its competitors and provide a competitive
advantage. The objectives of this initiative are to (i) identify those aspects
of customer service most in need of streamlining and revamping to create
"user-friendly" systems in areas such as billing information and admission and
emergency room registration and processing; (ii) review existing hospital
policies, procedures and practices which serve as barriers to personalized
customer service; (iii) establish quantitative performance targets and develop
monitoring systems for measuring and reporting results and progress toward
targets; (iv) develop a customer service questionnaire to quantify levels of
customer satisfaction and areas of dissatisfaction; and (v) conduct training of
hospital personnel in the customer service system. The Company currently expects
that it will begin introducing its customer service system on a pilot basis in
several of its hospitals during the first quarter of 1997.
REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY
The provision of high quality healthcare services is primarily a local
business, and the Company's business strategy and operating programs emphasize
local management initiative, responsibility and accountability combined with
corporate support and oversight. The Company establishes targets for various
categories of operating expenses for each hospital and tracks operating
efficiency on a daily basis. The Company also requires each of its hospitals to
provide forecasts on financial and operating performance for the month and
conducts in-depth monthly operating reviews with each local management team to
establish and ensure management discipline and accountability. In addition,
bonuses for key operating executives of the Company are in part based upon
margin improvement and performance. These actions are intended to focus
operating management on optimizing operating efficiencies.
OPERATIONS
The Company seeks to create a local healthcare system in each of its markets
that offers a continuum of inpatient, outpatient, emergency and alternative care
options. In many such markets, the Company will establish its acute care
hospitals as the hub of a local provider system that can include skilled nursing
facilities, home health agencies, clinics, physician practices and medical
office buildings. These operations are described below.
ACUTE CARE HOSPITALS
The Company owns and operates 25 acute care hospitals (including those owned
by DHHS) with a total of 2,748 licensed beds in nine states. Each of the
Company's acute care hospitals provides a broad array of general medical and
surgical services on an inpatient, outpatient and emergency basis, including
some or all of the following: intensive and cardiac care, diagnostic services,
radiological
46
<PAGE>
services and obstetrics on an inpatient basis and ambulatory surgery, laboratory
and radiology services on an outpatient basis. Certain hospitals also provide
comprehensive psychiatric services. The Company owns a 50% interest in and is
responsible for the operations of DHHS which owns two acute care hospitals in
Fargo, North Dakota.
SPECIALTY HOSPITALS
The Company owns and operates five psychiatric hospitals with 437 licensed
beds and one rehabilitative hospital with 60 licensed beds in three states.
Three of the psychiatric hospitals and the rehabilitative hospital are located
in California markets where the Company has acute care hospitals. The
psychiatric hospitals provide child, adolescent and adult comprehensive
psychiatric and chemical dependency treatment programs on an inpatient and
outpatient basis.
SKILLED NURSING FACILITIES
The Company owns and operates four skilled nursing facilities with a total
of 232 licensed beds in California that provide 24-hour nursing care,
principally for the elderly, by registered or licensed nurses and related
medical services prescribed by the patient's physician.
HOME HEALTH AGENCIES
The Company provides home health services through 12 of its hospitals
(including the two DHHS hospitals) in five states. These services include home
nursing, infusion therapy, physical therapy, respiratory services and other
rehabilitative services.
CLINICS
The Company owns and operates a number of stand-alone clinics, particularly
in rural areas. Most of these clinics are primary care clinics that operate as
physician offices where the physicians are employed by or are under contract
with one of the Company's hospitals in that market. The clinics serve to
complement the Company's acute care hospitals in their respective markets by
allowing the Company to provide a wider range of services in optimal settings
and providing an opportunity to attract patients to the Company's hospitals.
PHYSICIAN ARRANGEMENTS
The Company owns a majority interest in and operates five physician joint
ventures. Three of the joint ventures have nonexclusive use of office space and
equipment in certain hospitals which they use to provide specialized medical and
surgical services to patients. In all cases, the minority interests in the joint
ventures are held directly or indirectly by a physician or a group of
physicians. Additionally, several of the Company's hospitals have assisted with
the formation of and participate in physician hospital organizations ("PHOs") or
management services organizations ("MSOs").
MEDICAL OFFICE BUILDINGS
The Company owns, leases or manages 19 medical office buildings located
adjacent to certain of its hospitals.
SELECTED MARKET STRATEGIES
Key to the success of the Company is its ability to adjust the
implementation of its various operating strategies to the unique features of
each market it enters. The following are four examples of how the Company is
currently implementing its strategies under diverse market conditions.
CONTRACTING WITH MANAGED CARE PROVIDERS IN A MAJOR URBAN MARKET
The broad market in Utah encompasses a population of 1,800,000 across the 90
mile corridor known as the Wasatch Front. The Company has focused it efforts
around Salt Lake County which has a population base of approximately 800,000, or
43% of the state's population, where four of the Company's five Utah hospitals
are located. This area has favorable demographics in terms of employment, age
and family income levels. Managed care plans have achieved one of the highest
levels of penetration in the United States in providing healthcare coverage to
the target population base. To be
47
<PAGE>
successful in this market requires that providers be able to demonstrate to
managed care payors the ability to deliver a continuum of healthcare services on
a cost competitive basis that is geographically accessible to the covered lives.
Through its network of five hospitals, a home health agency, a skilled
nursing facility and a number of outpatient and physician clinics, the Company
is creating an integrated provider system that provides both extensive
geographic coverage and a full range of healthcare services. In order to
increase its profitability under its managed care contracts, the Company is
implementing several cost saving strategies. The Company has already achieved
cost savings at its SLRMC hospital through implementing staffing standards and
renegotiating existing contractual arrangements with a variety of service
providers. These same procedures will be rapidly implemented in the four
recently acquired hospitals in this market. Furthermore, because the four
hospitals and related clinics are in the same county (with the fifth hospital
located in an adjacent county but within the total market area), the Company
will have the opportunity to gain operational efficiencies by sharing and
combining services to reduce operating costs. In the Utah market, the Company
currently has contracts with FHP International Corp. ("FHP") that cover
approximately 102,000 capitated lives and 13,000 PPO lives and contracts with
CIGNA, United Health and Blue Cross of Utah that cover a total of approximately
220,000 non-capitated lives.
CONSOLIDATING A MID-SIZE MARKET
The combined Fargo, North Dakota and Moorehead, Minnesota market has a
population of approximately 160,000 and an annual population growth rate of
approximately 4%. This market also has favorable demographics in terms of
employment, age and family income levels. This market is characterized by a low
level of managed care penetration with most of the healthcare payors being
traditional health insurance companies.
Historically, four not-for-profit hospitals had competed for patients in
this market. In 1992, the Company acquired two of the hospitals that were
underperforming financially. The Company immediately consolidated the facilities
into one hospital, eliminated duplicative services, reduced labor costs by
implementing productivity standards and eliminating excess levels of employees,
discontinued marginal services and sold the physical plant of the other
hospital. In addition to these actions, the Company funded needed capital
expenditures and strengthened relationships with physicians in order to enhance
its competitiveness within the market.
In 1994, the Company determined it could extend its presence as well as
realize additional cost savings by forging a partnership with another hospital
in the market. The resulting DHHS partnership, which the Company manages, is now
a preeminent provider and has strengthened its competitive position against the
remaining hospital, which is the largest provider in the market. Through this
partnership, the Company has been able to achieve further cost savings by
eliminating burdensome contracts, consolidating certain services and eliminating
duplicative or otherwise marginal services. In order to further develop an
integrated healthcare delivery system in this market, the Company has acquired a
home health agency and opened a skilled nursing facility.
CONSTRUCTING A NEW FACILITY TO ENTER A LESS COMPETITIVE MARKET
The Midland, Texas market includes a population of approximately 120,000
with favorable demographics and a very low level of managed care penetration.
The Company viewed the Midland market as an opportunity to compete against a
large not-for-profit hospital that was not responsive to changing market forces
and generally had not been faced with significant competition from other
providers. Although Midland had been served by two hospitals for several years,
the not-for-profit hospital was by far the dominant provider.
In 1992, the Company acquired the other, smaller 60-bed facility, which had
an outdated and deteriorating physical plant and offered a limited range of
services, with the intention of closing the smaller facility and building a new
state of the art replacement hospital that could more effectively
48
<PAGE>
compete with the not-for-profit hospital. The Company's newly constructed
101-bed Westwood Medical Center ("Westwood"), which includes a physician office
building and a modern ambulatory diagnostic and surgery center, opened in
October 1995, and it continues to gain market share by capitalizing on the
advantages of having new facilities and technology, providing a broad array of
high quality healthcare services, focusing on patient service and cultivating
physician relationships. The Company believes Westwood has inherent cost
efficiencies that have resulted from it being a newly constructed facility.
BUILDING A REFERRAL BASE ACROSS A LARGE RURAL REGION
In Tennessee, the Company has built an integrated network providing a broad
array of healthcare services that covers 26 counties with a combined population
of approximately 900,000. The network is comprised of five home health agencies
with 20 satellite offices, which, in total, perform approximately 500,000 home
health visits annually, and seven rural health clinics. This network has the
effect of creating a large referral base for the Company's four hospitals in
this market and has allowed the Company to become one of the more significant
providers of healthcare in rural Tennessee.
RECENT TRANSACTIONS
ACQUISITION OF PHC SALT LAKE HOSPITAL
On May 17, 1996, Paracelsus acquired the PHC Salt Lake Hospital, a 125-bed
acute care hospital, including its surrounding campus, in Salt Lake City, Utah
from FHP for $70.0 million in cash. Paracelsus financed the acquisition of PHC
Salt Lake Hospital with borrowings under the Existing Paracelsus Credit
Facility. Prior to the acquisition, the PHC Salt Lake Hospital was operated by
FHP, an HMO, principally to provide care to its HMO members. Accordingly, FHP
operated the PHC Salt Lake Hospital as a captive cost center for the sole
benefit of FHP and not as a business managed separately for profit. In
connection with the acquisition of the PHC Salt Lake Hospital, Paracelsus
entered into a 15-year exclusive provider agreement (the "FHP Exclusive Provider
Agreement") under which FHP will pay Paracelsus stated percentages of its
monthly HMO member premiums to guarantee FHP HMO members access to inpatient
care at all Paracelsus-operated hospitals in Salt Lake City, Utah, including the
PHC Salt Lake Hospital. Based upon information provided to Paracelsus by FHP, as
of March 31, 1996, FHP had approximately 102,000 covered lives who would be
subject to the FHP Exclusive Provider Agreement. In addition, the PHC Salt Lake
Hospital will continue to provide access to approximately 13,000 additional
covered lives under an FHP PPO contract under which FHP will make a
fee-for-service payment to Paracelsus.
The Company intends to change significantly the patient base of the PHC Salt
Lake Hospital. In addition to the FHP HMO and PPO members, PHC Salt Lake
Hospital will enter into contracts with other insurance carriers and managed
care organizations and otherwise seek to serve the patients in its market. In
addition, the PHC Salt Lake Hospital will provide reference lab services and
emergency room services which are anticipated to generate additional revenues.
To date, Paracelsus has entered into non-capitated provider contracts to provide
services at PHC Salt Lake Hospital with CIGNA, United Health and Blue Cross
("other payors"). Under those contracts, based on public disclosures made by
such other payors as of March 31, 1996, the Company believes that the PHC Salt
Lake Hospital will provide services to approximately 220,000 additional covered
lives. As a result of the expansion and diversification of the patient base, the
Company anticipates that over time a substantially reduced portion of the PHC
Salt Lake Hospital's total inpatient care will be comprised of services provided
to FHP members, with additional revenues generated through admissions by
independent practicing physicians and patients covered by other insurance
carriers, managed care organizations and the Medicare and Medicaid program.
The Company believes that the PHC Salt Lake Hospital acquisition and the
revenues anticipated to be received under the FHP Exclusive Provider Agreement
will complement the hospitals owned by Champion and the Columbia Hospitals (as
defined below) recently acquired by Paracelsus from Columbia. The Company does
not believe that the historical financial statements of PHC Salt Lake
49
<PAGE>
Hospital are relevant because the future operations will include services
provided to the general public as compared to its previous operations as a
captive cost center, which served only FHP members. As a result, the PHC Salt
Lake Hospital acquisition has been accounted for as an acquisition of assets.
ACQUISITION OF COLUMBIA HOSPITALS
On May 17, 1996, Paracelsus acquired Pioneer Valley Hospital ("Pioneer"), a
139-bed hospital in West Valley City, Utah; Davis Hospital and Medical Center
("Davis") a 120-bed hospital in Layton, Utah; and Santa Rosa Medical Center
("Santa Rosa"), a 129-bed hospital in Milton, Florida (Pioneer, Davis and Santa
Rosa, collectively, the "Columbia Hospitals") from Columbia. The consideration
for the Columbia Hospitals consisted of $38.5 million in cash and the exchange
of Paracelsus' Peninsula Medical Center, a 119-bed hospital located in Ormond
Beach, Florida ("Peninsula"); Elmwood Medical Center ("Elmwood"), a 135-bed
hospital located in Jefferson, Louisiana; and Halstead Hospital ("Halstead"), a
190-bed hospital located in Halstead, Kansas (Peninsula, Elmwood and Halstead,
collectively, the "Exchanged Hospitals"). Paracelsus also purchased the real
property of Elmwood and Halstead from a real estate investment trust ("REIT"),
exchanged the Elmwood and Halstead real property for Pioneer's real property and
sold the Pioneer real property to the REIT (the "Real Property Purchase and Sale
Transaction"). The acquisition of the Columbia Hospitals was accounted for as a
purchase transaction. Paracelsus financed the cash portion of the acquisition of
the Columbia Hospitals from borrowings under the Existing Paracelsus Credit
Facility.
OTHER TRANSACTIONS
On March 1, 1996, Champion acquired from Columbia, Jordan Valley, a 50-bed
acute care hospital located in West Jordan, Utah, a suburb of Salt Lake City.
Champion acquired Jordan Valley in exchange for Autauga, an 85-bed acute care
hospital and a 72-bed skilled nursing facility, plus preliminary cash
consideration paid to Columbia of $10.8 million. The cash consideration included
$3.8 million for certain net working capital components, which are subject to
adjustment and final settlement by the parties, and reimbursement of certain
capital expenditures made previously by the seller. The transaction did not
result in a gain or loss. The Autauga facilities were acquired as part of
Champion's acquisition of AmeriHealth on December 6, 1994, through the
AmeriHealth Merger.
HOSPITAL PROPERTIES
The following table sets forth the name, location, type of facility, date of
acquisition and number of licensed beds for each of the hospitals operated by
the Company. Unless otherwise indicated, all hospitals are owned by the Company.
<TABLE>
<CAPTION>
DATE OF LICENSED
LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS
<S> <C> <C> <C> <C>
CALIFORNIA
Bellwood General Hospital Bellflower Acute Care 2/08/82 85
Chico Community Hospital Chico Acute Care 4/28/85 123
Chico Community Rehabilitation Hospital(2) Chico Rehabilitative 6/30/94 60
Hollywood Community Hospital of Hollywood Los Angeles Acute Care 12/22/82 100
Hollywood Community Hospital of Van Nuys Van Nuys Psychiatric 11/01/82 59
Lancaster Community Hospital Lancaster Acute Care 2/01/81 131
Los Angeles Comm. Hospital Los Angeles Acute Care 8/08/83 136
Monrovia Community Hospital(3) Monrovia Acute Care 2/01/81 49
Norwalk Community Hospital Norwalk Acute Care 2/01/81 50
Orange County Community Hospital of Orange Orange Psychiatric 11/01/91 104
Orange County Hospital of Buena Park(4) Buena Park Psychiatric 2/01/81 55
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
DATE OF LICENSED
LICENSED FACILITY LOCATION TYPE OF FACILITY ACQUISITION(1) BEDS
<S> <C> <C> <C> <C>
UTAH
Davis Hospital and Medical Center Layton Acute Care 5/17/96 120
Jordan Valley Hospital West Jordan Acute Care 3/01/96 50
PHC Salt Lake Hospital Salt Lake City Acute Care 5/17/96 125
Pioneer Valley Hospital(2) West Valley City Acute Care 5/17/96 139
Salt Lake Regional Medical Center Salt Lake City Acute Care 4/13/95 200
TEXAS
BayCoast Medical Center Baytown Acute Care 1/01/91 191
The Medical Center Of Mesquite Mesquite Acute Care 10/01/90 176
Westwood Medical Center(6) Midland Acute Care 10/25/95 101
NORTH DAKOTA
Heartland Medical Center(7) Fargo Acute Care 9/1/93 141
Dakota Hospital(7) Fargo Acute Care 12/31/94 200
TENNESSEE
Cumberland River Hospital North(2) Celina Acute Care 10/01/86 36
Cumberland River Hospital South Gainesboro Acute Care 9/05/95 44
Fentress County General Hospital Jamestown Acute Care 10/01/85 84
Bledsoe County Hospital(2) Pikeville Acute Care 10/01/85 32
VIRGINIA
Metropolitan Hospital(5) Richmond Acute Care 12/06/94 180
MISSOURI
Lakeland Regional Hospital Springfield Psychiatric 10/01/94 149
FLORIDA
Santa Rosa Medical Center Milton Acute Care 5/17/96 129
MISSISSIPPI
Senatobia Community Hospital(2) Senatobia Acute Care 1/01/86 76
LOUISIANA
Crossroads Regional Hospital Alexandria Psychiatric 10/01/94 70
GEORGIA
Flint River Community Hospital(2) Montezuma Acute Care 1/01/86 50
--------
Total licensed beds 3,245
--------
--------
</TABLE>
- ------------------------
(1) Reflects date facility was initially acquired by Paracelsus or Champion, as
applicable.
(2) Hospital facility is leased.
(3) Monrovia Community Hospital is operated as a joint venture with a physician
investor. Paracelsus owns a 50.98% interest in this joint venture.
51
<PAGE>
(4) Orange County Hospital of Buena Park is owned subject to a mortgage securing
borrowings in the amount of $283,473 as of March 31, 1996.
(5) Champion owns an 88.3% general partnership interest in a limited partnership
that owns the hospital.
(6) Constructed by Champion and placed in service October 25, 1995.
(7) Champion owns a 50% interest in and operates DHHS, a partnership that owns
the hospital.
SELECTED OPERATING STATISTICS
The table below sets forth selected operating statistics of the Company's
acute care, psychiatric and rehabilitative hospitals during the periods
presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995 MARCH 31, 1996
----------------------- -----------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Number of hospitals at period end.............................. 29 2 28 2
Licensed beds at period end.................................... 2,964 341 2,845 341
Admissions..................................................... 67,154 10,096 35,822 4,676
Adjusted admissions(1)......................................... 97,421 15,628 52,774 7,358
Average length of stay (days):
All beds..................................................... 6.2 5.5 5.9 5.7
Medical-surgical............................................. 5.2 4.4 5.1 4.4
Psychiatric.................................................. 11.7 9.6 11.3 9.6
Patient days................................................... 415,882 55,476 212,751 26,618
Adjusted patient days(2)....................................... 603,341 85,876 313,430 41,884
Occupancy rate(3).............................................. 40% 45% 41% 43%
Deliveries..................................................... 4,642 1,449 2,777 630
Total surgeries................................................ 39,272 9,769 19,688 4,569
Outpatient visits(4)........................................... 1,189,797 126,211 741,378 59,721
Gross outpatient revenues as a percent of gross operating
revenues...................................................... 31% 35% 32% 36%
</TABLE>
- ------------------------
(1) Total admissions for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(2) Total patient days for the period multiplied by the ratio of total patient
revenue divided by total inpatient revenue.
(3) Average daily census for the period divided by licensed beds.
(4) Includes emergency room and home health agency visits.
COMPETITION
The competition for patients among hospitals and other healthcare providers
has intensified in recent years as hospital occupancy rates have declined. This
decline is attributable to several factors, including cost containment
pressures, changing medical technology, changing government regulations and
utilization management. Such factors have prompted new competitive strategies by
hospitals and other healthcare providers. Among these strategies is an
increasing emphasis on outpatient healthcare delivery procedures (E.G.,
outpatient surgery, diagnostic centers and home healthcare) which tend to
eliminate or reduce the length of hospital stays.
The Company believes that one of the most significant factors in the
competitive position of a hospital is the number and quality of the physicians
affiliated with such hospital, because physicians determine the majority of
hospital admissions. Although physicians may at any time terminate their
affiliation with a hospital operated by the Company, the Company seeks to retain
physicians of varied specialties on its hospitals' medical staffs and to attract
other qualified physicians. The Company
52
<PAGE>
believes that physicians refer patients to a hospital primarily on the basis of
the quality of services it renders to patients and physicians, the quality of
other physicians on the medical staff, the location of the hospital and the
quality of the hospital's facilities, equipment and employees. However,
physicians affiliated with certain managed care providers may be precluded from
utilizing the Company's facilities for their patients, or referring patients to
doctors using the Company's facilities, if the facility or referred doctors are
not currently contracting with such managed care providers.
The competitive position of a hospital is also affected by its management's
ability to negotiate service contracts with purchasers of group healthcare
services, including employers, PPOs and HMOs. PPOs and HMOs attempt to direct
and control the use of hospital services through "managed care" programs and
obtain discounts from hospitals' established charges, and, in return, hospitals
acquire access to a large number of potential patients. In addition, employers
and traditional health insurers are increasingly interested in containing costs
through negotiations with hospitals for managed care programs and discounts from
established charges. Of importance to a hospital's competitive position is its
ability to obtain contracts with PPOs and HMOs and other organizations that
finance healthcare. Managed care providers are increasingly contracting with
hospitals or networks of hospitals that can provide a full range of services in
a particular market. Accordingly, the Company is attempting to join or establish
hospital networks and to increase services to compete for contracts in such
markets.
MEDICARE, MEDICAID AND OTHER REVENUE
GENERAL
The Company receives payment for services rendered to patients from private
insurers, managed care providers, the Federal government under the Medicare
program, state governments under their respective Medicaid programs and directly
from patients. The table below sets forth the approximate percentages of the
historical gross operating revenues derived by the facilities of the Company and
of DHHS from Medicare, Medicaid and private insurance and all other payors for
the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995(1) MARCH 31, 1996
--------------------- ---------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Medicare.................................................... 45% 46% 46% 46%
Medicaid.................................................... 13% 9% 14% 9%
Private insurance and all other payors...................... 42% 45% 40% 45%
</TABLE>
- ------------------------
(1) Includes Champion data for its year ended December 31, 1995.
In addition, the Company's revenues depend on the level of inpatient census
at its hospitals, the volume of outpatient services at its hospitals and
outpatient facilities, the acuity of patients' conditions and charges for
services. The approximate percentages of historical gross patient revenue for
inpatient and outpatient services for the Company and for DHHS for the periods
indicated were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995(1) MARCH 31, 1996
--------------------- ---------------------
CONSOLIDATED CONSOLIDATED
HOSPITALS DHHS HOSPITALS DHHS
<S> <C> <C> <C> <C>
Inpatient services.......................................... 69% 65% 68% 64%
Outpatient services......................................... 31% 35% 32% 36%
</TABLE>
- ------------------------
(1) Includes Champion data for its year ended December 31, 1995.
MEDICARE
The Medicare program is a Federal healthcare program created by the Social
Security Act Amendments of 1965. Each of the Company's hospitals is certified as
a provider of services under the Medicare program. Revenues attributable to
Medicare patients represented 45% and 46% of the
53
<PAGE>
Company's historical gross operating revenues in fiscal 1995 and in the six
months ended March 31, 1996, respectively. The Medicare program has changed
significantly during the past several years, and these changes have had and will
continue to have a significant effect on the Company's hospitals. In addition,
the requirements for certification in the Medicare program are subject to
change, and, in order to remain qualified for the program, it may be necessary
for the Company to make changes from time to time in its facilities, equipment,
personnel and services. Although the Company intends to continue its
participation in the Medicare program, there is no assurance that it will
continue to qualify for participation.
Pursuant to the Social Security Act Amendments of 1983 and subsequent budget
reconciliations and modifications, Congress adopted a prospective payment system
("PPS") under which a hospital is paid a predetermined amount for each Medicare
inpatient discharge depending on the patient's diagnosis and related procedures.
Generally, under the PPS, if the costs of meeting the health needs of the
patient are greater than the predetermined payment rate, the hospital must
absorb the loss. Conversely, if the cost of the services provided is less than
the predetermined payment, the hospital retains the difference.
Prior to 1988, Medicare reimbursed hospitals for 100% of their share of
capital related costs, which included depreciation, interest, taxes and
insurance related to plant and equipment for inpatient hospital services. The
reimbursed rate was reduced thereafter to 85% of costs. Federal regulations
effective October 1, 1991 created a PPS for inpatient capital costs to be phased
in over a 10-year transition period from a hospital-based rate to a fully
Federal payment rate or a per-case rate. Such a method of capital cost payment
could have a material adverse effect on the operating revenues of the Company.
Recent legislation has reduced projected increases for Medicare payments to
providers for hospital outpatient services. The payment rate for hospital
outpatient surgery and hospital radiology services is limited to a blend of 42%
of reasonable costs and 58% of Medicare's prospective rates. The payment rate
for other outpatient diagnostic services is limited to a blend of 50% of
reasonable costs and 50% of the prospective rates. Furthermore, studies are
currently in process at the Health Care Financing Administration (the "HCFA")
that propose converting payment for all outpatient services (including home
health services), inpatient psychiatric services and skilled nursing care to a
prospective payment system. The Congress is presently considering further
significant reductions in projected increases in Medicare payments to providers.
The financial effect of these changes may have a negative impact on the Company,
although the exact method of implementing these reductions and whether a
prospective payment system for outpatient services or inpatient psychiatric and
home health services and skilled nursing care will be adopted are not yet known.
Pursuant to the Omnibus Budget Reconciliation Act of 1990, Congress revised
the Gramm-Rudman budget and sequestration process and established a
"pay-as-you-go" system for entitlement programs, including Medicare. Legislation
increasing entitlements and/or reducing revenues must be deficit-neutral (i.e.,
it must pay for itself by a reduction in entitlement spending elsewhere or
additional revenues). Legislation violating the pay-as-you-go principle would
trigger a sequestration of entitlement program funds in the same amount that
such legislation added to the deficit. Up to a maximum of 4% of Medicare program
funds would be included among those sequestered. Medicaid program funds,
however, continue to be exempt from sequestration. Payment reductions under the
revised sequestration process were not implemented in fiscal years 1993, 1994 or
1995. If implemented in future years, these reductions could have a material
adverse effect on the Company's operating revenues. However, because the actual
amount of the reduction for any fiscal year may vary according to the federal
deficit, the financial impact of the revised process on the Company cannot be
predicted.
54
<PAGE>
The Medicare program makes additional payments to those healthcare providers
that serve a disproportionate share of low income patients. The qualification
and funding for disproportionate share payments can vary by fiscal year.
Disproportionate share payments for future years could vary significantly from
historical payments.
Within the statutory framework of the Medicare program, there are
substantial areas subject to administrative rulings, interpretations and
discretion that may affect payments made under the program. In addition, the
Federal government might, in the future, reduce the funds available for, or
require more stringent utilization of, hospital facilities, either of which
could have a material adverse effect on the Company's future income.
MEDICAID PROGRAM
Medicaid (Title XIX of the Social Security Act) is a program of medical
assistance that is administered by each state. Each of the Company's hospitals
is certified for participation in the various state Medicaid programs, although
not all of the Company's hospitals have chosen to participate. In fiscal 1995
and for the six months ended March 31, 1996, on a combined historical basis the
Company's facilities derived approximately 13% and 14%, respectively, of their
gross operating revenues from Medicaid programs. Payment for inpatient services
varies by state, but a majority of states pays either a fixed, pre-determined
daily rate or a fixed payment for each type of service.
The Medicaid program also makes additional payments to those healthcare
providers that serve a disproportionate share of low income patients. The
methodology used to determine qualification and funding will vary by state. The
qualification and funding for disproportionate share payments can vary by fiscal
year. Disproportionate share payments for future years could vary significantly
from historical payments.
REGULATION AND OTHER FACTORS
GENERAL
All hospitals are subject to compliance with various Federal, state and
local statutes, regulations and ordinances, and receive periodic inspection by
state and local licensing agencies, as well as by nongovernmental organizations
acting under contract or pursuant to Federal law, to review compliance with
standards of medical care and requirements concerning facilities, equipment,
staffing, cleanliness and related matters. The Company's hospitals must comply
with the licensing requirements of state and local health agencies, as well as
the requirements of municipal building codes, health codes and local fire
departments. All of the Company's hospitals have obtained the licenses which the
Company believes are necessary under applicable law for the operation of the
hospitals. In addition, all of the Company's hospitals are presently accredited
by the Joint Comission on Accreditation of Healthcare Organizations ("JCAHO")
except for one rural hospital in Georgia, which is surveyed annually by state
regulatory authorities.
"CERTIFICATE OF NEED" REQUIREMENTS
In recent years, many states have enacted legislation regulating the
establishment or expansion of hospital facilities and services. In certain
states, prior to the construction of new hospitals, the expansion of old
hospitals or the introduction of certain new services in existing hospitals, one
must obtain a CON by demonstrating to either state or local authorities, or
both, that it is in compliance with plans adopted by such authorities, or
receive an exemption from CON requirements by demonstrating that the project is
covered by statutory and regulatory exemption provisions. This requirement can
increase the cost (in time and money) of a project, and may affect the
feasibility of some projects. Of the eleven states in which the Company
operates, a CON is required in Florida, Georgia, Louisiana, Mississippi,
Missouri, Tennessee and Virginia.
55
<PAGE>
HOSPITAL INSPECTIONS AND REVIEWS
JCAHO regularly conducts an on-site review and inspection of every hospital
seeking to obtain or maintain its accreditation. Hospitals accredited by the
JCAHO are deemed to be in compliance with the standards for participation in the
Medicare program, although Medicare can conduct its own compliance reviews.
During fiscal 1995, three Paracelsus facilities had full JCAHO reviews. All
such facilities maintained full three-year accreditation. In addition to the
JCAHO inspections and inspections conducted by certain state and local
regulatory authorities, HCFA, generally in response to specific complaints from
patients but also occasionally on a random basis, causes hospitals participating
in the Medicare program to be inspected. Since fiscal 1995, three facilities had
state regulatory surveys, some of which may have been done on behalf of HCFA,
and all of those facilities remained eligible to participate in the Medicare
program. In addition, all of Champion's hospitals are accredited by the JCAHO,
including Champion's newly constructed hospital in Midland, Texas, which
received its provisional accreditation in the first quarter of 1996.
REGULATORY COMPLIANCE
The operation of healthcare facilities is subject to Federal, state and
local regulations. Facilities are subject to periodic inspection by state
licensing agencies to determine whether the standards of medical care provided
therein comply with licensing standards. The Company believes that all of its
healthcare facilities are in substantial compliance with such Federal, state and
local regulations and licensing requirements.
OTHER FEDERAL STATUTES AND REGULATIONS
Effective January 1, 1995, the so-called Stark II law bars physicians from
referring Medicare and Medicaid patients to 11 designated health services in
which the physicians have an investment or compensation arrangement. HCFA has
not set a target date for proposing the Stark II regulations, but it finally
issued the so-called Stark I regulations on August 14, 1995. (Stark I bans
physicians from referring Medicare and Medicaid patients to clinical
laboratories in which they have a financial interest). HCFA has stated that the
Stark I regulations will also be applicable to Stark II.
HCFA plans to require healthcare entities, including hospitals, to sign a
declaration form in which they promise not to bill Medicare for patients
referred by a physician who has a prohibited financial relationship with the
entity. HCFA will keep those forms on file. Physicians who own an interest in a
designated health service will also be asked to sign a declaration form saying
they will not refer Medicare patients to that service. The entity will keep the
physician forms on file, and HCFA will check to see that entities are keeping
the forms.
In addition, the Antifraud Amendments provide criminal penalties for
individuals or entities participating in the Medicare or Medicaid programs who
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce referrals for items or services reimbursed under such programs. In
addition to felony criminal penalties, the Social Security Act also establishes
the intermediate sanction of excluding violators from Medicare or Medicaid
participation. The HHS has promulgated regulations that define certain Safe
Harbors for arrangements that would not violate the Antifraud Amendments. Any
venture that meets all the conditions of an applicable Safe Harbor will be
exempt both from prosecution and exclusion under the Antifraud Amendments.
None of the Company's joint ventures with physician investors falls within
any of the defined Safe Harbors. The fact that the terms of a venture do not
satisfy applicable Safe Harbor criteria, however, does not mean that the venture
is illegal but does mean that the venture may be subject to review. Under the
Company's joint venture arrangements, physician investors are not and will not
be under any obligation to refer or admit their patients, including Medicare or
Medicaid beneficiaries, to receive services at the Company's facilities, nor are
distributions to those physician investors contingent upon or calculated with
reference to referral by the physician investors. On the basis thereof, the
Company does not believe the ownership of interests in or receipt of
distributions from its joint ventures would
56
<PAGE>
be construed to be knowing and willful payments to the physician investors to
induce them to refer patients in violation of the Antifraud Amendments. There
can be no assurance, however, that government officials charged with
responsibility for enforcing the prohibitions of section 1128B(b) of the Social
Security Act will not assert that one or more of the Company's joint ventures
are in violation of the Antifraud Amendments. To date, none of the Company's
current joint ventures has been reviewed by any governmental authority for
compliance with the Antifraud Amendments.
STATE STATUTES AND REGULATIONS
Each of the states in which the Company does business has a state medical
practice act that prohibits unprofessional conduct of physicians, including
failure to conform to the ethical standards of the profession. A physician who
is found to have violated a state medical practice act may be subject to
disciplinary action up to and including loss of the physician's license to
practice medicine. Certain states as well as Federal regulations require
disclosure by physicians of an investment interest in a facility to which the
physician refers, and most state medical associations require such disclosure to
meet ethical standards. Moreover, the American Medical Association's ethical
opinions generally proscribe as unprofessional any conduct or transaction by a
physician that places the physician's own financial interest above the welfare
of the physician's patients or results in the provision of unnecessary services
or overutilization of services or facilities. The ethical opinions also require
that a physician disclose any ownership interest to his or her patient prior to
referral.
Certain states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals. These statutes may involve
criminal as well as civil penalties which may impact the operations at the
Company's facilities. The scope of these laws is broad, and little precedent
exists for their interpretation or enforcement. The Company monitors
developments in this area of law and will from time to time determine what steps
are necessary to ensure that patients at its facilities receive required
disclosures, and it will, accordingly, revise disclosure requirements for its
facilities and for physician limited partners as necessary.
Some states have also enacted their own version of Stark II prohibiting
physician ownership in designated health services. Although the Company believes
that its joint ventures have been structured to comply with all applicable
federal and state laws, no assurance can be given that the ventures will not be
reviewed and challenged by enforcement authorities empowered to do so or that,
the ventures, if challenged, would prevail. No documents or agreements have been
challenged by any regulatory authorities alleging that distributions to any
joint venture's partners violate any governmental or ethical prohibitions
against illegal remuneration arrangements, kickbacks, commissions, bonuses or
rebates.
HEALTHCARE REFORM LEGISLATION
Federal and state legislators continue to consider legislation that could
significantly impact Medicare, Medicaid and other government funding of health
care costs. Initiatives currently before Congress, if enacted, would
significantly reduce payments under various government programs, including,
among others, payments to disproportionate share and teaching hospitals. A
reduction in these payments would adversely affect net revenue and operating
margins at certain of the Company's hospitals. The Company is unable to predict
what legislation, if any, will be enacted at the Federal and state level in the
future or what effect such legislation might have on the Company's financial
position, results of operations, or liquidity.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company's management does not believe that the Company will be required to
expend any material amounts in order to comply with these laws and regulations
or that compliance will materially affect its capital expenditure earnings, or
competitive position.
57
<PAGE>
MEDICAL STAFF AND EMPLOYEES
At March 31, 1996, approximately 3,100 licensed physicians were members of
the medical staffs of the Company's hospitals. Many of these professionals also
serve on the staffs of other nearby competing hospitals. Approximately 270
physicians were under contract with the Company's hospitals at March 31, 1996,
primarily to staff emergency rooms, to provide ancillary services and to serve
in other support capacities. As of March 31, 1996, the Company had approximately
9,300 employees, of which approximately 1,300 were covered by collective
bargaining agreements.
Hollywood Community Hospital, Lancaster Community Hospital, Chico Community
Hospital and University Convalescent Hospital are the Company's only facilities
with employees represented by unions. The Company believes that its relationship
with its employees is satisfactory.
As of March 31, 1996, DHHS had approximately 1,400 employees. Approximately
170 physicians were active members of the medical staff, many of whom also serve
on the staffs of competing hospitals, and approximately 25 physicians were under
contract to staff the emergency room and serve in support capabilities. None of
DHHS' employees are covered by a collective bargaining agreement.
LIABILITY INSURANCE
Paracelsus is self-insured for the first $500,000 per occurrence of general
and professional liability risks occurring after October 1, 1987 and the first
$250,000 per occurrence of workers' compensation liability risks occurring after
October 1, 1992. Paracelsus formed Hospital Assurance Company, Ltd., a wholly
owned subsidiary ("HAC"), in order to insure the general and professional and
workers' compensation risks beginning October 1, 1992. In addition, Paracelsus
owns approximately 10% of Hospital Underwriters Group ("HUG"), which insures the
first $2.5 million per occurrence of claims in excess of $500,000, and reinsures
amounts over $3.0 million per occurrence with unrelated third-party commercial
insurance carriers, up to $100.0 million per occurrence. Upon consummation of
the Merger, the Company intends for Champion and its subsidiaries to be insured
by HAC and HUG in the same manner and to the same extent as the current
subsidiaries of the Company. Prior to the Merger, Champion and its subsidiaries
mantained a program of insurance that Champion believed adequate to cover the
claims and legal actions to which it and its subsidiaries were subject in the
ordinary course of business.
LITIGATION RELATING TO THE MERGER
Certain holders of Champion Common Stock have filed a purported class action
lawsuit in the Chancery Court of the State of Delaware, naming as defendants
certain members and a former member of the Champion Board of Directors, Mr.
Charles R. Miller, Mr. James G. VanDevender, Mr. James A. Conroy, Mr. Manuel M.
Ferris, Mr. David S. Spencer, Mr. Nolan Lehmann, Mr. Paul B. Queally, Mr. Scott
F. Meadow, Mr. William G. White and Mr. Richard D. Sage (collectively, the
"Individual Defendants"), and Champion and Paracelsus. The plaintiffs claim,
among other things, that the Merger and the exchange ratio for the Champion
Common Stock pursuant thereto are unfair and inadequate, that the Individual
Defendants violated their fiduciary duties to Champion and its public
stockholders by failing to actively pursue the acquisition of Champion by other
companies or conduct an adequate market check, and that Paracelsus knowingly
aided and abetted the breaches of fiduciary duty committed by the Individual
Defendants. Plaintiffs seek preliminary and permanent injunctions against the
proposed Merger. In addition, plaintiffs seek an accounting of all profits
realized by the defendants, as well as monetary damages for an unspecified
amount, and costs and attorneys' and experts' fees.
CERTAIN OTHER LEGAL PROCEEDINGS
During March 1996, Paracelsus settled two lawsuits in connection with the
operation of its psychiatric programs. Paracelsus recognized an unusual charge
for settlement costs totaling $22.4 million in the six months ended March 31,
1996 which consisted of settlement payments, legal fees and the write off of
certain psychiatric accounts receivables in connection with the settlement of
the two lawsuits. Paracelsus did not admit liability in either case but resolved
the disputes through the
58
<PAGE>
settlements in order to reestablish a business relationship and/or avoid further
legal costs in connection with the disputes. Paracelsus and the plaintiff
insurance company have reestablished their business relationship. See
"Paracelsus Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Paracelsus Selected Historical Consolidated
Financial Information."
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's acute care, psychiatric and rehabilitative hospitals and skilled
nursing facilities, and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. The Company
believes that the ultimate resolution of the proceedings presently pending
against Paracelsus or Champion (or any of the Company's other subsidiaries) will
not have a material adverse effect on the Company's consolidated financial
position.
59
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
At the Effective Time, the authorized number of directors on the Board will
be nine. After the Effective Time, the Board will be divided into three classes,
as nearly equal in number as possible, with the initial term of office of Class
I directors to expire at the 1997 annual meeting of shareholders, the initial
term of office of Class II directors to expire at the 1998 annual meeting of
shareholders and the initial term of office of Class III directors to expire at
the 1999 annual meeting of shareholders, with each class of directors to hold
office until their successors have been duly elected and qualified.
The Class III directors will be Dr. Krukemeyer and Messrs. Messenger and
Miller. The Class II directors will be Messrs. VanDevender, Lange and one
Independent Director (as defined below). The Class I directors will be Messrs.
Conroy and Hofmann and one Independent Director. As contemplated by the
Shareholder Agreement, Dr. Krukemeyer and Messrs. Messenger, Lange and Hofmann
will each be the initial representatives of the Paracelsus Shareholder (any such
representatives are the "Shareholder Directors") and Mr. Conroy, and two
Independent Directors will each be the initial Independent Directors. After the
Effective Time, the Shareholder Agreement, the Articles and the Bylaws will
provide that the Board may be enlarged by up to three additional Independent
Directors if the beneficial ownership of Common Stock of the Paracelsus
Shareholder falls below certain levels. For these purposes, an "Independent
Director" is a director of the Board who is not a Shareholder Director (as
defined below), a "Transferee Director" (as defined in the Shareholder
Agreement) or an officer of the Company or any of its subsidiaries.
The following table sets forth certain information with respect to those
individuals who will serve as directors and executive officers of the Company
immediately following the Effective Time:
<TABLE>
<CAPTION>
NAME AGE PROJECTED POSITION WITH THE COMPANY
<S> <C> <C>
Dr. Manfred G. Krukemeyer 34 Chairman of the Board
R. J. Messenger 51 Vice Chairman of the Board and Chief Executive Officer
Charles R. Miller 57 President, Chief Operating Officer and Director
James G. VanDevender 48 Executive Vice President, Chief Financial Officer and Director
Ronald R. Patterson 54 Executive Vice President and President, Healthcare Operations
Robert C. Joyner 49 Senior Vice President, Secretary and General Counsel
David R. Topper 48 Senior Vice President, Development
George Asbell 47 Senior Vice President, Operations
W. Warren Wilkey 51 Senior Vice President, Operations
Michael M. Brooks 47 Senior Vice President, Acquisitions
James Rush 49 Senior Vice President
Lawrence A. Humphrey 40 Senior Vice President, Corporate Finance
Michael D. Hofmann 56 Director
Christian A. Lange 57 Director
James A. Conroy 35 Director
</TABLE>
In addition, there will be two additional Independent Directors who will be
named to the Board prior to the Effective Time.
Dr. Krukemeyer, a German medical doctor, has been a director of the Company
since its inception in January 1981, and Chairman of the Paracelsus Board since
the death of his father, Dr. Hartmut Krukemeyer, the Company's founder and
previous Chairman of the Board, in May 1994.
60
<PAGE>
Dr. Krukemeyer was Vice-Chairman of the Board from November 1983 until May 1994.
Dr. Krukemeyer is also the Chief Executive Officer and sole shareholder of
Paracelsus Klinik Osnabruck, which owns and operates 37 hospitals ranging in
size from 100 to 400 beds in Germany, England and Switzerland. Dr. Krukemeyer is
a graduate of the University of Vienna School of Medicine and practiced medicine
in Europe before assuming full time business responsibilities in 1992.
Mr. Messenger joined the Company in March 1984, as President, Chief
Operating Officer and Secretary of the Company. He was promoted to Chief
Executive Officer in 1992. Mr. Messenger has been a director since joining the
Company in 1984. Prior to joining the Company, Mr. Messenger was the Regional
Vice President of the National Medical Enterprises, Inc. ("NME") (now Tenet
Healthcare) Southwestern and Eastern regions, and the Senior Vice President,
Acquisitions and Development/Hospital Group, where he was responsible for all
acquisitions and development projects on a national basis. Mr. Messenger has
over 27 years of experience in the hospital industry. Mr. Messenger serves on
the Board of Directors of the Federation of American Health Systems, the
California Hospital Association and the Health Resources Institute, Inc. Mr.
Messenger also serves as an advisory member on the Board of Directors of Liberty
Mutual Insurance Company and on the Board of Councilors of the University of
Southern California ("USC"). Mr. Messenger received a BS degree in Industrial
Engineering in 1967 and a Masters degree in Healthcare Administration in 1969,
both from USC.
Mr. Miller has been the Chairman, President and Chief Executive Officer of
Champion since its founding in February 1990. Mr. Miller has over 37 years of
experience in the hospital industry. In 1981, he co-founded Republic Health
Corporation ("Republic"), serving as President and a director of the company. In
less than three years, Republic had revenues of $540 million and was the fifth
largest publicly-held hospital management company, owning 23 acute hospitals, 20
psychiatric and substance abuse facilities and managing 18 hospitals and 3
specialty units. In 1986, Republic was acquired in a leveraged buy-out for $800
million. Mr. Miller, who declined to participate in the leveraged buyout of
Republic, resigned as an officer and director of Republic in 1986. After leaving
Republic, Mr. Miller and Mr. Brooks acquired in 1987 a general acute care
hospital in El Paso, Texas and subsequently sold that facility in late 1988.
During 1989, Mr. Miller did limited healthcare consulting and developed the
business plan for Champion. Prior to co-founding Republic, Mr. Miller was
employed for seven years by Hospital Affiliates International ("HAI"). Mr.
Miller received a BBA in Personnel Management from Texas Tech University in 1968
and a Masters degree in Public Health Administration from the University of
Texas in 1974.
Mr. VanDevender has been the Executive Vice President, Chief Financial
Officer, Secretary and Director of Champion since its formation in February
1990. Mr. VanDevender has approximately 24 years of experience in the hospital
industry, including management positions in accounting and finance at the
hospital level, and senior executive positions in accounting, finance,
acquisitions and development and operations at the corporate level of
multi-hospital companies. Mr. VanDevender was employed with Republic from 1981
until 1987 and was a Senior Vice President primarily responsible for Republic's
acquisition and development function. Before joining Republic, Mr. VanDevender
was employed for four years by HAI. From 1987 until 1990, Mr. VanDevender
pursued private investments. He received his undergraduate degree in Accounting
from Mississippi State University in 1970.
Mr. Patterson has been Executive Vice President and Chief Operating Officer
of Champion since 1994 after joining Champion in 1992 as Senior Vice President
- -- Operations. Mr. Patterson has 26 years of experience in the healthcare
industry. His operational responsibilities have included community hospitals,
large university teaching hospitals, psychiatric hospitals, contract management
of hospitals and specialty units and mobile diagnostic services. Prior to
joining Champion, he was a Senior Vice President with Harris Methodist Health
System, a Fort Worth, Texas not-for-profit healthcare system from 1990 until
1991. From 1988 until 1990, Mr. Patterson did private turnaround management
consulting in the healthcare industry. From 1982 to 1988, Mr. Patterson was
employed
61
<PAGE>
by Republic, serving initially as an Operations Vice President and subsequently
as Senior Vice President with responsibility for a major operating division.
From 1975 to 1981, Mr. Patterson was employed in various management positions by
HAI. Mr. Patterson is a Fellow in the American College of Health Care
Executives. He received his undergraduate degree from the University of Houston
in 1965 and a Masters degree in Health Care Administration from Trinity
University in 1973.
Mr. Joyner joined the Company as Vice President, Corporate Counsel and
Assistant Secretary in 1986. Prior to joining the Company, Mr. Joyner served as
Senior Vice President and Assistant General Counsel for NME. Mr. Joyner is a
member of the California and Florida Bars, has practiced law since 1972 and has
approximately 20 years of experience in the healthcare industry. In addition to
his responsibilities as General Counsel he is responsible for the Paracelsus
departments of Human Resources and Insurance and Risk Management. Mr. Joyner
graduated with a BSBA degree in 1969 and a JD in 1972, both from the University
of Florida.
Mr. Topper joined the Company in February 1981, and in January 1985 became
its Vice President, Development. He was promoted to Senior Vice President in
1993. Prior to joining the Company, Mr. Topper was with Community Psychiatric
Centers in various senior management positions.
Mr. Asbell joined the Company in September 1985 as Senior Financial Officer
for the Eastern Region. He was promoted to Regional Vice President, Operations
and Development in 1988 and served in that capacity until 1995 when he was
promoted to Senior Vice President, Operations. He is responsible for all
hospital operations of the Company. Prior to joining the Company, Mr. Asbell
served for five years in various capacities with American Medical International.
Mr. Wilkey joined Champion in 1995 and has served as Senior Vice President
- -- Market Operations of Champion since February 1996. From January 1995 to
January 1996, Mr. Wilkey served as Vice President Operations. Mr. Wilkey has
approximately 26 years of experience in the healthcare industry, including group
hospital operations, hospital administration and ancillary service management.
For the six years prior to joining Champion, Mr. Wilkey was a Vice President and
Director of Group Operations for Epic Healthcare Group, a publicly held hospital
ownership and management company.
Mr. Brooks has served as Senior Vice President -- Development since February
1996, and Senior Vice President -- Operations Controller/Administration of
Champion since January 1992. From 1989 until 1992, Mr. Brooks did private
consulting within the healthcare industry and was associated with Champion in
this capacity from February 1991 to December 1991.
Mr. Rush joined the Company as Vice President, Finance and Chief Financial
Officer in February 1985. Prior to joining the Company, Mr. Rush was the Senior
Vice President and Chief Financial Officer for over eight years at Summit Health
Ltd., a healthcare company similar in size and operations to the Company. Mr.
Rush is a Certified Public Accountant.
Mr. Humphrey has served as Senior Vice President -- Corporate Finance of
Champion since February 1996 and prior to that as Vice President of Operations
- -- Finance of Champion. Prior to joining Champion in September 1993, Mr.
Humphrey worked for NME from 1981. Mr. Humphrey has over 15 years of experience
in healthcare finance and operations. Mr. Humphrey is a Certified Public
Accountant.
Mr. Hofmann has been a director of the Company since 1983. He has been an
international consultant in finance and banking, with his own consulting
practices in London, England and Fribourg, Switzerland for more than the last
five years. In addition, between 1990 and 1992 Mr. Hofmann was the Chief
Executive Officer of Swiss Bank Corporation in Germany.
Mr. Lange has been a director of the Company since 1983. He has been
President of European Investors, Inc. since 1983, and has served as Chairman of
the Board of European Investors Corporate Finance, Inc. Prior to 1983, he was a
senior executive with Friedrich Flick Industrieverwaltung KgaA of Dusseldorf,
Germany.
62
<PAGE>
Mr. Conroy has been a general partner of OGP Partners, L.P., the general
partner of The Olympus Private Placement Fund, L.P. ("Olympus"), since 1990. Mr.
Conroy is also a general partner of OGP II, L.P., the general partner of Olympus
Growth Fund II, L.P. Olympus invests in growth companies, acquisitions and
restructurings through the purchase of private equity and equity-linked
securities.
COMMITTEES OF THE NEW PARACELSUS BOARD
EXECUTIVE COMMITTEE
Under the Articles and the Bylaws the Board may, by resolution passed by the
affirmative vote of at least 75% of the Board, appoint from its membership,
annually, an executive committee of two or more directors, which shall include
the Chief Executive Officer and the President of the Company. The Board may
designate in such resolution one or more directors as alternate members of the
Executive Committee, who may replace any absent or disqualified member at any
meeting of the committee. The Executive Committee, during the intervals between
meetings of the Board, will have authority and power to act on behalf of the
Board as provided in the Bylaws. After the Merger, the initial members of the
Executive Committee will be Messrs. Messenger, Miller and VanDevender.
OTHER COMMITTEES OF THE BOARD
The Board may, by resolution adopted by a majority of the authorized number
of directors, designate one or more other committees, each consisting of two or
more directors, to serve at the pleasure of the Board. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent member at any meeting of the committee. The appointment of members or
alternate members of a committee requires the vote of a majority of the
authorized number of directors. Any such committee shall have authority to act
in the manner and to the extent provided in the resolution of the Board and may
have all the authority of the Board, except with respect to the limitations as
set forth in the Bylaws.
After the Merger, the Board will have the following committees, in addition
to the Executive Committee, and the following respective initial members: (i)
the Audit Committee (Mr. Conroy and two additional Independent Directors), (ii)
the Finance and Strategic Planning Committee (Messrs. Hofmann and Lange and one
Independent Director) and (iii) the Compensation Committee (Dr. Krukemeyer and
two Independent Directors).
MEETINGS AND ACTIONS OF COMMITTEES
Meetings and actions of committees permitted by the provisions of the
Articles will be governed by, and held and taken in accordance with each of the
provisions of the Bylaws, with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the Board and its
members; PROVIDED, HOWEVER, that the time of regular meetings of committees may
be determined either by resolution of the Board or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the Board, and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all meetings
of the committee. The Board may adopt rules for the government of any committee
not inconsistent with the provisions of the Bylaws and the Articles.
AGREEMENT REGARDING COMPOSITION OF COMMITTEES
The Shareholder Agreement provides that, for so long as such agreement
remains in effect, each committee of the Board (other than the Audit Committee
and the Compensation Committee) will contain such numbers of Shareholder
Directors or Transferee Directors so that the number of Shareholder Directors or
Transferee Directors, when taken together, on each such committee shall be as
nearly as possible proportional to the total number of Shareholder Directors and
Transferee Directors on the Board. The Shareholder Agreement and Bylaws provide
that the Audit Committee will be comprised solely of Independent Directors and,
for so long as the Paracelsus Shareholder is entitled to nominate any
Shareholder Directors, the Compensation Committee will be comprised of one
non-employee Shareholder Director, one Independent Director and one additional
non-employee director. The parties have agreed to the initial composition of the
Executive Committee as described
63
<PAGE>
under "-- Executive Committee" and the initial composition of the Finance and
Strategic Planning Committee and have waived such composition requirements with
respect to the initial composition of the Finance and Strategic Planning
Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Paracelsus to its
then Chief Executive Officer and its then four other most highly compensated
executive officers (the "Named Executive Officers") during the fiscal years
ended September 30, 1995, 1994 and 1993. It is expected that Messrs. Messenger,
Miller, VanDevender, Patterson and Joyner will serve, respectively, as the
Company's Chief Executive Officer and four other most highly compensated
executive officers following the Merger. See "Management." Information regarding
the compensation paid by Champion to Messrs. Miller, VanDevender and Patterson
in the fiscal years ended December 31, 1995, 1994 and 1993 is provided in
footnotes to the following tables. Historical information regarding Dr.
Krukemeyer, Harold E. Buck, who served as the Chief Operating Officer of
Paracelsus until his retirement in April 1995, and Mr. Topper is provided
pursuant to the requirements of the Securities and Exchange Commission (the
"Commission").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS
ANNUAL COMPENSATION ------------- PAYOUTS
------------------------------------------------- SECURITIES ---------
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY (1) BONUS (2) COMPENSATION OPTIONS (3)(4) PAYOUTS COMPENSATION(5)(6)
POSITION YEAR ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Manfred George 1995 916,663 900,000 -- -- -- --
Krukemeyer, 1994 333,332 810,000 -- -- -- --
Chairman of the 1993 -- -- -- -- -- --
Board
R.J. Messenger 1995 686,433 3,970,041 88,370(7) -- 895,134 10,860
President, Chief 1994 588,726 518,218 94,684(7) -- 457,246 7,288
Executive Officer 1993 585,717 471,107 59,550(7) -- 407,140 6,913
and Secretary
Harold E. Buck 1995 392,221 -- -- -- 1,511,014 22,890
Chief Operating 1994 280,316 240,000 -- -- 18,704 13,933
Officer (8) 1993 255,000 212,000 -- -- 16,654 11,330
David R. Topper 1995 217,630 181,360 -- -- 486,074 7,466
Senior Vice 1994 212,831 172,696 -- -- 206,579 5,722
President, 1993 216,106 164,160 -- -- 351,229 5,361
Development
Robert C. Joyner 1995 200,810 171,360 -- -- 142,240 7,332
Vice President and 1994 191,111 163,200 -- -- 91,683 6,386
General Counsel 1993 190,806 155,520 -- -- 7,286 5,905
</TABLE>
- ------------------------------
(1) For the fiscal years ended December 31, 1995, 1994 and 1993, Champion paid a
salary to Mr. Miller of $437,500, $295,000 and $234,167, respectively; to
Mr. VanDevender, of $295,000, $235,417 and $181,667, respectively; and to
Mr. Patterson, of $200,810, $191,111 and $190,806, respectively.
(2) For the fiscal year ended December 31, 1995, Champion paid bonuses to Mr.
Miller and Mr. Patterson of $225,000 and $150,000, respectively. For the
fiscal years ended December 31, 1995 and 1993, Champion paid bonuses to Mr.
VanDevender of $162,500 and $100,000, respectively.
(3) For the fiscal year ended December 31, 1994, Champion awarded to Messrs.
Miller, VanDevender and Patterson options to purchase 13,876, 128,000 and
150,690 shares of Champion Common Stock, respectively.
(4) Messrs. Miller, VanDevender and Patterson held, as of June 27, 1996,
unexercised options representing the right to purchase 211,876, 350,000 and
270,690 shares of Champion Common Stock, respectively. As of such date, such
options were exercisable as to 207,250, 307,333 and 220,460 shares,
respectively, for an aggregate value of $1,582,594, $1,742,249 and $933,363,
respectively, based upon a closing stock price of $10.875 per share on June
21, 1996. As of such date, such options
64
<PAGE>
were unexercisable as to 4,626, 42,667 and 50,230 shares, respectively, for
an aggregate value of $8,674, $80,001 and $94,181, respectively, based upon
a closing stock price of $10.875 per share on June 21, 1996. None of such
options were granted or exercised in 1995.
(5) For the fiscal year ended September 30, 1995, represents matching
contributions by Paracelsus under its Employee Retirement Savings (401(k))
Plan and term life insurance premiums paid by Paracelsus.
(6) For the fiscal years ended December 31, 1995 and 1994, Champion paid other
compensation to Mr. Patterson of $2,310 and $2,250, respectively,
representing in each case matching contributions under its Marathon 401(k)
Plan. For the fiscal year ended December 31, 1993, Champion paid other
compensation of $75,782 to Mr. Patterson as reimbursement of relocation
expenses.
(7) Represents perquisites and personal benefits, including, among other things,
club dues in the amounts of $20,199, $43,767 and $31,449, respectively, in
1995, 1994 and 1993, and automobile-related expenses of $35,408 in 1995.
(8) Retired in April 1995.
The following table sets forth grants of phantom stock appreciation rights
("PSARs") in the fiscal year ended September 30, 1995 to the Named Executive
Officers under the Paracelsus Healthcare Corporation Phantom Equity Long-Term
Incentive Plan (the "Phantom Equity Plan").
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE BASED PLANS
NUMBER OF ----------------------------------------
NAME PSARS (1) PERIOD UNTIL PAYOUT THRESHOLD (2) TARGET (3) MAXIMUM (4)
<S> <C> <C> <C> <C> <C>
Dr. Manfred George
Krukemeyer.................. -- -- -- -- --
R. J. Messenger.............. 500 10/1/92 - 9/30/96 $ 286,500 -- $ 1,536,667
Harold E. Buck............... 250 10/1/92 - 9/30/96 143,250 -- 768,333
David R. Topper.............. 250 10/1/92 - 9/30/96 143,250 -- 768,333
Robert C. Joyner............. 100 10/1/92 - 9/30/96 57,300 -- 307,349
</TABLE>
- ------------------------------
(1) Under the Phantom Equity Plan, which is to be terminated in connection with
the Merger, each participant was eligible to be awarded a certain number of
PSARs effective as of the beginning of each fiscal year. The dollar value of
each PSAR was determinable based on the Company's performance over a period
of four fiscal years, beginning on the effective date of such PSAR award (a
"Cycle"). At the end of a Cycle, if the participant had remained in service
with Paracelsus throughout the Cycle, that participant's PSARs would vest
and could be exchanged for an amount equal to the increase in the actual
book value of the Company, if any, during that Cycle divided by 100,000. At
the end of each Cycle, the Board could award additional PSARs if certain
growth and income targets established at the beginning of the Cycle had been
achieved. Such additional PSARs would be awarded effective as of the
beginning of such Cycle. No more than 5,000 PSARs could be granted with
respect to any particular Cycle. Upon consummation of the Merger, the
Phantom Equity Plan will be terminated. In exchange for cancellation of all
awards under the Phantom Equity Plan, participants will receive a lump sum
in cash plus immediately exercisable Options with an exercise price equal to
$0.01 per share. For information regarding the number of Options to be
granted to the Named Executive Officers in connection with the cancellation
of awards under the Phantom Equity Plan, see "-- 1996 Stock Incentive Plan."
In addition, cash payments in the aggregate amount of $10.5 million will be
made to all participants in the Phantom Equity Plan, including the Named
Executive Officers, based on the value of their terminated PSARs and/or
PSUs.
(2) The threshold amounts shown are calculated based on an assumed annual net
income growth rate of 0%. If the actual annual net income growth rate were
negative the threshold amount payable under the Phantom Equity Plan could
reach zero.
(3) The Phantom Equity Plan does not contemplate specific performance targets.
If the percentage increase in annual net income for fiscal year 1995 were
the same as that achieved in fiscal year 1994, the amounts payable would
equal the amounts shown under the maximum payout column.
(4) The maximum amounts shown are calculated based on an assumed annual net
income growth rate of 20%, the annual net income growth rate at which the
maximum number of PSARs become available to all participants under the
Phantom Equity Plan. The Phantom Equity Plan does not impose any limit on
the value of a PSAR, which would continue to increase with further increases
in the annual net income growth rate.
65
<PAGE>
1996 STOCK INCENTIVE PLAN
The Company has adopted the Paracelsus Healthcare Corporation 1996 Stock
Incentive Plan (the "1996 Stock Incentive Plan"), which will be administered by
the Compensation Committee. All officers (including officers who are also
directors), employees, consultants and advisors of the Company are eligible for
discretionary stock-based incentive awards under the 1996 Stock Incentive Plan,
including incentive stock options, non-qualified stock options, restricted
stock, performance shares, stock appreciation rights ("SARs") and deferred
stock. The 1996 Stock Incentive Plan authorizes the Compensation Committee to
select eligible persons to receive awards and to determine certain terms and
conditions of such awards, including the vesting schedule and exercise price of
each award, and whether the vesting of such award will accelerate upon the
occurrence of a change in control of the Company. Under the 1996 Stock Incentive
Plan, non-qualified options may be granted with an option exercise price that is
less than the then current market value of such stock. Under the 1996 Stock
Incentive Plan, stock options, restricted stock, performance shares or SARs
covering no more than 80% of the shares reserved for issuance under the 1996
Stock Incentive Plan may be granted to any participant in any one year. A total
of 8,749,933 shares of Common Stock have been reserved for issuance under the
1996 Stock Incentive Plan.
The 1996 Stock Incentive Plan may be amended, suspended or terminated at any
time. However, the maximum number of shares that may be sold or issued under the
1996 Stock Incentive Plan may not be increased, nor may the class of persons
eligible to participate in the 1996 Stock Incentive Plan be altered, without the
approval of Paracelsus' shareholders; PROVIDED, HOWEVER, that adjustments to the
number of shares subject to the 1996 Stock Incentive Plan and to individual
awards thereunder and/or to the exercise price of awards previously granted are
permitted without shareholder approval upon the occurrence of certain events
affecting the capital structure of the Company. With respect to any other
amendments to the 1996 Stock Incentive Plan, the Board may, in its discretion,
determine that such amendment will become effective only upon approval by the
shareholders of the Company if the Board determines that such shareholder
approval may be advisable, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under Federal or state securities laws, Federal
or state tax laws or any other laws or for the purpose of satisfying applicable
stock exchange listing requirements.
In connection with the termination of PSARs and/or preferred stock units
("PSUs") previously granted under the Phantom Equity Plan, the Company has
granted options under the 1996 Stock Incentive Plan to the Named Executive
Officers. In addition, pursuant to their respective Employment Agreements (as
defined below), the Company has granted additional options under the 1996 Stock
Incentive Plan to Messrs. Messenger and Joyner, as described in the table below.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING OPTIONS EXERCISE OR BASE
GRANTED (#)(1) PRICE ($/SH)
------------------- -----------------
<S> <C> <C>
R.J. Messenger 513,000(2) 0.01
487,000(3) 0.01
1,000,000(4) 12.00
Robert C. Joyner 160,933(2) 0.01
</TABLE>
- ------------------------
(1) Pursuant to their respective Employment Agreements, the Company has granted
to Messrs. Miller, VanDevender and Patterson under the 1996 Stock Incentive
Plan Value Options (as defined below) representing the right to purchase
336,000, 180,000 and 180,000 of Paracelsus Common Stock, respectively, and
Market Options (as defined below) representing the right to purchase
1,000,000, 540,000 and 240,000 shares of Common Stock, respectively.
(2) Indicates options granted in exchange for cancellation of PSARs and/or PSUs
under the Phantom Equity Plan. Options are vested and exercisable
immediately upon consummation of the Merger and have a term of ten years
from the date of grant.
66
<PAGE>
(3) Options are vested and exercisable immediately upon consummation of the
Merger and have a term of ten years from the date of grant (the "Value
Options").
(4) Options vest and become exercisable in 25% installments on each of the first
four anniversaries of the consummation of the Merger and have a term of ten
years from the date of grant (the "Market Options").
PERFORMANCE BONUS PLAN
The Board has adopted the Paracelsus Healthcare Corporation Executive
Officer Performance Bonus Plan (the "Performance Bonus Plan") covering eligible
officers of the Company. The Performance Bonus Plan will be administered by the
Compensation Committee, which each year will select the officers of the Company
who will be eligible to receive awards under the Performance Bonus Plan. Upon
achievement by the Company of certain targeted operating results or other
performance goals, such as operating income, pre-tax income or earnings per
share, the Company will pay performance bonuses, the aggregate amounts of which
will be determined annually based upon an objective formula. The actual amount
of such bonuses may be proportionately greater or less than the target bonus
established for each participant, to the same extent to which the Company's
actual performance exceeds or falls short of the targeted goals. The Employment
Agreements provide for certain minimum bonuses upon the achievement of targeted
performance criteria under the Performance Bonus Plan. See "-- Employment
Contracts and Termination of Employment Agreements."
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The matrix below sets forth benefits payable to the Named Executive Officers
under the Paracelsus Healthcare Corporation Supplemental Executive Retirement
Plan (the "SERP"). Amounts shown represent the annual benefits to which the
Named Executive Officers would be entitled under the SERP (assuming payment in
the form of a single life annuity), but do not reflect an offset with respect to
certain Social Security benefits.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL -------------------------------------
COMPENSATION 5 10 15
<S> <C> <C> <C>
$ 100,000 $ 18,350 $ 36,700 $ 55,050
125,000 22,938 45,875 68,813
150,000 27,525 55,050 82,575
175,000 32,113 64,225 96,338
200,000 36,700 73,400 110,100
225,000 41,228 85,575 123,863
250,000 45,875 91,750 137,625
300,000 55,050 110,100 165,150
400,000 73,400 146,800 220,200
500,000 91,750 183,500 275,250
600,000 110,100 220,200 330,300
700,000 128,450 256,900 385,350
800,000 146,800 293,600 440,400
</TABLE>
SERP benefits for the Named Executive Officers are determined, subject to
certain vesting requirements, as (i) the product of (x) years of service with
the Company, (y) 3.67% for officer participants (2.33% for non-officer
participants) and (z) average earnings for the final 36 months of employment,
less (ii) a percentage of the participating officer's Social Security benefits.
SERP benefits for the Named Executive Officers generally accrue and vest ratably
over a 15-year period. However, upon a change in control of the Company, each
Named Executive Officer will immediately become fully vested and entitled to
full benefits under the SERP, regardless of his actual number of years of
service with the Company, in the event of a termination by such person of his
employment or a termination of such person by the Company without cause after
such change in control. Under the SERP, the term "change in control" is defined
to include, among other things, certain offerings of equity securities pursuant
to a registration statement, including the registration statement filed in
67
<PAGE>
connection with the Merger. Thus, consummation of the Merger will constitute a
change in control for the Named Executive Officers. In addition, pursuant to
their Employment Agreements, Messrs. Miller, VanDevender and Patterson will each
receive credit for eligibility, vesting and benefit accrual purposes under the
SERP for their prior service with Champion. Immediately following the Effective
Time of the Merger, Messrs. Messenger, Topper, Joyner, Miller, VanDevender and
Patterson will each have, respectively, 15, 15, 15, 6, 6 and 4 years of credited
service under the SERP. Mr. Buck retired in April 1995 with 11 years of service
and is currently receiving benefits under the SERP. Dr. Krukemeyer does not
participate in the SERP.
COMPENSATION OF DIRECTORS
Following the Merger, it is anticipated that non-employee directors of the
Company will receive an annual fee of $30,000 and a fee of $2,500 for each
meeting of the Board or any committee thereof attended, up to a maximum of
$50,000 per year. Directors of the Company who are also employees of the Company
will not receive any additional compensation for their service as directors. All
directors will be reimbursed for expenses incurred in the performance of their
duties. For information regarding a service agreement pursuant to which Dr.
Krukemeyer will provide consulting services to the Company (not in his capacity
as Chairman of the Board) see "Certain Relationships and Related Transactions --
Services Agreement."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
In connection with the consummation of the Merger, Messrs. Messenger and
Joyner's existing employment agreements with Paracelsus and Messrs. Miller,
VanDevender and Patterson's employment agreements with Champion will be
terminated and replaced with new employment agreements (the "Employment
Agreements") as described below.
Such officers' respective Employment Agreements provide that they will serve
in the following capacities: Mr. Messenger as Chief Executive Officer and, for
so long as he is a Shareholder Director, the Vice Chairman of the Board and the
Chairman of the Executive Committee; Mr. Miller as President and Chief Operating
Officer, a director on the Board and, for so long as he is a director, a member
of the Executive Committee; Mr. VanDevender as Executive Vice President and
Chief Financial Officer, a director on the Board and, for so long as he is a
director, a member of the Executive Committee; Mr. Patterson as Executive Vice
President and President, Healthcare Operations; and Mr. Joyner as Senior Vice
President, Secretary and General Counsel.
Each of the Employment Agreements of Messrs. Messenger, Miller and
VanDevender will have an initial term of five years, and each of the Employment
Agreements of Messrs. Patterson and Joyner will have an initial term of three
years. Each of the Employment Agreements of Messrs. Messenger, Miller and
VanDevender will be renewed automatically upon expiration of its initial term
and any subsequent five-year term unless the Company or any of Messrs.
Messenger, Miller or VanDevender, as applicable, gives 12 months' prior notice
that such agreement will not be renewed. Upon expiration of their initial terms,
each of the Employment Agreements of Messrs. Patterson and Joyner will be
renewed automatically one time only for three and two additional years,
respectively, unless the Company or either of Messrs. Patterson or Joyner, as
applicable, gives 12 months' prior notice that such agreement will not be
renewed.
Under the Employment Agreements, each of such officers will be entitled to
receive a base salary and an annual bonus and will be entitled to participate in
the stock option plans of the Company that are generally available to the
executives of the Company. The initial base salary of each of such officers
under his respective Employment Agreement is as follows: Mr. Messenger:
$750,000; Mr. Miller: $500,000; Mr. VanDevender: $350,000; Mr. Patterson:
$350,000; and Mr. Joyner: $240,000. The maximum bonuses payable upon the
achievement of targeted performance criteria under the Performance Bonus Plan,
expressed as a percentage of base salary, will be as follows: Mr. Messenger:
100%; Mr. Miller: 85%; Mr. VanDevender: 70%; Mr. Patterson: 70%; and Mr. Joyner:
60%. Each of Messrs. Messenger, Miller, VanDevender and Patterson will be
granted Paracelsus Options as described in "-- 1996 Stock Incentive Plan." Each
of Messrs. Miller, VanDevender and Patterson will
68
<PAGE>
also receive credit for eligibility, vesting and benefit accrual purposes under
the SERP with respect to their respective years of prior service with Champion.
See "-- Supplemental Executive Retirement Plan." In addition, Messrs. Miller,
VanDevender and Patterson will receive bonuses in the respective amounts of
$1,200,000, $750,000 and $500,000 in connection with the termination of their
prior employment agreements with Champion.
Each of Messrs. Messenger, Joyner, Miller, VanDevender and Patterson is
generally prohibited from competing with the Company while employed by the
Company. In certain circumstances, each of Messrs. Miller, VanDevender and
Patterson will be prohibited from so competing for two years following
termination during the initial term of his Employment Agreement, and each of
Messrs. Messenger and Joyner will be prohibited from so competing for one year
following termination of his Employment Agreement during the initial term of his
Employment Agreement. All such officers will be prohibited from so competing for
one year following termination during successive terms of his agreement.
Under the Employment Agreements, the employment of Messrs. Messenger, Miller
and VanDevender cannot be terminated by the Company without the prior approval
of two-thirds of the Board. If any of Messrs. Messenger, Miller or VanDevender
is terminated without "Cause" or resigns for "Good Reason" (each as defined in
his Employment Agreement), such officer's outstanding options will immediately
vest and become exercisable and such officer will be entitled to receive a lump
sum payment equal to the greater of (x) his current base salary and annual
target bonus payable over the remaining term of employment or (y) three times
his current base salary plus annual target bonus.
If Mr. Patterson is terminated by the Company without "Cause" or resigns for
"Good Reason" (each as defined in his Employment Agreement), his outstanding
options will immediately vest and become exercisable and he will be entitled to
receive a lump sum payment equal to the greater of (x) his current base salary
and annual target bonus payable over the remainder of his contract term or (y)
2.5 times his current annual salary plus annual target bonus. If Mr. Joyner is
terminated by the Company without "Cause" or resigns for "Good Reason" (each as
defined in his Employment Agreement), his outstanding options will immediately
vest and become exercisable and he will be entitled to receive a lump sum
payment equal to the greater of (x) his current base salary and annual target
bonus payable over the remainder of his contract term or (y) two times his
current annual salary plus annual target bonus.
Upon termination of the employment of any of Messrs. Messenger, Joyner,
Miller, VanDevender or Patterson by the Company without "Cause" or by such
officer for "Good Reason," such officer would be entitled to receive a lump sum
payment equal to the total amount of any excise taxes to which such officer may
become subject under section 4999 of the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Merger, the Company did not have a compensation committee. Dr.
Krukemeyer and Mr. Messenger each participated in deliberations of the Board
concerning executive officer compensation during fiscal 1995. Following the
Merger, the Compensation Committee is expected to consist of Dr. Krukemeyer and
two Independent Directors. See "Certain Relationships and Related Transactions,"
immediately below, for information regarding certain agreements between Dr.
Krukemeyer and one Independent Director.
69
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Described below are certain related agreements to be entered into prior to
or in connection with the Merger. The following descriptions are qualified in
their entirety by reference to the complete text of the relevant agreements,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part and are incorporated by reference herein.
SHAREHOLDER AGREEMENT
The consummation of the Merger is conditioned upon the Paracelsus
Shareholder and Paracelsus entering into the Shareholder Agreement. The
Paracelsus Shareholder, which term is defined under the Shareholder Agreement to
include any wholly owned entity or any entity that wholly owns the Paracelsus
Shareholder, and all Permitted Transferees (as defined in the Shareholder
Agreement) are together referred to in the following discussion and in the
Shareholder Agreement as the "Investor."
LIMITATION ON ACQUISITIONS OF THE COMPANY VOTING SECURITIES
The Shareholder Agreement prohibits, except as described below, an Investor
from acquiring, or agreeing or offering to purchase or otherwise acquiring, or
suffering or permitting any Affiliates or Associates (as defined in the
Shareholder Agreement) of the Investor to so acquire, or agree or offer to
purchase or otherwise acquire, in a transaction or group of related
transactions, any Voting Securities (as defined below) of the Company, such that
the Investor, together with its Affiliates and Associates, after giving effect
to such transaction or transactions, will beneficially own 66 2/3% or more of
the Total Voting Power (as defined below) of the Company.
ACQUISITIONS IN A FAIR PROPOSAL
The Shareholder Agreement will allow an Investor, together with its
Affiliates and Associates, to beneficially own 66 2/3% or more of the Total
Voting Power of the Company pursuant to a Fair Proposal. A "Fair Proposal" is
defined as (i) an Acquisition Proposal (as hereinafter defined) by such Investor
(or such Investor's Affiliates or Associates) that is approved by the unanimous
vote of the Independent Directors or (ii) a transaction to acquire all of the
outstanding shares that complies with all of the procedures described below. An
"Acquisition Proposal" is defined as any BONA FIDE offer or proposal for (a) a
merger or other business combination (other than a Surviving Company Merger) (as
defined herein) involving the Company, (b) the acquisition of any Voting
Securities representing more than 50% of the Total Voting Power after giving
effect to such Acquisition Proposal or (c) the acquisition of all or
substantially all of the assets of the Company. As used herein, a "Surviving
Company Merger" means any merger or other business combination or reorganization
(x) where the transaction has been approved by a unanimous vote of the entire
Board or (y) where the holders of Voting Securities of the Company prior to such
transaction will beneficially own (as determined pursuant to Rule 13d-3 or Rule
13d-5 of the Exchange Act) in the aggregate at least 60% of the surviving
corporation's Total Voting Power immediately upon giving effect to such
transaction.
In order for a transaction to qualify as a Fair Proposal under clause (ii)
of the immediately preceding paragraph, the transaction must comply with all the
following procedures. First, the Investor must make a written request to the
Board expressing the Investor's desire to acquire beneficial ownership of Voting
Securities. Promptly after the Board's receipt of such request, the Independent
Directors, as a group, and the Investor will each designate an investment
banking firm of recognized national standing that does not beneficially own
(excluding securities held on behalf of third parties) a material amount of the
Company' securities (the "Company Appraiser" and the "Investor Appraiser,"
respectively) (the date of designation, the "Initiation Date"), in each case to
determine the fair value per share. Pursuant to the terms of the Shareholder
Agreement, the consideration that constitutes fair value per share is the price
per share (including control premium) that an unrelated third party would pay if
it were to acquire all outstanding shares (including the shares held by the
Investor and its Affiliates and Associates) in an arm's-length transaction,
assuming that the Company was being sold in a manner reasonably designed to
solicit all possible participants and to permit all interested parties an
opportunity to participate and to achieve the best value reasonably available to
the shareholders at that time, taking into account all then existing
circumstances.
70
<PAGE>
Within 30 days after the Initiation Date, each appraiser will determine its
initial view as to the fair value per share and consult with one another with
respect thereto. By the 45th day after the Initiation Date, the appraisers will
each have determined its final view as to the fair value per share. At that
point, if the difference between the higher and lower views of such appraisers
is not greater than 10% of the higher amount, the price per share (the "Price")
will be the average of those two views. Otherwise, the appraisers will each
designate a third investment banking firm of recognized national standing that
does not beneficially own (excluding securities held on behalf of third parties)
a material amount of the securities of the Company (the "Mutually Designated
Appraiser") to determine such fair value. The Mutually Designated Appraiser
will, no later than the 60th day after the Initiation Date, determine such fair
value, and the Price will be (i) the amount determined by the Mutually
Designated Appraiser, if such amount falls within the range of values that is
greater than one-third and less than two-thirds of the way between the lower and
the higher amount, or (ii) the average of the amount determined by the Mutually
Designated Appraiser and the other appraised amount (lower or higher) that is
closest to such amount, if the amount determined by the Mutually Designated
Appraiser does not fall within that range. If the Price so determined is less
than the lower amount or more than the higher amount, the Price will be the
lower amount or the higher amount, as the case may be. During such 60-day
period, the Company will not, subject to fiduciary duties and applicable law,
enter into or recommend to its shareholders any other Acquisition Proposal.
After the Price is determined the Investor will have 15 days to notify the
Board of a decision to proceed with a Fair Proposal at the Price. If the
Investor decides not to proceed, (i) the Investor will promptly notify the Board
in writing and (ii) the Investor and its Affiliates and Associates will not make
a written request for an Acquisition Proposal to the Board under the Fair
Proposal provisions for a period of six months from the date the Investor
notifies the Board of his intent not to proceed, PROVIDED that the Investor and
its Affiliates and Associates will not at any time be restricted from making a
written request for an Acquisition Proposal to the Board under the Fair Proposal
provisions at a price that is equal to or in excess of the last determined Price
or from exercising their right of first offer, if any, as described below.
If the Investor decides to proceed with a Fair Proposal, the Investor may
pay or cause to be paid the Price in cash or non-cash consideration or any
combination of cash and non-cash consideration that the Investor Appraiser and
the Company Appraiser mutually agree upon within 15 days will have an aggregate
market value, on a fully distributed basis, of not less than the Price. However,
if such appraisers fail to reach agreement, they will within five business days
designate the Mutually Agreed Appraiser to make such determination within ten
days after such designation, whose determination will be final.
If the Investor determines to proceed with a Fair Proposal, the Investor and
the Company will enter into an agreement (containing customary terms and
conditions applicable in a situation in which the acquiror has an ownership
position comparable to the Investor's ownership interest in the Company) and, if
the Fair Proposal is not to be consummated pursuant to a tender or exchange
offer for all of the outstanding shares, will cause a meeting of shareholders of
the Company to be held as soon as practicable to consider and vote thereon.
However, for a period of one year following the Effective Time, no Fair Proposal
may be consummated unless (i) if the Fair Proposal is not a tender or exchange
offer, it is approved by the affirmative vote of the holders of a majority of
the Minority Shares (as defined below) at a meeting duly called therefor, in
addition to any vote required by law, or (ii) if the Fair Proposal is a tender
or exchange offer, a majority of the Minority Shares have been validly tendered
and not withdrawn and are accepted for payment as of the expiration date (as may
be extended) of the offer. If the Fair Proposal is not approved or insufficient
shares of Common Stock are tendered to consummate the Fair Proposal in
accordance with the terms of the Shareholder Agreement described herein within
180 days from the Initiation Date (which period may be extended by a vote of 75%
of the entire Board and a majority of the Independent Directors), the Investor
will terminate the Fair Proposal and will not make a written request for an
Acquisition Proposal to the Board under the Fair Proposal provisions for a
period of one year from the Initiation Date; PROVIDED
71
<PAGE>
that the Investor and its Affiliates and Associates will not at any time be
restricted from exercising their right of first offer, if any, as described
below. The Company has agreed, subject to fiduciary duties and in accordance
with applicable law, to promptly call and to take all other action necessary to
hold the shareholder meeting referred to above.
As used herein, "Minority Shares" means the shares beneficially owned by
Minority Shareholders, and "Minority Shareholders" means the beneficial owners
of Voting Securities of the Company who are not Investors, their Affiliates or
Associates or any member of a group of which an Investor, or its Affiliates or
Associates, are members (in each case for each Investor and its Affiliates and
Associates only for so long as the Shareholder Agreement is in effect with
respect to the respective Investor).
Finally, notwithstanding anything to the contrary in the provisions of the
Shareholder Agreement described above, if the Independent Directors unanimously
determine, in the good faith exercise of their fiduciary duties, based upon the
facts and the circumstances existing at the time of such determination, that it
is in the best interests of the Company and its shareholders that the
Independent Directors approve and recommend, in accordance with the terms
hereof, an Acquisition Proposal at a price lower than the Price, then such
unanimously "Approved Acquisition Proposal" will be a Fair Proposal and the
price at which the Investor may consummate the Acquisition Proposal hereunder
will be the price so determined. At the Effective Time, Paracelsus Shareholder
and Messrs. Miller and VanDevender will enter into an agreement to vote, or
cause to be voted, any shares of the Common Stock beneficially owned by each of
them and their respective affiliates with the Paracelsus Shareholder with
respect to any Approved Acquisition Proposal. See "-- Voting Agreement."
STANDSTILL LIMITATIONS
Under the Shareholder Agreement, an Investor is subject to customary
standstill provisions, whether acting alone or in concert with others, except as
otherwise permitted by the Shareholder Agreement, including without limitation
restrictions on:
(a) soliciting proxies or any Voting Securities of the Company in any
way that is inconsistent with the provisions of the Shareholder Agreement;
(b) becoming a participant in any election contest in opposition to a
slate of director nominees nominated by the Board;
(c) proposing a director nominees proposal with respect to the Company
as described in Rule 14a-8 under the Exchange Act;
(d) seeking election to or to place a representative on the Board or
remove any member of the Board;
(e) taking any action, including providing non-public information to any
other person, with respect to any form of business combination transaction
involving the Company or the acquisition of a substantial portion of the
equity securities or assets of the Company or any subsidiary of the Company,
including a merger, consolidation, tender offer, exchange offer or
liquidation of the Company's assets, or any restructuring, recapitalization
or similar transaction with respect to the Company or any material
subsidiary of the Company; or
(f) forming a group with respect to any Voting Securities of the
Company, other than a group consisting solely of the Investors, the Company
and their respective Affiliates and Associates.
72
<PAGE>
LIMITATIONS ON TRANSFERS OF VOTING SECURITIES
The Shareholder Agreement contains certain customary transfer restrictions
that prohibit an Investor from Transferring, or permitting any Affiliates or
Associates to Transfer (as defined below), in any single transaction or group of
related transactions, any Voting Securities of the Company, except for certain
Transfers, including without limitation the following:
(a) to any person who owns 100% of the Total Voting Power of the
Investor and to any wholly owned subsidiary of the Investor or any such
person; PROVIDED that such transferee must become a party to the Shareholder
Agreement as an Investor and, in the case of a Transfer to a wholly owned
subsidiary, the Transferring Investor guarantees to the Company the
performance of all obligations of such transferee under the Shareholder
Agreement;
(b) to any person such that, after such Transfer, such person, together
with its Affiliates and Associates, will not beneficially own, after giving
effect to such Transfer, Voting Securities of the Company constituting 25%
or more of the Total Voting Power of the Company;
(c) in a BONA FIDE pledge of such Voting Securities to a financial
institution to secure borrowings as permitted by applicable laws, rules and
regulations;
(d) to underwriters in connection with an underwritten public offering
of such Voting Securities on a firm commitment basis registered under the
Securities Act, pursuant to which the sale of such Voting Securities will be
in a manner to effect a broad distribution;
(e) to the Company or a wholly owned subsidiary of the Company;
(f) to a person so long as either immediately after or simultaneously
with the acquisition of such Voting Securities, such person or an Affiliate
of such person makes an Acquisition Proposal to acquire all outstanding
shares at the same price and on equivalent terms offered to the Investor and
its Affiliates and Associates that is made in compliance with the Exchange
Act and the rules and regulations thereunder; PROVIDED that: (i) other than
with respect to the shares to be transferred by the Investor or its
Affiliates or Associates, such person may not purchase any shares in the
Acquisition Proposal and the Acquisition Proposal may not otherwise be
consummated unless it is approved and recommended (and, immediately prior to
consummation of the Acquisition Proposal, continues to be recommended) by a
majority of the Independent Directors; (ii) if the Acquisition Proposal is a
tender or exchange offer that is approved and recommended (and, immediately
prior to consummation of the Acquisition Proposal, continues to be
recommended) by a majority of the Independent Directors, the terms of such
tender will provide that such person will, and such person will be required
to, accept for payment and purchase all shares validly tendered and not
withdrawn upon expiration of the offer if a majority of the Minority Shares
are validly tendered and not withdrawn upon expiration of the offer; and
(iii) such person will agree to be bound as an Investor by all obligations
of the Investor under the Shareholder Agreement and will remain so obligated
notwithstanding the termination of the Shareholder Agreement pursuant to its
terms with respect to any other Investor. In addition to the foregoing, for
a period of one year from the Effective Time, other than with respect to the
shares of Common Stock to be transferred by the Investor or its Affiliates
or Associates, (x) if the Acquisition Proposal is not a tender or exchange
offer, the Acquisition Proposal may not be consummated unless it is approved
by holders of a majority of the Minority Shares at a meeting duly called
therefor, in addition to any vote required by law, or (y) if the Acquisition
Proposal is a tender or exchange offer, such person may not accept for
payment or purchase any shares in connection with the offer unless a
majority of the Minority Shares have been tendered and not withdrawn upon
expiration of the offer; and
(g) to any person in connection with an Approved Acquisition Proposal or
a Surviving Company Merger.
73
<PAGE>
RIGHT OF FIRST OFFER
The Shareholder Agreement provides that after the Effective Time the Company
will not enter into or recommend any Approved Acquisition Proposal without first
notifying the Paracelsus Shareholder in writing (a "Proposal Notice") and
providing the Paracelsus Shareholder (including its Affiliates) the opportunity
to consummate an Acquisition Proposal on terms substantially equivalent to and,
if the Approved Acquisition Proposal is a cash offer, at a cash price or, if the
Approved Acquisition Proposal includes non-cash consideration, at a price (in
either case, the "Offer Price") equal to the sum of the amount of any cash plus
the fair market value of any other consideration offered in such prospective
Approved Acquisition Proposal, as the same may be amended or modified from time
to time (a "Shareholder Proposal"). The Proposal Notice will set forth the
identity of the proposed purchaser and the material terms of the proposed
Approved Acquisition Proposal. If the proposed Approved Acquisition Proposal is
amended or modified, the Company will promptly notify Paracelsus Shareholder in
writing (an "Amended Proposal Notice"). However, if the Paracelsus Shareholder
does not provide an Acceptance Notice (as defined below) after receipt of a
Proposal Notice or any required Amended Proposal Notice, no Amended Proposal
Notice will be required unless the terms of such amendments or modifications are
less favorable in any material respect to the Company than those contained in
the Proposal Notice or any prior Amended Proposal Notices. Any required Amended
Proposal Notice will set forth the identity of the proposed purchaser and the
material terms of the amended or modified proposed Approved Acquisition
Proposal.
The Paracelsus Shareholder has further agreed that within six business days
after receipt of the Proposal Notice or any required Amended Proposal Notice,
the Paracelsus Shareholder will notify (an "Acceptance Notice") the Board in
writing of its good faith intention to enter into negotiations regarding a
Shareholder Proposal. The failure to so notify will constitute notice of the
Paracelsus Shareholder's intention not to pursue a Shareholder Proposal. If the
Paracelsus Shareholder fails to deliver an Acceptance Notice after the Proposal
Notice or, if applicable, the Amended Proposal Notice, (i) the Independent
Directors and the Board will have the right to approve and recommend the
Approved Acquisition Proposal to the Company's shareholders and (ii) the Company
will have the right to enter into such agreements and take such actions in
furtherance of consummating, and to consummate, the Approved Acquisition
Proposal at the Offer Price at any time within one year from the date the
Approved Acquisition Proposal was first made to the Company.
For a period of 15 days from the date of the last Acceptance Notice, the
Paracelsus Shareholder will have the non-exclusive right to negotiate the
Shareholder Proposal in good faith with the Independent Directors of the Board
and their representatives. However, if at the end of that 15-day period, a
majority of the Independent Directors in the good faith exercise of their
fiduciary duties determine that the competing Approved Acquisition Proposal is
superior to the Shareholder Proposal or if the Shareholder Proposal is accepted
and is then terminated in accordance with its terms, (i) the Independent
Directors and the Board will have the right to approve and recommend such
competing Approved Acquisition Proposal to the Company's shareholders and (ii)
the Company will have the right to enter into such agreements and take such
actions in furtherance of consummating, and to consummate, such competing
Approved Acquisition Proposal at the Offer Price at any time within one year
from the date the Acquisition Proposal was first made to the Company.
The Shareholder Agreement also provides that if the consideration offered by
the prospective purchaser or transferee or, if permitted, offered by the
Paracelsus Shareholder, includes non-cash consideration, the Company and the
Paracelsus Shareholder will in good faith seek to agree upon the value of such
non-cash consideration. If the Company and the Paracelsus Shareholder fail to
agree on such value within 15 days following receipt by the Paracelsus
Shareholder of the Proposal Notice, then the Independent Directors and the
Paracelsus Shareholder will appoint a nationally recognized investment banking
firm mutually acceptable to the Independent Directors and the Paracelsus
Shareholder which will resolve the issues in dispute. However, if the
Independent Directors and the Paracelsus Shareholder cannot agree on an
investment banking firm then each will appoint a nationally recognized
investment banking firm which together will within five business days mutually
agree
74
<PAGE>
on another nationally recognized investment banking firm which will make a final
and binding determination within ten days. The value of any securities will be
the fair market value of such securities, and the value of any property other
than securities will be the fair market value of such property. If a
determination under the provisions of the Shareholder Agreement described in
this paragraph is required, any deadline for acceptance described in this
paragraph will be postponed until the third business day after the date of such
determination; and any such determination will be final and binding on the
Company and the Paracelsus Shareholder.
The Shareholder Agreement provides that the foregoing right of first offer
of the Paracelsus Shareholder will not inure to the benefit of any Permitted
Transferees. At the Effective Time, the Paracelsus Shareholder and Messrs.
Miller and VanDevender will enter into an agreement to vote, or cause to be
voted, any shares of Common Stock beneficially owned by each of them and their
respective affiliates to approve any Shareholder Proposal contemplated by the
Shareholder Agreement. See "-- Voting Agreement."
COMPOSITION OF THE BOARD
Pursuant to the Shareholder Agreement, as of the Effective Time, the Board
will consist of nine members, which number may only be increased as described
below. The Board will be divided into three classes with the number of directors
divided as equally as possible among the three classes. At the Paracelsus
Shareholder's request, the Company will include, as nominees for the Board slate
recommended by the Board, up to four directors (the "Shareholder Directors"),
one of whom will be a member of Class I, one of whom will be a member of the
Class II and two of whom will be members of Class III. In addition, three
members of the Board will be Independent Directors and each of such Independent
Directors will be elected to one of the three classes. Independent Directors to
be nominated for election will be nominated by a vote of 75% of the entire Board
or, if the Board cannot so agree, by the unanimous vote of the Independent
Directors then in office. As used herein, an "Independent Director" is a
director of the Board who is not a Shareholder Director, a Transferee Director
or an officer of the Company or any of its subsidiaries; PROVIDED that, only for
the purpose of determining an individual's qualification to vote on a particular
matter, each such individual also must not have (and must not be an Affiliate of
any person who has) any material financial interest with respect to the
particular matter under consideration. In addition, the Shareholder Agreement
provides that two persons who are not Shareholder Directors, Transferee
Directors or Independent Directors may be nominated to the Board.
The Board size may be increased, but to no more than 12 members, upon the
Paracelsus Shareholder, together with its Affiliates and Associates, ceasing to
own certain threshold percentages of the non-diluted aggregate number of votes
that may be cast by the holders of outstanding Voting Securities (the "Total
Voting Power") of the Company. As used herein, "Voting Securities" means all
securities entitled to vote in the ordinary course in the election of directors
or of persons serving in a similar governing capacity, including the voting
rights attached to such securities and rights or options to acquire such
securities. Specifically, the Paracelsus Shareholder agrees to vote, and to use
its best efforts to cause all Shareholder Directors to vote, immediately to
increase the size of the Board if the Paracelsus Shareholder together with its
Affiliates and Associates ceases to beneficially own (i) 35% of the Total Voting
Power, to ten directors, (ii) 32.5% of the Total Voting Power, to 11 directors
and (iii) 30% of the Total Voting Power, to 12 directors. The nominees to
vacancies created as a result of such increase shall be Independent Directors.
As used herein, any reference to beneficial ownership by any person of Voting
Securities has the meaning set forth in the Shareholder Agreement.
Vacancies among the Independent Directors occurring prior to the expiration
of their respective terms of office or created for Independent Directors as a
result of increasing the size of the Board as described above, will be filled by
a vote of 75% of the entire remaining Board or, if the Board cannot so agree, by
the unanimous vote of the Independent Directors then in office. The Shareholder
Agreement
75
<PAGE>
also provides that the Investor will vote, or cause any of its Affiliates or
Associates to vote, any Voting Securities of the Company beneficially owned by
such Investor or its Affiliates or Associates against the removal of any
directors without cause other than Shareholder Directors or Transferee
Directors.
The Shareholder Agreement provides that the Company will nominate and will
use its best efforts to take and cause to be taken all necessary action
(corporate and other) to elect to the Board the individuals required to be
nominated for election as directors in accordance with the provisions of the
Shareholder Agreement described above. In addition, the Shareholder Agreement
provides that the Investor will nominate and use its best efforts, and will use
its best efforts to cause the Shareholder Directors and Transferee Directors, as
the case may be, and the Investor's Affiliates and Associates to use their
respective reasonable efforts, to take and cause to be taken all necessary
action (corporate and other), which efforts will include the voting of all
Voting Securities of the Company beneficially owned by the Investor and the
Investor's Affiliates and Associates and voting, subject to his or her fiduciary
duties, as a Shareholder Director or Transferee Director, to nominate and elect
to the Board the individuals nominated by the Board in accordance with the
provisions of the Shareholder Agreement and the terms of any employment
contracts between the Company and its executive officers so long as such
employment agreements remain in effect.
The quorum required for the transaction of business by the Board will
include at least one Shareholder Director or one Transferee Director and one
director who is an Independent Director, or their respective designees.
The Shareholder Agreement also provides that, for so long as such agreement
remains in effect, each committee of the Board (other than the Audit Committee
and the Compensation Committee) will contain such numbers of Shareholder
Directors or Transferee Directors so that the number of Shareholder Directors
and Transferee Directors, when taken together, on each such committee shall be
as nearly as possible proportional to the total number of Shareholder Directors
and Transferee Directors on the Board. In addition, the Shareholder Agreement
provides that the Audit Committee will be comprised solely of Independent
Directors and, for so long as the Paracelsus Shareholder is entitled to nominate
any Shareholder Directors, the Compensation Committee will be comprised of one
non-employee Shareholder Director, one Independent Director and one additional
non-employee director. The parties have agreed to the initial composition of the
Executive Committee and the Finance and Strategic Planning Committee as
described under "Management" and the Company will waive the proportionality
requirement with respect to the initial members of the Finance and Strategic
Planning Committee.
Under the terms of the Shareholder Agreement, upon the Paracelsus
Shareholder ceasing to beneficially own, together with its Affiliates and
Associates, at least 10% of the Total Voting Power of the Company, the Company
may request that all or any of the Shareholder Directors then on the Board
resign, and upon such request the Paracelsus Shareholder will use its best
efforts to cause such Shareholder Directors, except for Dr. Krukemeyer (who will
resign at the next annual shareholder meeting for election of directors to his
class), to resign immediately and relinquish all rights and privileges as a
member of the Board. In addition, upon the Paracelsus Shareholder ceasing to
beneficially own, together with his Affiliates and Associates, at least 25% of
the Total Voting Power, the Company may request that all or any of the
Shareholder Directors then on the Board resign at the next annual shareholder
meeting for election of directors to their respective classes, and upon such
request the Paracelsus Shareholder shall use its best efforts to cause such
Shareholder Directors to resign at such respective times and thereupon
relinquish all rights and privileges as a member of the Board. Upon termination
of the Shareholder Agreement with respect to any Permitted Transferee, the
Company may request that all of the Transferee Directors then on the Board
resign, and upon such request the Permitted Transferee shall use its best
efforts to cause such Transferee Directors to resign immediately and relinquish
all rights and privileges as a member of the Board.
Under the terms of the Shareholder Agreement, if an Investor consummates any
direct or indirect sale, transfer, assignment, pledge, hypothecation, mortgage
or other disposition, including
76
<PAGE>
those by operation or succession of law, merger or otherwise, or any encumbrance
(other than encumbrances arising by operation of law) (a "Transfer") to a
Permitted Transferee, such Investor will have the right, upon written notice to
the Company, to enter into such agreements and understandings with such
Permitted Transferee so that such Investor relinquishes the right to nominate
directors, and such Permitted Transferee will be entitled to nominate, in place
of the relinquished directors, such number of Transferee Directors for whom the
Investor has in such written notice relinquished the right to nominate. However,
the Shareholder Agreement provides that (i) the number of directors entitled to
be nominated by such Investor under the Shareholder Agreement will be reduced by
the number of directors so relinquished and (ii) in no event will all or any one
or any combination of Investors, together with their respective Affiliates and
Associates, at any time have more than four representatives on the Board,
whether pursuant to the terms of the Shareholder Agreement, any right of
director appointment as set forth in any employment agreement between any such
representative and the Company or otherwise.
AGREEMENT TO SELL VOTING SECURITIES
Subject to the rights of the Paracelsus Shareholder to propose, negotiate
and consummate a Shareholder Proposal in accordance with the provisions of the
Shareholder Agreement, the Paracelsus Shareholder has agreed that the Paracelsus
Shareholder will, and will cause any Affiliates or Associates of the Paracelsus
Shareholder to, sell in, tender into and vote in favor of, as the case may be,
any Approved Acquisition Proposal and any Shareholder Proposal approved by the
Independent Directors in accordance with the provisions of the Shareholder
Agreement all Voting Securities of the Company beneficially owned by the
Paracelsus Shareholder or any Affiliate or Associate of the Paracelsus
Shareholder.
The Shareholder Agreement provides that the foregoing obligation to vote and
sell Voting Securities of the Company will not be binding upon any Permitted
Transferees so long as, if the Paracelsus Shareholder continues to be subject to
the Shareholder Agreement, such Permitted Transferee is not an Affiliate or
Associate of the Paracelsus Shareholder.
VOTING ON CERTAIN MATTERS
The Shareholder Agreement provides that unless such action is recommended by
the Board, an Investor will not, and will cause its Affiliates and Associates
not to, vote any Voting Securities of the Company to amend or repeal the
Articles or the Bylaws or to call or request any special meeting of the
Company's shareholders. In addition, the Investor has agreed to cause all Voting
Securities of the Company beneficially owned by the Investor and all of its
Affiliates and Associates to be represented, in person or by proxy, at all
meetings of holders of Voting Securities of the Company of which the Investor
has actual notice, so that such Voting Securities may be counted for the purpose
of determining the presence of a quorum at such meetings.
TERMINATION
With respect to a particular Investor (but not with respect to any other
person who may at such time be bound by the terms of the Shareholder Agreement),
the Shareholder Agreement shall terminate automatically without any action by
any party upon the earliest to occur of (i) the Investor, together with all of
its Affiliates and Associates, ceasing to beneficially own at least 25% of the
Total Voting Power of the Company (but certain provisions described under "--
Composition of the Board" will not, with respect to the Paracelsus Shareholder,
terminate until the Paracelsus Shareholder, together with all of its Affiliates
and Associates, ceases to beneficially own at least 10% of the Total Voting
Power of the Company) and (ii) the Investor, together with all of its Affiliates
and Associates, beneficially owning at least 90% of the Total Voting Power of
the Company. However, in the event of a termination pursuant to clause (ii)
above, the Investor will remain obligated to and will promptly acquire all of
the remaining Voting Securities of the Company (other than any such Voting
Securities properly exercising any appraisal or dissenters' rights) at a price
equal to or in excess of any price paid by the Investor or Affiliates or
Associates of such Investor for such Voting Securities in the 90-day
77
<PAGE>
period preceding such acquisition. In addition, in the event of a termination
pursuant to clause (i) above, the Investor shall remain subject to certain
provisions of the Shareholder Agreement described above under the caption "--
Composition of the Board."
VOTING AGREEMENT
At or prior to the Effective Time, the Paracelsus Shareholder and Messrs.
Miller and VanDevender will enter into a voting agreement (the "Voting
Agreement") pursuant to which Messrs. Miller and VanDevender will agree to vote,
or cause to be voted, the shares of Common Stock beneficially owned by each of
them and their respective affiliates (a) with the Paracelsus Shareholder to
approve any Shareholder Proposal contemplated by the Shareholder Agreement and
any related actions (including voting against any action or agreement that may
impede, interfere with or adversely affect any such approved Shareholder
Proposal) and (b) as the Paracelsus Shareholder is required to vote with respect
to any such Shareholder Proposal pursuant to the Shareholder Agreement and any
Approved Acquisition Proposal under the Shareholder Agreement. In addition, the
Voting Agreement will provide that Messrs. Miller and VanDevender agree to sell
(including by tender or otherwise) their shares of Common Stock in any
transaction for which they are required to vote under the terms of the Voting
Agreement. The Voting Agreement will also provide that, if any of the amendments
to any of the stock option agreements under the Champion Founders' Stock Option
Plan is not approved at the Special Meeting of Champion stockholders to be held
in connection with the Merger, Messrs. Miller and VanDevender and the Paracelsus
Shareholder will vote for the approval of such amendments if presented at the
next meeting of the Company's shareholders and will use their respective best
efforts to cause such amendments to be presented as shareholder proposals at
such meeting. Each of Messrs. Messenger, Miller and VanDevender has also agreed
that prior to his disposing of any of his Common Stock, he will provide the
Paracelsus Shareholder with the opportunity for three days after the date of
notice of sale to purchase his shares at the market value on the date of such
notice of sale. The Voting Agreement will remain in effect for so long as the
Shareholder Agreement is in effect with respect to the Paracelsus Shareholder.
FIRST REFUSAL AGREEMENT
At or prior to the Effective Time, Dr. Krukemeyer and Messrs. Messenger,
Miller, VanDevender and Patterson will enter into an agreement (the "First
Refusal Agreement") pursuant to which Dr. Krukemeyer will have the right to
purchase shares of Paracelsus Common Stock beneficially owned by each such
person which they may from time to time determine to sell.
PARACELSUS SHAREHOLDER REGISTRATION RIGHTS AGREEMENT
Pursuant to the Merger Agreement, prior to the Effective Time, the Company
and the Paracelsus Shareholder will enter into a registration rights agreement
(the "Paracelsus Shareholder Registration Rights Agreement"). For a ten-year
period the Paracelsus Shareholder will generally have the right to require the
Company, on up to five separate occasions, to register for sale under the
Securities Act shares of Common Stock owned beneficially of record by the
Paracelsus Shareholder (each a "Demand Registration"). Subject to certain
limitations, any Demand Registration may be for a shelf registration under Rule
415 under the Securities Act. The Paracelsus Shareholder Registration Rights
Agreement will also grant the Paracelsus Shareholder customary "piggyback"
registration rights with respect to registrations by the Company or pursuant to
registration rights of other parties. The Company will be required to pay all
costs, fees and expenses incident to its performance of the Paracelsus
Shareholder Registration Rights Agreement.
CHAMPION INVESTORS REGISTRATION RIGHTS AGREEMENTS
Pursuant to the Merger Agreement, as of the Effective Time, certain Champion
Investors who are holders of Champion Capital Stock and holders of warrants
exercisable for shares of Champion Common Stock and are issued shares of Common
Stock in the Merger or may be issued shares of Common Stock upon exercise of
warrants exercisable for shares of Common Stock, will enter into registration
rights agreements (the "Champion Investors Registration Rights Agreements") with
the Company as follows: (i) with the holders of warrants issued in connection
with the Champion Series D
78
<PAGE>
Notes ("Series D Champion Warrants"), an agreement to file one registration
statement at the request of holders of warrants issued in exchange for the
Series D Champion Warrants ("Series D Paracelsus Warrants") exercisable for more
than 50% of the shares of Common Stock issuable upon the exercise of all of such
warrants; (ii) with the holders of the warrants issued in connection with the
Champion Series E Notes ("Series E Champion Warrants"), an agreement to file one
registration statement at the request of holders of warrants issued in exchange
for the Series E Champion Warrants ("Series E Paracelsus Warrants") exercisable
for more than 50% of the shares of Common Stock issuable upon exercise of all of
such warrants; and (iii) with certain Champion Investors who will immediately
following the Effective Time own more than 1% of the outstanding shares of
Common Stock, an agreement (the "Champion Affiliates Registration Rights
Agreement") pursuant to which the Company will agree to file one registration
statement upon the request of such holders holding at least 25% of shares of
Common Stock held by such holders.
Pursuant to the terms of each Champion Investors Registration Rights
Agreement, for a two-year period the Champion Investors, as parties to the
respective Champion Investors Registration Rights Agreement, will generally have
the right to require the Company to register for sale under the Securities Act
of 1933, as amended (the "Securities Act") the shares of Common Stock owned
beneficially or of receipt by the Champion Investors (a "Champion Investors
Demand Registration") PROVIDED, that, in the case of the Champion Affiliates
Registration Rights Agreement, such demand right will expire upon the occurrence
of a public offering by the Company equity securities that results in proceeds
of at least $50.0 million, including without limitation the Equity Offering.
Subject to certain limitations, any Champion Investors Demand Registration may
be for a shelf registration under Rule 415 of the Securities Act. The Champion
Investors party to each such Champion Investors Registration Rights Agreement
will also have in the aggregate one customary piggyback registration right with
respect to registrations by the Company, which "piggyback" right will expire
upon consummation of the Equity Offering, and PARI PASSU "piggyback"
registrations with respect to registrations by the Company and certain selling
shareholders, subject to customary underwriters' cutbacks. The Company will be
required to pay all costs, fees and expenses incident to its performance of each
of the Champion Investors Registration Rights Agreements, other than any
commissions, fees or discounts payable to brokers, dealers or underwriters.
SERVICES AGREEMENT
The consummation of the Merger is conditioned upon the Company entering into
an agreement (the "Services Agreement") with Dr. Krukemeyer, pursuant to which
Dr. Krukemeyer will provide high-level management and strategic advisory
services to the Company following the Merger. The term of the Services Agreement
is ten years, and the Company will pay Dr. Krukemeyer a consulting fee of $1.0
million per year, commencing upon the execution of the Services Agreement. The
Services Agreement may be terminated only by mutual consent of the parties.
INSURANCE AGREEMENT
The consummation of the Merger is conditioned upon the Company and Dr.
Krukemeyer entering into an insurance agreement (the "Insurance Agreement")
pursuant to which the Company will obtain and maintain an insurance policy or
other death benefit with respect to Dr. Krukemeyer's life in an amount
sufficient to provide an aggregate of $1.0 million of annual payments to his
beneficiaries for a term commencing upon his death (if such death occurs prior
to the tenth anniversary of the Effective Time) and extending to the tenth
anniversary of the Effective Time. The Insurance Agreement may be terminated
only by the mutual consent of the parties.
NON-COMPETE AGREEMENT
The consummation of the Merger is conditioned upon Dr. Krukemeyer and the
Company entering into the Non-Compete Agreement.
The Non-Compete Agreement will provide that, from the date of the
Shareholder Agreement to the date of termination of the Shareholder Agreement
with respect to Dr. Krukemeyer or any Affiliates or Associates of Dr.
Krukemeyer, neither Dr. Krukemeyer nor any of his Affiliates or Associates
79
<PAGE>
shall, without the prior written consent of the Company, (i) directly or
indirectly, compete with the Company and its subsidiaries in the Business (as
hereinafter defined) in the Restricted Area (as hereinafter defined) or (ii)
have any interest, directly or indirectly, in any entity engaged in the Business
in the Restricted Area. As used in the Non-Compete Agreement, the term
"Business" is defined as owning, leasing or managing hospitals and ambulatory
care centers, excluding any ancillary hospital service business related to such
business, including, without limitation, dietary, maintenance, security and
other related service businesses, and the term "Restricted Area" is defined as
each and every county or state of the United States of America.
Nothing in the Non-Compete Agreement will prohibit Dr. Krukemeyer from (x)
owning, directly or indirectly, control of a person (the "Subject Company") if
the Subject Company is not primarily engaged, directly or indirectly, in the
Business in the Restricted Area and, within 12 months after such acquisition, he
causes the Subject Company to divest any business or assets of the Subject
Company that engage in the Business in the Restricted Area or (y) owning,
directly or indirectly, not more than 5% of any class of voting securities of a
publicly traded person that is engaged, directly or indirectly, in the Business
in the Restricted Area.
The Non-Compete Agreement will also provide that if the length of time or
geographical area set forth in it is deemed too restrictive by a court, then
such time or area shall be reduced to a time or area that such court may deem
reasonable under the circumstances. The Non-Compete Agreement will be governed
by Texas law.
Under the Non-Compete Agreement, Dr. Krukemeyer will further agree that
following the Effective Time, neither he nor any of his Affiliates or Associates
will, without the prior written consent of the Company, directly or indirectly,
solicit for employment any current key employee or officer of the Company or any
of its subsidiaries; PROVIDED, that the foregoing restriction shall not apply to
employees no longer employed by the Company or its subsidiaries or to employees
who respond to general solicitations of employment not specifically directed
toward such key employees or officers of the Company or its subsidiaries or, in
the case of certain international projects, to Mr. Messenger.
DIVIDEND; DIVIDEND AND NOTE AGREEMENT
The consummation of the Merger is conditioned upon the Company and the
Paracelsus Shareholder entering into the Dividend and Note Agreement. Pursuant
to the Dividend and Note Agreement, the Paracelsus Shareholder will agree to
purchase the Shareholder Subordinated Note from the Company for $7.2 million
promptly after receipt of the Dividend. The Shareholder Subordinated Note will
have a term of ten years, will bear interest at the rate of 6.51% per year and
will provide for payments of principal and accrued interest in an aggregate
annual amount of $1.0 million. Prior to the Effective Time, Paracelsus will
declare the Dividend, which will be paid no later than 60 days after the
Effective Time. See "The Merger and Financing -- Paracelsus Dividend Prior to
Effective Time."
PARTICIPANTS AGREEMENT
Champion has entered into an Agreement in Contemplation of Merger, dated as
of April 12, 1996, with certain holders of Champion securities (the
"Participants Agreement") pursuant to which, among other things: (i) holders of
all of the outstanding Champion Notes have agreed to waive their rights to
require Champion to repurchase the Champion Notes as a result of the "change of
control" (as defined in the Participants Agreement) of Champion occurring as a
result of the Merger; (ii) at such time as the Company completes a "qualified
debt offering" of at least $100 million that also meets certain other
conditions, the Company or Champion will have the right to repay, and such
noteholders will have the right to demand repayment, of their Champion Notes at
specified prices; (iii) holders of warrants attached to certain of such Champion
Notes will agree to the assumption by the Company of Champion's obligations with
respect to such warrants; and (iv) a stockholders' agreement among certain of
Champion's stockholders will be terminated. The Notes Offering will be a
qualified debt offering under the Participants Agreement, and, upon completion
of the Notes Offering,
80
<PAGE>
the Company intends to loan all of the proceeds therefrom to Champion to prepay
all of the outstanding Champion Notes in accordance with the terms thereof, as
amended by the Participants Agreement. See "The Merger and Financing."
OTHER TRANSACTIONS
A sole proprietorship doing business as Paracelsus Klinik, currently owned
by Dr. Krukemeyer, is party to the Amended and Restated Know-how Contract, dated
as of October 1, 1988, as amended, with Paracelsus (the "Know-how Contract").
The Know-how Contract provides for the transfer of specified know-how to the
Company. The Know-how Contract provides for an annual payment of the lesser of
$400,000 or 0.75% of Paracelsus' net operating revenue, as defined in the
Know-how Contract. The Know-how Contract will be terminated upon consummation of
the Merger. The Company's rights under the Know-how Contract will be replaced
with a royalty-free license from Paracelsus Klinik.
In November 1993, the Company lent Dr. Krukemeyer $3.2 million under a
promissory loan agreement. In April 1994, the Company lent Dr. Krukemeyer an
additional $1.8 million under a new $5.0 million promissory loan agreement which
replaced the existing $3.2 million promissory loan agreement. The note balance
and interest are due in annual payments of $1.0 million each May 1, commencing
May 1, 1995 through May 1, 1999 with interest at 8% per annum. The balance
outstanding under the note at May 31, 1996 was $3.0 million. This loan will be
repaid in full contemporaneously with the payment by the Company of the
Dividend.
In August 1994, Dr. Krukemeyer and Internationale Nederlanden (U.S.) Capital
Corporation ("INCC") entered into certain arrangements relating to the extension
of credit by INCC to Dr. Krukemeyer. In connection with such extension of credit
to Dr. Krukemeyer, the Company entered into certain agreements with INCC
agreeing to pay to Dr. Krukemeyer, to the extent permitted by the provisions of
certain senior debt of the Company (i) transfer payments, such as dividends and
know-how payments in an amount equal of the consolidated net income of the
Company on a quarterly basis and (ii) salary and bonus payments equal to a
minimum of $2.0 million per year. The $10.5 million outstanding under this loan
will be repaid in full contemporaneously with the payment by Paracelsus of the
Dividend.
The Paracelsus Shareholder, which is wholly owned by Dr. Krukemeyer, and
certain Champion Investors, including an associated entity of Mr. Conroy, will
have rights to both require and participate in the filing of registration
statements by the Company with the Commission. See "-- Paracelsus Shareholder
Registration Rights Agreement" and "-- Champion Investors Registration Rights
Agreements."
Messrs. Hofmann and Lange serve as directors of the Company and also as
financial consultants under a contract entered into with the Company on July 4,
1983. The consulting services provided involve the coordination of the Company's
policies and strategies and, to a lesser extent, the financial affairs of the
Company. The consultants also advise the Company as to certain matters involving
the healthcare industry. These contracts provide for aggregate annual payments
of $250,000 each and reimbursement for certain out-of-pocket expenses. The
Company believes that the terms of the Company's arrangements with Messrs.
Hofmann and Lange are at least as favorable as could have been obtained from
unaffiliated third parties. These consulting arrangements will be terminated
upon consummation of the Merger.
81
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the number of shares of Common Stock expected
to be beneficially owned upon consummation of the Merger by (i) each person
expected by the Company to beneficially own more than 5% of the shares of Common
Stock, (ii) each of the Company's current directors, (iii) the Named Executive
Officers, (iv) Messrs. Miller, VanDevender and Patterson who, along with Messrs.
Messenger and Joyner, will serve as the Company's Chief Executive Officer and
four other most highly compensated executive officers following the Merger and
(v) all directors and executive officers as a group following the Merger. In
addition, there will be two additional Independent Directors who will be named
to the Board prior to the Effective Time. Unless otherwise indicated, the
shareholders have sole voting and investment power with respect to shares of
Common Stock to be beneficially owned by them after the Effective Time. In
addition, unless otherwise indicated each such person's business address is 515
W. Greens Road, Suite 800, Houston, Tx 77067.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE EQUITY OFFERING AFTER THE EQUITY OFFERING
---------------------------- --------------------------
NUMBER PERCENT (1) NUMBER PERCENT
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Park Hospital GmbH (2)................................ 29,771,742 60.2% 29,771,742 54.5
Am Natruper Holz 69
4500 Osnabrueck
Federal Republic of Germany
Dr. Manfred George Krukemeyer (2)..................... 29,771,742 60.2% 29,771,742 54.5
R.J. Messenger (3).................................... 1,000,000 2.0 1,000,000 1.8
Charles R. Miller (4)................................. 1,075,026 2.1 1,075,026 2.0
James G. VanDevender (5).............................. 630,000 1.3 630,000 1.2
Ronald R. Patterson (6)............................... 461,761 * 461,761 *
Robert C. Joyner (7) ................................. 160,933 * 160,933 *
Michael D. Hofmann (8)................................ 0 0 0 0
Christian A. Lange (8)................................ 0 0 0 0
James A. Conroy (12).................................. 2,077,292 4.2 2,077,292 3.8
Harold E. Buck........................................ -- -- --
David R. Topper....................................... 200,000 * 200,000 *
First Interstate Bank of California, as
Trustee (9)(10)...................................... 2,681,972 5.4 2,681,972 4.9
707 Wilshire Boulevard, W-11-2
Los Angeles, CA 90017
Donaldson, Lufkin & Jenrette, Inc. (10)(11)........... 2,785,453 5.6 2,785,453 5.1
277 Park Avenue
New York, NY 10172
The Equitable Companies Incorporated (10)(11)......... 2,785,453 5.6 2,785,453 5.1
277 Park Avenue
New York, NY 10172
All directors and executive officers as a group (27
persons)............................................. 35,320,067 71.4% 35,320,067 64.6
</TABLE>
- ------------------------
* Less than one percent.
(1) Based on 49,447,167 shares of Common Stock expected to be outstanding
immediately following the consummation of the Merger.
(2) Park Hospital GmbH, a German corporation wholly owned by Dr. Krukemeyer, is
the record owner of such shares.
82
<PAGE>
(3) Shares issuable with respect to stock options exercisable within 60 days.
(4) Includes 543,250 shares issuable with respect to stock options exercisable
within 60 days.
(5) Includes 567,334 shares issuable with respect to stock options exercisable
within 60 days.
(6) Includes 400,460 shares issuable with respect to stock options exercisable
within 60 days.
(7) Shares issuable with respect to stock options exercisable within 60 days.
(8) Director.
(9) Voting power only. Trustee under a ten-year voting trust agreement dated
August 31, 1995, granting it sole voting power of the securities it holds on
behalf of Sprout Growth, Sprout VI, DLJ II, Growth II, and DLJCC (each as
defined below).
(10) DLJ II may be deemed to be the beneficial owner of 37,606 shares held by
First Interstate Bank of California ("First Interstate") as trustee (the
"DLJ II Shares").
DLJ Fund Associates II ("Associates II"), as the general partner of DLJ II,
may be deemed to beneficially own indirectly the DLJ II Shares.
Growth may be deemed to be the beneficial owner of 773,909 shares held by
First Interstate, as trustee (the "Growth Shares").
DLJ Growth Associates ("Associates"), as a general partner of Growth, may be
deemed to beneficially own indirectly the Growth Shares.
Sprout VI may be deemed to be the beneficial owner of 170,109 shares held by
First Interstate, as trustee (the "Sprout VI Shares").
Growth II may be deemed to be the beneficial owner of 635,652 shares by
First Interstate, as trustee (the "Growth II Shares").
DLJCC may be deemed to be the beneficial owner of 64,693 shares held by
First Interstate, as trustee. DLJCC, because of its relationships with DLJ
II, Associates II, Growth and Associates, and as the managing general
partner of each of Sprout VI and Growth II, also may be deemed to be
beneficially own indirectly the DLJ II Shares, the Growth Shares, the Sprout
VI Shares and the Growth II Shares, for an aggregate of 2,681,969 (the
"DLJCC Shares").
DLJ First ESC L.L.C. ("ESC") may be deemed to be the beneficial owner of
1,969 shares.
DLJ LBO Plans Management Corporation ("LBO"), as the manager of ESC, may be
deemed to beneficially own indirectly 1,266 of the ESC shares. DLJ may be
deemed to be the beneficial owner of 101,512 shares.
As the sole stockholder of DLJCC and DLJ, Donaldson, Lufkin & Jenrette, Inc.
("Donaldson, Lufkin") may be deemed to beneficial own indirectly the DLJCC
Shares and the DLJ Shares. In addition, as the sole stockholder of LBO,
Donaldson Lufkin may be deemed to beneficially own indirectly the shares
that are beneficially owned indirectly by LBO. Accordingly, Donaldson,
Lufkin may be deemed to beneficially own indirectly an aggregate of
2,785,450 shares of Common Stock (the "Donaldson, Lufkin Shares"). As the
sole stockholder of Donaldson, Lufkin, The Equitable Companies Incorporated
("Equitable") may be deemed to beneficially own indirectly the Donaldson,
Lufkin Shares. In addition, the following entities, by reason of their
relationship with Equitable or Donaldson, Lufkin may be deemed to
beneficially own indirectly the Donaldson, Lufkin Shares: AXA, FINAXA, AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe
Assurance Mutuelle, Alpha Assurances Vie Mutuellle, Alpha Assurances
I.A.R.D. Mutuelle, Claude Be Bear, as voting trustee, Patrice Garnier, as
Voting Trustee, Henri de Clermont-Tonnerre, as voting trustee.
(11) Not held of record, but may be deemed beneficially owned.
(12) Based on the assumption that prior to the Merger Mr. Conroy is a general
partner of Olympus and disclaims beneficial ownership of Champion's
securities owned by that fund.
(13 Metro Center, One Station Place, Stamford, CT 06902.
83
<PAGE>
(14) Based on the assumption that prior to the Merger Olympus is the beneficial
owner of 2,077,292 shares of Champion Common Stock through its direct
ownership of (i) 1,703,078 shares of Champion Common Stock, (ii) 103,773
shares of Series C Preferred Stock, which may be converted at any time at
the option of the holder into 207,546 shares of Champion Common Stock, and
(iii) 83,334 shares of Champion Series D Preferred Stock, which may be
converted at any time at the option of the holder into 166,668 shares of
Champion Common Stock. OGP Partners, L.P., James A. Conroy, and Robert S.
Morris may be deemed to beneficially own the shares of Champion Common Stock
beneficially owned by Olympus.
84
<PAGE>
SELLING SHAREHOLDERS
Of the 7,000,000 shares of Common Stock to be sold in the Equity Offering,
1,800,000 shares are being offered for the account of the Selling Shareholders.
The shares of Common Stock owned by the Selling Shareholders will be acquired in
the Merger prior to the consummation of the Equity Offering. The following table
sets forth as of June 27, 1996 certain information regarding the number of
shares of Common Stock expected to be beneficially owned following the Merger.
<TABLE>
<CAPTION>
BENEFICIAL OWNERESHIP
BENEFICIAL OWNERSHIP PRIOR AFTER THE EQUITY
TO THE EQUITY OFFERING OFFERING (1)
-------------------------- --------------------------
NUMBER OF NUMBER OF SHARES NUMBER OF
SHARES PERCENT BEING OFFERED(1) SHARES PERCENT
------------- ----------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Virginia Retirement System (2)............... 1,700,040 3.4
Frontenac VI Limited Partnership (3)......... 1,186,466 2.4
RFE Capital Partners, L.P. (4)(5)............ 731,973 1.4
RFE Investment Partners IV, L.P. (4)(5)(6)... 1,186,466 2.4
William Blair Venture Partnership
III (7)(8)(a)(b)............................ 793,644 1.6
Hancock Venture Partners III, L.P. (9)....... 678,455 1.3
Equity-Linked Investors L.P. (10)(a)(b)...... 497,726 1.0
Baker, Fentress & Company (11)............... 535,443 1.0
Equity-Linked II L.P. (12)(a)(b)............. 358,078 0.7
John Hancock Venture Capital Fund Limited
Partnership II (13)(a)(b)................... 355,443 0.7
Frontenac Diversified Limited III
Partnership (14)............................ 338,774 0.7
</TABLE>
- ------------------------
a) Shared voting power.
b) Shared investment power.
(1) Assumes no exercised of the Underwriters' over-allotment option.
(2) Based on the assumption that prior to the Merger Virginia Retirement System
is the beneficial owner of 1,700,040 shares of Champion Common Stock through
its direct ownership of 1,354,128 shares of Champion Common Stock, and (ii)
172,956 shares of Champion Series C Cumulative Convertible Preferred Stock,
which may be converted at any time at the option of the holder into 345,912
shares of Champion Common Stock.
(3) Based on the assumption that prior to the Merger Frontenac Diversified III
Limited Partnership ("Frontenac III") is the beneficial owner of 338,774
shares of Champion Common Stock through its direct ownership of (i) 172,108
shares of Champion Common Stock, and (ii) 83,333 shares of Champion Series D
Cumulative Convertible Preferred Stock, which may be converted at any time
at the option of the holder into 166,666 shares of Champion Common Stock.
Frontenac Company and Frontenac VI Partners, L.P. may be deemed to
beneficially own the shares of Champion Common Stock beneficially owned by
Frontenac III.
(4) Based on the assumption that prior to the Merger RFE Capital Partners, L.P.
("RFE") is the beneficial owner of 237,782 shares of Champion Common Stock
through its direct ownership of 237,782 shares of Champion Common Stock.
Norcon Associates ("Norcon"), RFE Investment Partners IV, L.P., RFE
Associates IV, L.P. ("RFE Associates IV"), RFE Management Corp. ("RFE
Corp."), Robert M. Williams, Howard C. Landis, James A. Parsons, Knute C.
Albrecht, A. Dean Davis and Michael J. Foster may be deemed to beneficially
own the shares of Champion Common Stock beneficially owned by RFE.
85
<PAGE>
(5) Based on the assumption that prior to the Merger RFE Investment IV is the
beneficial owner of 494,191 shares of Champion Common Stock through its
direct ownership of (i) 197,365 shares of Champion Common Stock, and (ii)
148,413 shares of Champion Series D Cumulative Covertible Preferred Stock,
which may be converted at any time at the option of the holder into 296,826
shares of Champion Common Stock. RFE, Norcon, RFE Associates IV, RFE Corp.,
Robert M. Williams, Howard C. Landis, James A. Parsons, Knute C. Albrecht,
Michael J. Foster, and A. Dean Davis may be deemed to beneficially own the
shares of Champion Common Stock beneficially owned by RFE Investment IV.
(6) Based on the assumption that prior to the Merger Mr. Robert M. Williams may
be deemed to be the beneficial owner of 741,973 shares of Champion Common
Stock, including his direct ownership of 10,000 shares of Champion Common
Stock as well as 731,973 shares of Champion Common Stock and 148,413 shares
of Champion Series D Cumulative Convertible Preferred Stock beneficially
owned by RFE Investment IV.
Based on the assumption that prior to the Merger Mr. Michael J. Foster may
be deemed to be the beneficial owner of 733,726 shares of Champion Common
Stock, including his direct ownership of 1,753 shares of Champion Common
Stock as well as 731,973 shares of Champion Common Stock and 148,413 shares
of Champion Series D Cumulative Convertible Preferred Stock beneficially
owned by RFE Investment IV.
Based on the assumption that prior to the Merger Mr. Knute C. Albrecht may
be deemed to be the beneficial owner of 734,953 shares of Champion Common
Stock, including his direct ownership of 2,980 shares of Champion Common
Stock as well as 731,973 shares of Champion Common Stock and 148,413 shares
of Champion Series D Cumulative Convertible Preferred Stock beneficially
owned by RFE Investment IV.
(7) Based on the assumption that prior to the Merger William Blair Venture
Partners III Limited Partnership ("Blair II")is the beneficial owner of
793,644 shares of Champion Common Stock through its direct ownership of (i)
558,246 shares of Champion Common Stock, (ii) 7,380 shares of Champion
Common Stock that may be acquired within 60 days upon the exercise of
Champion Warrants, (iii) 30,675 shares of Champion Series C Cumulative
Convertible Preferred Stock which may be converted at any time at the option
of the holder into 61,350 shares of Champion Common Stock, and (iv) 83,334
shares of Champion Series D Cumulative Convertible Preferred Stock which may
be converted at any time at the option of the holder into 166,668 shares of
Champion Common Stock.
(8) Based on the assumption that prior to the Merger William Blair Venture
Capital Management Company, Samuel Guren and William Blair & Company may be
deemed to beneficially own the shares of Champion Common Stock, Champion
Series C Cumulative Convertible Preferred Stock and Champion Series D
Cumulative Convertible Preferred Stock beneficially owned by Blair III.
(9) Based on the assumption that prior to the Merger Hancock Venture Partners
III, L.P. ("Hancock III") is the beneficial owner of 678,455 shares of
Champion Common Stock through its direct ownership of (i) 414,485 shares of
Champion Common Stock, (ii) 20,874 shares of Champion Series C Cumulative
Convertible Preferred Stock, which may be converted at any time at the
option of the holder into 41,748 shares of Champion Common Stock, and (iii)
111,111 shares of Champion Series D Cumulative Convertible Preferred Stock,
which may be converted at any time at the option of the holder into 222,222
shares of Champion Common Stock of the outstanding shares of Champion Common
Stock. Back Bay Partners V, L.P. ("Back Bay V"), Back Bay Partners, Hancock
Venture Partners Inc., John Hancock Subsidiaries, Inc. ("Hancock Inc."), and
John Hancock Mutual Life Insurance Company ("Hancock Mutual") (all of whose
business address is John Hancock Place, Boston, Massachusetts 02117) may be
deemed to beneficially own the shares of Champion Common Stock beneficially
held by Hancock.
86
<PAGE>
(10) Based on the assumption that prior to the Merger Equity-Linked Investors,
L.P. ("Equity") is the beneficial owner of 497,726 shares of Champion Common
Stock through its direct ownership of (i) 174,622 shares of Champion Common
Stock, and (ii) 161,552 shares of Series D Cumulative Convertible Preferred
Stock which may be converted at any time at the option of the holder into
323,104 shares of Champion Common Stock.
(11) Based on the assumption that prior to the Merger Baker Fentress & Company
is the beneficial owner of 535,443 shares of Champion Common Stock through
its direct ownership of (i) 313,221 shares of Champion Common Stock, and
(ii) 111,111 shares of Champion Series D Cumulative Convertible Preferred
Stock, which may be converted into 222,222 shares of Champion Common Stock.
(12) Based on the assumption that prior to the Merger Equity-Linked Investors
II, L.P. ("Equity II") is the beneficial owner of 358,078 shares of Champion
Common Stock through its direct ownership of (i) 125,626 shares of Champion
Common Stock, and (ii) 116,226 shares of Champion Series D Cumulative
Convertible Preferred Stock which may be converted at any time at the option
of the holder into 232,452 shares of Champion Common Stock.
(13) Based on the assumption that prior to the Merger John Hancock Venture
Capital Fund Limited Partnership II ("Hancock II") is the beneficial owner
of 355,443 shares of Champion Common Stock through its direct ownership of
(i) 133,221 shares, and (ii) 111,111 shares of Champion Series D Cumulative
Convertible Preferred Stock, which may be converted at any time at the
option of the holder into 222,222 shares of Champion Common Stock. Back Bay
Partners L.P. II, Hancock Inc., Hancock Subs., and Hancock Mutual may be
deemed to beneficially own the shares of Champion Common Stock beneficially
held by Hancock II.
(14) Based on the assumption that prior to the Merger Frontenac VI Limited
Partnership ("Frontenac VI") is the beneficial owner of 1,186,466 shares of
Champion Common Stock through its direct ownership of (i) 297,576 shares of
Champion Common Stock, (ii) 55,556 shares of Champion Series C Cumulative
Convertible Preferred Stock, which may be converted at any time at the
option of the holder into 111,112 shares of Champion Common Stock and (iii)
388,889 shares of Champion Series D Cumulative Convertible Preferred Stock,
which may be converted at any time at the option of the holder into 777,778
shares of Champion Common Stock. Frontenac Company may be deemed to
beneficially own the shares of Champion Common Stock beneficially owned by
Frontenac VI.
87
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Merger, the authorized capital stock of the
Company will consist of 150 million shares of Common Stock and 25 million shares
of Preferred Stock. The following summary description of the capital stock of
the Company is qualified in its entirety by reference to the Articles and
Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. As of , 1996, there were
holders of record of Common Stock assuming consummation of the Merger.
COMMON STOCK
Holders of Common Stock are subject to the prior rights of holders of
Preferred Stock which may be issued from time to time in the future. Holders of
Common Stock are entitled to receive such dividends, if any, as may from time to
time be declared by the Board out of funds legally available therefor. Holders
of Common Stock are entitled to one vote per share on all matters on which such
holders are entitled to vote and do not have any cumulative voting rights.
Holders of Common Stock have no preemptive, conversion, redemption or sinking
fund rights. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
the assets of the Company, if any, remaining after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
Preferred Stock. The outstanding shares of Common Stock are fully paid and
nonassessable.
Application will be made to list the Common Stock on the NYSE upon
consummation of the Merger under the symbol " ." The transfer agent and
registrar for the Common Stock will be Chemical Mellon Shareholder Services.
PREFERRED STOCK
The Company will be authorized to issue up to 25 million shares of Preferred
Stock, par value $.01 per share, which may be issued from time to time in one or
more series. The Board will be specifically authorized to establish the number
of shares in any series and to set the designation of any series and the powers,
preferences, and rights and the qualifications, limitations or restrictions on
each series of Preferred Stock. The holders of Preferred Stock will not have any
preemptive rights.
Pursuant to the Merger Agreement, prior to the Effective Time Paracelsus and
Champion will present to the Board the Rights Agreement for approval, subject to
fiduciary duties and applicable law. In connection with any such approval, prior
to the Effective Time the Board would authorize the issuance of up to
shares of Preferred Stock to be designated as "Series A
Participating Preferred Stock" (the "Participating Preferred"). Upon issuance,
each share of Participating Preferred will be entitled to quarterly cash
dividends equal to the greater of $ or 100 times (subject to antidilution
adjustments for stock dividends and stock splits) the aggregate value of all
dividends or other distributions declared on Common Stock (other than
distributions of Common Stock) since the last quarterly dividend payment date.
Once issued, the Participating Preferred will not be redeemable by the Company.
Each share of Participating Preferred will be entitled to 100 votes (subject
to antidilution adjustments) on all matters submitted to a vote of the
shareholders of the Company voting together as one class with Common Stock. In
addition, if at any time dividends in an amount equal to six quarterly dividend
payments shall have accrued and be unpaid, the Board shall be increased by two
directors and holders of the Participating Preferred shall have the right to
elect two members to the Board until dividends on the Participating Preferred
have been declared and paid or set apart for payment. Except as required by
applicable law, holders of Participating Preferred will have no other special
voting rights. Whenever dividends or distributions on the Participating
Preferred are in arrears, the Company will be prohibited from declaring or
paying dividends or distributions on, and the Company and any subsidiary will be
prohibited from redeeming or acquiring for value, any stock ranking junior to
the Participating Preferred as to dividends or upon liquidation. During any such
arrearage, the Company may declare or pay dividends on stock ranking on a parity
with the Participating Preferred
88
<PAGE>
as to dividends or upon liquidation only if declared or paid ratably with the
Participating Preferred. During any such arrearage, the Company and any
subsidiary will be prohibited from redeeming or acquiring for value any such
parity stock or any Participating Preferred, except pursuant to an exchange of
parity stock for stock ranking junior to the Participating Preferred or pursuant
to a purchase offer to the holders of Participating Preferred and holders of
parity stock on terms the Board determines to be fair and equitable.
The Participating Preferred will rank junior to all other series of
Preferred Stock as to the payment of dividends and the distribution of assets,
unless the terms of any such series shall provide otherwise.
Upon any liquidation, dissolution or winding up of the Company, the
Participating Preferred will be entitled to a liquidation preference of $100 per
share plus any accrued but unpaid dividends, subject to the prior rights of any
series of Preferred Stock ranking in liquidation senior to the Participating
Preferred. In the event of any shortfall in the assets available for
distribution, any such liquidating distribution shall be made ratably to the
Participating Preferred and any other series of Preferred Stock ranking on a
parity in proportion to their relative liquidation preferences. Following such
payment, no additional liquidating distributions will be permitted to be made on
the Participating Preferred until each share of Common Stock has received $1.00
(subject to antidilution adjustments). Thereafter, any remaining assets shall be
distributed to each share of Participating Preferred and each share of Common
Stock in the ratio of 100 to 1 (subject to antidilution adjustments).
DESCRIPTION OF RIGHTS
GENERAL
Pursuant to the Merger Agreement, prior to the Effective Time Paracelsus and
Champion will present to the Board the Rights Agreement for approval, subject to
fiduciary duties and applicable law. As long as the Rights (as defined in the
Rights Agreement) are attached to the Common Stock, the Company will
automatically issue one Right with each new share of Common Stock so that all
such shares will have Rights attached.
The Rights will not prevent a takeover of the Company. However, the Rights
may cause substantial dilution to a person or group that acquires beneficial
ownership of 25% or more of the Total Voting Power of the Company unless the
Rights are first redeemed by the Board. Nevertheless, the Rights should not
interfere with a transaction that is in the best interests of the Company and
its shareholders because the Rights can be redeemed on or prior to the close of
business on the Flip-in Date (as herein-after defined), before the consummation
of such transaction, except that a majority of the directors of the Company who
are not Affiliates, Associates, nominees or representatives of an Acquiring
Person (as hereinafter defined) may need to approve the redemption.
RIGHTS DISTRIBUTION
At such time as the Rights Agreement is adopted by the Company Board,
pursuant thereto a dividend (a "Rights Distribution") of one Right for each
outstanding share of the Company Common Stock, including those shares to be
issued in the Merger, held of record at the close of business on the record date
set by the Company Board (the "Rights Record Time"), or issued thereafter and
prior to the Separation Time (as defined below) and thereafter pursuant to
options, warrants and convertible securities outstanding at the Separation Time.
Each Right will entitle its registered holder to purchase from the Company,
after the Separation Time, one one-hundredth of a share of Participating
Preferred Stock for an exercise price to be determined by the Company Board (the
"Exercise Price"). As a result of the Rights Distribution, one Right will be
distributed in respect of each share of the Company Common Stock then
outstanding or thereafter as issued by the Company, including the shares of the
Company Common Stock to be issued to holders of Champion Capital Stock in the
Merger.
89
<PAGE>
EVIDENCE OF RIGHTS
The Rights will be evidenced by the Company Common Stock certificates until
the close of business on the earlier of (either, the "Separation Time") (i) the
tenth business day (or such later date as the Board may from time to time fix by
resolution adopted prior to the Separation Time that would otherwise have
occurred) after the date on which any Person (as defined in the Rights
Agreement) commences a tender or exchange offer which, if consummated, would
result in such Person's becoming an Acquiring Person and (ii) the first date
(the "Flip-in Date") of public announcement by the Company or any Person that
such Person has become an Acquiring Person, other than as a result of a
Flip-over Transaction or Event (as defined below); PROVIDED that if the
foregoing results in the Separation Time being prior to the Rights Record Time,
the Separation Time shall be the Rights Record Time; and PROVIDED, FURTHER, that
if a tender or exchange offer referred to in clause (i) is cancelled, terminated
or otherwise withdrawn prior to the Separation Time without the purchase of any
shares of stock pursuant thereto, such offer shall be deemed never to have been
made. An Acquiring Person is any Person having Beneficial Ownership (as defined
in the Rights Agreement) of 25% or more of the Total Voting Power of the
Company, which term shall not include (i) the Company, any wholly owned
subsidiary of the Company or any employee stock ownership or other employee
benefit plan of the Company, (ii) any Person who is the Beneficial Owner of 25%
or more of the Total Voting Power of the Company as of the date of the Rights
Agreement or who shall become the beneficial owner of 25% or more of the Total
Voting Power of the Company solely as a result of an acquisition of Voting
Securities of the Company by the Company, until such time as such Person
acquires additional Voting Securities of the Company, other than through a
dividend or stock split, (iii) any Person who becomes an Acquiring Person
without any plan or intent to seek or affect control of the Company if such
Person, upon notice by the Company, promptly divests sufficient securities such
that such 25% or greater Beneficial Ownership ceases, (iv) any Person who
Beneficially Owns Voting Securities of the Company consisting solely of (A)
shares acquired pursuant to the grant or exercise of an option granted by the
Company in connection with an agreement to merge with, or acquire, the Company
at a time at which there is no Acquiring Person, (B) shares owned by such Person
and its Affiliates and Associates (as such terms are defined in the Rights
Agreement) at the time of such grant and (C) shares, amounting to less than 1%
of the outstanding Voting Securities of the Company, acquired by Affiliates and
Associates of such Person after the time of such grant or (v) any Person who
shall become the Beneficial Owner of 25% or more of the Total Voting Power of
the Company solely as a result of an acquisition of Voting Securities of the
Company pursuant to the Shareholder Agreement, until such time as such Person
acquires additional Voting Securities of the Company (other than in accordance
with the Shareholder Agreement), other than through a dividend or stock split.
The Rights Agreement will provide that, until the Separation Time, the
Rights will be transferred with and only with the Common Stock. The Common Stock
certificates issued after the Rights Record Time but prior to the Separation
Time shall evidence one Right for each share of the Common Stock represented
thereby. The Rights Agreement will further provide that promptly following the
Separation Time separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of the Common Stock at the
Separation Time.
EXERCISABILITY OF RIGHTS
The Rights will not be exercisable until the business day following the
Separation Time. The Rights will expire on the earliest of (i) the Exchange Time
(as defined below), (ii) the close of business on the expiration date of the
Rights Agreement and (iii) the date on which the Rights are redeemed as
described below (in any such case, the "Expiration Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, are
subject to adjustment from time to time to prevent dilution in certain specified
events.
90
<PAGE>
"FLIP-IN" TRANSACTIONS OR EVENTS
Pursuant to the Rights Agreement, the Company will agree, in the event that
prior to the Expiration Time a Flip-in Date occurs, to take such action as is
necessary to ensure and provide, to the extent permitted by applicable law, that
each Right (other than Rights Beneficially Owned by the Acquiring Person or any
Affiliate or Associate thereof, which Rights shall become void) will constitute
the right to purchase from the Company, upon the exercise thereof in accordance
with the terms of the Rights Agreement, that number of shares of the Common
Stock or the Participating Preferred having an aggregate Market Price (as
defined in the Rights Agreement), on the date of the public announcement of an
Acquiring Person's becoming such (the "Stock Acquisition Date") that gave rise
to the Flip-in Date, equal to twice the Exercise Price for an amount in cash
equal to the then current Exercise Price. Alternatively, the Rights Agreement
will provide that the Board may, at its option, at any time after a Flip-in Date
and prior to the time that an Acquiring Person becomes the Beneficial Owner of
more than 50% of the Total Voting Power of the Company, elect to exchange all
(but not less than all) of the then outstanding Rights (other than Rights
Beneficially Owned by the Acquiring Person or any Affiliate or Associate
thereof, which Rights shall become void) for shares of the Company Common Stock
at an exchange ratio of one share of the Common Stock per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date of the Separation Time (the "Flip Ratio"). Immediately
upon such action by the Board (the "Exchange Time"), the right to exercise the
Rights will terminate and each Right will thereafter represent only the right to
receive a number of shares of the Company Common Stock equal to the Flip Ratio.
The Rights Agreement will provide that whenever the Company may become
obligated to issue shares of the Common Stock upon exercise of or in exchange
for Rights as described in the preceding paragraph, at its option, may
substitute therefor shares of Participating Preferred at a ratio of one
one-hundredth of a share of Participating Preferred for each share of the Common
Stock so issuable.
"FLIP-OVER" TRANSACTIONS OR EVENTS
In the event that prior to the Expiration Time the Company enters into,
consummates or permits to occur a transaction or series of transactions after
the time an Acquiring Person has become such in which, directly or indirectly,
(i) the Company consolidates or merges or participates in a binding share
exchange with any other person if, at the time of the consolidation, merger or
share exchange or at the time the Company enters into an agreement with respect
to such consolidation, merger or share exchange, the Acquiring Person controls
the Board and any term of or arrangement concerning the treatment of shares of
capital stock in such merger, consolidation or share exchange relating to the
Acquiring Person is not identical to the terms and arrangements relating to
other holders of Voting Securities of the Company, (ii) the Company sells or
otherwise transfers (or one or more of its subsidiaries shall sell or otherwise
transfer) assets (A) aggregating more than 50% of the assets (measured by either
book value or fair market value) or (B) generating more than 50% of the
operating income or cash flow of the Company and its subsidiaries (taken as a
whole) to any other person (other than the Company or one or more of its wholly
owned subsidiaries) or to two or more such persons which are affiliated or
otherwise acting in concert, if, at the time of such sale or transfer of assets
or at the time the Company (or any such subsidiary) enters into an agreement
with respect to such sale or transfer, the Acquiring Person controls the Company
Board or (iii) any Acquiring Person (A) sells, purchases, leases, exchanges,
mortgages, pledges, transfers or otherwise acquires or disposes of, to, from, or
with, as the case may be, the Company or any of its subsidiaries, over any
period of 12 consecutive calendar months, assets (x) having an aggregate fair
market value of more than $ or (y) on terms and conditions less favorable
to the Company than the Company would be able to obtain through arm's-length
negotiations with an unaffiliated third party, (B) receives any compensation for
services from the Company or any of its subsidiaries, other than compensation
for full-time employment as a regular employee at rates in accordance with the
Company' (or its subsidiaries') past practices, (C) receives the benefit,
directly or indirectly (except proportionately as a stockholder), over any
period of 12 consecutive calendar months, of any loans, advances, guarantees,
pledges, insurance, reinsurance or other financial assistance or any tax credits
or other tax advantage provided by the
91
<PAGE>
Company or any of its subsidiaries involving an aggregate principal amount in
excess of $ or an aggregate cost or transfer of benefits from the Company
or any of its subsidiaries in excess of $ or, in any case, on terms and
conditions less favorable to the Company than the Company would be able to
obtain through arm's-length negotiations with a third party, or (D) increases by
more than 1% its proportionate share of the outstanding shares of any class of
Voting Securities of the Company or any of its subsidiaries as a result of any
acquisition from the Company (with or without consideration), any
reclassification of securities (including any reverse stock split), or
recapitalization, of the Company, or any merger or consolidation of the Company
with any of its subsidiaries or any other transaction or series of transactions
(whether or not with or into or otherwise involving an Acquiring Person), (a
"Flip-over Transaction or Event"), the Company will take such action as shall be
necessary to ensure, and will not enter into, consummate or permit to occur such
Flip-over Transaction or Event until it will have entered into a supplemental
agreement with the person engaging in such Flip-over Transaction or Event or the
parent corporation thereof (the "Flip-over Entity"), for the benefit of the
holders of the Rights, PROVIDED that upon consummation or occurrence of the
Flip-over Transaction or Event (i) each Right will thereafter constitute the
right to purchase from the Flip-over Entity, upon exercise thereof in accordance
with the terms of the Rights Agreement, that number of shares of common stock of
the Flip-over Entity having an aggregate Market Price on the date of
consummation or occurrence of such Flip-over Transaction or Event equal to twice
the Exercise Price for an amount in cash equal to the then current Exercise
Price and (ii) the Flip-over Entity will thereafter be liable for, and will
assume, by virtue of such Flip-over Transaction or Event and such supplemental
agreement, all the obligations and duties of the Company pursuant to the Rights
Agreement.
For purposes of the foregoing description, the term "Acquiring Person" will
include any Acquiring Person and its Affiliates and Associates counted together
as a single Person.
REDEMPTION OF RIGHTS
The Rights Agreement will also provide that the Company Board may, at its
option, at any time prior to the close of business on the Flip-in Date, redeem
all (but not less than all) of the then outstanding Rights at a price of $.01
per Right (the "Redemption Price"), as provided in the Rights Agreement.
Immediately upon the action of the Company Board electing to redeem the Rights,
without any further action and without any notice, the right to exercise the
Rights will terminate and each Right will thereafter represent only the right to
receive the Redemption Price in cash for each Right so held.
NO SHAREHOLDER RIGHTS
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as shareholders of the Company, including without limitation the
right to vote or to receive dividends.
AMENDMENT
The Rights Agreement will provide that at any time prior to the Separation
Time, the Rights Agreement may be amended in any manner without the approval of
the holders of the Rights, except to amend the Redemption Price and the
Expiration Time.
92
<PAGE>
PRICE RANGE OF CHAMPION COMMON STOCK
No equity securities of the Company have publicly traded prior to the
Effective Time. The Company has made application to list the Common Stock on the
NYSE following the consummation of the Merger under the symbol " ."
The Champion common stock, par value $.01 per share (the "Champion Common
Stock"), is listed on the American Stock Exchange, Inc. (the "AMEX") under the
symbol "CHC." The Champion Preferred Stock is not listed on any securities
exchange or publicly traded. Champion acquired AmeriHealth on December 6, 1994,
through a merger (the "AmeriHealth Merger") recorded as a reverse acquisition
and thereby became a publicly listed company on the AMEX. Prior to such reverse
merger, the Champion Common Stock had no existing trading market. The shares of
AmeriHealth were previously listed on the AMEX and traded under the symbol
"AHH."
For purposes of reporting stock information, AmeriHealth is considered the
predecessor of Champion; accordingly, the following table sets forth the high
and low sales prices for the common stock of AmeriHealth through December 6,
1994, the date of the AmeriHealth Merger, and Champion Common Stock thereafter
on the AMEX, based on published financial sources. The sales prices have been
adjusted to reflect a 5.70358 to 1 reverse stock split effective December 6,
1994. Other than a $0.085 per share distribution to AmeriHealth stockholders in
connection with the AmeriHealth Merger, Champion has never paid any dividend
with respect to the Champion Common Stock and does not intend to declare any
dividend prior to the Effective Time.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1994
First Quarter............................................................ $ 4.63 $ 3.21
Second Quarter........................................................... 5.70 3.21
Third Quarter............................................................ 6.42 3.21
Fourth Quarter........................................................... 10.00 6.42
1995
First Quarter............................................................ 9.13 7.00
Second Quarter........................................................... 8.63 6.25
Third Quarter............................................................ 7.88 6.63
Fourth Quarter........................................................... 7.13 4.75
1996
First Quarter............................................................ 10.50 5.31
Second Quarter...........................................................
Third Quarter (through July 1996)......................................
</TABLE>
93
<PAGE>
SHARES ELIGIBLE FOR FUTURE ISSUANCE AND SALE
Sales of substantial amounts of Common Stock in the open market or the
availability of such shares for sale could adversely affect prevailing market
prices for the Common Stock. See "Risk Factors -- Shares Eligible for Future
Issuance and Sale."
Upon consummation of the Merger, 54,647,167 shares of Common Stock will be
outstanding. In addition, 7,515,740 shares of Common Stock are currently
expected to be reserved for issuance to holders of Options and Warrants,
securities convertible into Common Stock and other rights to acquire shares of
Common Stock. Following the Merger, certain holders of shares of Common Stock
and of Warrants will have certain rights to require the Company to register
Common Stock under the Securities Act under registration rights agreements with
the Company. Upon consummation of the Equity Offering, the shares of Common
Stock covered by these registration rights will include 29,771,742 shares
beneficially owned by the Paracelsus Shareholder, approximately shares
beneficially owned by the Champion Investors and an aggregated of 414,690 shares
issuable upon the exercise of Warrants held by the Champion Investors. In
addition, the Company currently intends to register up to million shares
of Common Stock to be issued in connection with certain employee benefit
programs. The Company, the Selling Shareholders, the Company's executive
officers and directors and certain other shareholders of the Company have agreed
that for a period of days from the date of this Prospectus, they will not,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable for Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock (other than the granting by the Company of
stock options pursuant to the Company's exisiting stock option plans and the
issuing by the Company of shares of Common Stock upon the exercise of an Option
or Warrant or a subscription right outstanding in the date of this Prospectus)
except for the shares of Common Stock offered and sold in connection with the
Equity Offering.
94
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by a
holder that, for United States federal income tax purposes, is not a "United
States person" (a "Non-US Holder"). This discussion is based upon the United
States federal tax law now in effect, which is subject to change, possibly
retroactively. For purposes of this discussion, a "United States person" means a
citizen or resident of the United States; a corporation, partnership, or other
entity created or organized in the United States or under the laws of the United
States or of any political subdivision thereof; or an estate or trust whose
income is includible in gross income for United States federal income tax
purposes regardless of its source. This discussion does not consider any
specific facts or circumstances that may apply to a particular Non-US Holder.
Prospective investors are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding, and disposing of
Common Stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-US Holder will generally be subject to withholding
of United States federal income tax at the rate of 30% unless the dividend is
effectively connected with the conduct of a trade or business within the United
States by the Non-US Holder, in which case the dividend will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax). Non-US Holders should consult any
applicable income tax treaties, which may provide for a lower rate of
withholding or other rules different from those described above. A Non-US Holder
may be required to satisfy certain certification requirements in order to claim
treaty benefits or otherwise claim a reduction of or exemption from withholding
under the foregoing rules.
GAIN ON DISPOSITION
A Non-US Holder will generally not be subject to United States federal
income tax on gain recognized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-US Holder, (ii) in the case of a
Non-US Holder who is a nonresident alien individual and holds the Common Stock
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable year and certain other requirements are met, or (iii) the
Non-US Holder is subject to tax under the United States real property holding
company rules discussed below]. Gain that is effectively connected with the
conduct of a trade or business within the United States by the Non-US Holder
will be subject to the United States federal income tax on net income that
applies to United States persons generally (and, with respect to corporate
holders and under certain circumstances, the branch profits tax) but will not be
subject to withholding. Non-US Holders should consult applicable treaties, which
may provide for different rules.
The Company does not believe that it has been or will be treated as a United
States real property company for United States federal income tax purposes,
although no assurances can be given that the Company will not become a United
States Real Property Holding Company. If the Company were to be treated as a
United States real property holding company, a Non-US Holder who holds, directly
or indirectly, more than 5% of the Common Stock of the Company will be subject
to United States federal income taxation on any gain realized from the sale or
exchange of such stock, unless an exemption is provided under an applicable
treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specifically defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
95
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-US Holder at an address
outside the United States. Payments by a United States office of a broker of the
proceeds of a sale of the Common Stock is subject to both backup withholding at
a rate of 31% and information reporting unless the holder certifies its Non-US
Holder status under penalties of perjury or otherwise establishes an exemption.
Information reporting requirements (but not backup withholding) will also apply
to payments of the proceeds of sales of the Common Stock by foreign offices of
United States brokers, or foreign brokers with certain types of relationships to
the United States, unless the broker has documentary evidence in its records
that the holder is a Non-US Holder and certain other conditions are met, or the
holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-US
Holder's United States federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations. The Internal Revenue Service recently issued
proposed Treasury Regulations concerning the withholding of tax and reporting
for certain amounts paid to non-resident individuals and foreign corporations.
The proposed Treasury Regulations, if adopted in their present form, would be
effective for payments made after December 31, 1997. Prospective investors
should consult their tax advisors concerning the potential adoption of such
proposed Treasury Regulations and the potential effect on their ownership of the
Common Stock.
96
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the U.S. Underwriters named below (the "U.S.
Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and are acting as representatives (the "U.S.
Representatives"), and the international managers named below (the
"International Managers" and, together with the U.S. Underwriters, the
"Underwriters"), for whom DLJ and are acting as representatives
(the "International Representatives"), have severally agreed to purchase
5,200,000 shares of Common Stock from the Company and 1,800,000 shares of Common
Stock from the Selling Shareholders. The number of shares of Common Stock that
each Underwriter has agreed to purchase is set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................
-----------
Total.................................................................................... 5,200,000
-----------
-----------
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................
-----------
Total.................................................................................... 1,800,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than the shares covered by the over-allotment option described below) if any of
such shares are purchased.
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers (who may include the Underwriters) at
such price less a discount not in excess of $ per share, and that the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to any other Underwriters and certain other
dealers. After the shares of Common Stock are released for sale to the public,
the public offering price and other selling terms may be changed by the U.S. and
International Representatives.
The Selling Shareholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
1,050,000 additional shares of Common Stock from the Selling Shareholders at the
initial public offering price, less underwriting discounts and commissions,
solely for the purpose of covering over-allotments, if any, made in connection
with the sale of the shares of Common Stock offered hereby. To the extent that
the U.S. Underwriters exercise such option, each of the U.S. Underwriters will
become obligated, subject to certain conditions, to purchase the same proportion
of such additional shares as the number of shares set forth opposite such U.S.
Underwriter's name in the above table bears to 5,200,000 shares of Common Stock.
97
<PAGE>
Under the terms of the Underwriting Agreement, the Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, the Selling Shareholders, the Company's executive officers and
directors and certain other shareholders of the Company have agreed that for a
period of days from the date of this Prospectus they will not, without the
prior written consent of DLJ, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of or transfer any shares of Common Stock or
securities convertible or exchangeable for Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock (other than the granting by the Company of
stock options pursuant to the Company's existing stock option plans and the
issuing by the Company of shares of Common Stock upon the exercise of an Option
or Warrant or a subscription right outstanding on the date of this Prospectus)
except for the shares of Common Stock offered and sold in connection with the
Equity Offering. See "Shares Eligible for Future Issuance and Sale."
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to which
each U.S. Underwriter has represented and agreed that, with respect to the
shares included in the U.S. Offering and with certain exceptions, (i) it is not
purchasing any Common Stock for the account of anyone other than a U.S. or
Canadian person (as defined below) and (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Common Stock or distribute any
prospectus relating to the Common Stock outside the U.S. or Canada or to anyone
other than a U.S. or Canadian Person, and any dealer to whom it may sell any of
the Common Stock will represent that it is not purchasing any of the Common
Stock for the account of anyone other than a U.S. or Canadian Person and will
agree that it will not offer or resell such Common Stock, directly or
indirectly, outside the U.S. or Canada or to anyone other than a U.S. or
Canadian Person or to any other dealer who does not represent and agree.
Pursuant to the Agreement Between U.S. Underwriters and International Managers,
each International Manager has represented and agreed that, with respect to the
shares included in the International Offering and with certain exceptions, (i)
it is not purchasing any Common Stock for the account of any U.S. or Canadian
Person and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Common Stock or distribute any prospectus relating to the
Common Stock in the U.S. or Canada or to any U.S. or Canadian Person, and any
dealer to whom it may sell any of the Common Stock will represent that it is not
purchasing any of the Common Stock for the account of any U.S. or Canadian
Person and will agree that it will not offer or resell such Common Stock,
directly or indirectly, in the U.S. or Canada or to any U.S. or Canadian Person
or to any other dealer who does not so represent and agree. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions among the U.S. Underwriters and International Managers. As used
herein, "U.S. or Canadian Person" means any resident or national of the U.S. or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under or governed by the laws of the U.S. or Canada or any
political subdivision thereof (other than a branch located outside the U.S. or
Canada of any U.S. or Canadian Person) and includes any U.S. or Canadian branch
of a person who is not otherwise a U.S. or Canadian Person, and "U.S." means the
United States of America, its territories, its possessions and all areas subject
to its jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or sold,
and has agreed not to offer or sell, any Common Stock, directly or indirectly,
in Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of Common Stock in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
Canada or to, or for the benefit of, any
98
<PAGE>
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of Common Stock in Canada will
be made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer is made, and that
such dealer will deliver to any other dealer to whom it sells any of such Common
Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented that (i) it has not offered
or sold and will not offer or sell any shares of Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances that do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 (the "Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain and the Regulations with respect to anything
done by it in relation to the Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in connection with the
issue of the Common Stock to a person who is of a kind described in Article 8 of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2)
Order 1995 of Great Britain or is a person to whom such document may otherwise
lawfully be issued or passed on.
No registration, filing, or other action has been or will be made or taken
in any jurisdiction by the Company, the Selling Shareholders or the
International Managers that would permit an offering to the general public of
the shares offered hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page thereof.
The Company and the Selling Shareholders have been advised by the
Representative that the Underwriters do not intent to confirm sales to any
account over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was determined by negotiations among the
Company, the Selling Shareholders and the U.S. and International
Representatives. Among the principal factors considered in such negotiations
were the history of and the prospects for the industry in which Paracelsus and
Champion compete, the ability of the Company's management, the past and present
operations of Paracelsus and Champion, the historical results of operations of
Paracelsus and Champion, the historical trading prices for Champion Common
Stock, the prospects for future earnings of the Company, the general condition
of the securities markets at the time of the Equity Offering and the recent
market prices of securities of generally comparable companies.
Immediately after giving effect to the Merger, affiliates of DLJ will
beneficially own shares of Common Stock representing 5.1% of the issued and
outstanding Common Stock. In addition, DLJ and its affiliates are parties to the
Participants Agreement and hold in the aggregate approximately $5.2 million
aggregate principal amount of the Champion Series D Notes. DLJ is also acting as
the lead managing underwriter for the Notes Offering. DLJ has acted as
Champion's financial advisor in the Merger and has performed investment banking
and other services for Paracelsus in the past including acting as a lead manager
in the sale of $75.0 million of the Existing Senior Subordinated Notes in
October 1993 and has received usual and customary fees for such services. In
addition, DLJ has performed investment banking and other services for Champion
in the past and has received usual and customary fees for such services.
99
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Robert C. Joyner, Senior Vice President, Secretary and General
Counsel of the Company, and by Skadden, Arps, Slate, Meagher & Flom, Los
Angeles, California. Mr. Joyner owns stock options under the 1996 Stock
Incentive Plan and may receive additional awards under the plan in the future.
The validity of the Common Stock will be passed upon for the Underwriters by
Sullivan & Cromwell, Los Angeles, California. Sullivan & Cromwell also
represented Champion in the Merger.
EXPERTS
The (i) consolidated balance sheet of Champion Healthcare Corporation as of
December 31, 1994
and 1995 and the consolidated statements of operations, stockholders' equity and
cash flows of Champion Healthcare Corporation for each of the three years in the
period ended December 31, 1995; (ii) the balance sheet as of December 31, 1994
and 1995 of Dakota Heartland Healthcare System and the statements of income,
partners' equity, and cash flows of Dakota Heartland Healthcare System for the
year ended December 31, 1995; (iii) the balance sheet as of September 30, 1995
of Jordan Valley Hospital and the statements of income and changes in owner's
equity and cash flows of Jordan Valley Hospital for the period from January 1,
1995 through September 30, 1995; and (iv) the consolidated balance sheets of
Salt Lake Regional Medical Center as of May 31, 1994 and April 13, 1995 and the
consolidated statements of income, equity, and cash flows of Salt Lake Regional
Medical Center for each of the two years in the period ended May 31, 1994 and
the period from June 1, 1994 through April 13, 1995 included in this Prospectus
and the Registration Statement, have been included herein in reliance on the
reports of Coopers & Lybrand L.L.P., independent accountants, given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Paracelsus Healthcare Corporation
as of September 30, 1994 and 1995 and for each of the three years in the period
ended September 30, 1995 and the combined financial statements of Davis Hospital
and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center as of
December 31, 1994 and 1995 and for the years then ended appearing in this
Prospectus and the Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their respective reports thereon
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed under the Securities Act with the Commission the
Registration Statement for the registration of the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Notes, reference is made
to the Registration Statement, including the exhibits thereto, and the financial
statement schedules filed as a part thereof. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document referred to
herein are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit, reference
is made thereto for a complete description thereof, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company and Champion are subject to the informational requirements of
the Exchange Act and, in accordance therewith, file reports, proxy statements
(in the case of Champion only) and other information with the Commission. Such
reports and other information filed with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and at Citicorp Center,
100
<PAGE>
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The shares of Champion Common Stock, are currently listed
on the AMEX, and, prior to consummation of the Merger, such material may also be
inspected at the offices of the AMEX at 86 Trinity Place, New York, New York
10006. After consummation of the Merger the Paracelsus Common Stock will be
listed on the NYSE. Accordingly, such material may also be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
101
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the U.S. Underwriters named below (the "U.S.
Underwriters") and the international managers named below (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters"), for
whom Donaldson, Lufkin & Jenrette Securities Corporation is acting as the
representative (the "Representative"), have severally agreed to purchase
5,200,000 shares of Common Stock from the Company and 1,800,000 shares of Common
Stock from the Selling Shareholders. The number of shares of Common Stock that
each Underwriter has agreed to purchase is set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................
-----------
Total.................................................................................... 5,200,000
-----------
-----------
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................
-----------
Total.................................................................................... 1,800,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than the shares covered by the over-allotment option described below) if any of
such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representative that the Underwriters propose to offer the shares of Common Stock
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
discount not in excess of & per share, and that the Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share on
sales to other dealers. After the Equity Offering, the public offering price and
other selling terms may be changed by the Representative.
The Selling Shareholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
840,000 additional shares of Common Stock from the Selling Shareholders at the
initial public offering price, less underwriting discounts and commissions. The
U.S. Underwriters may exercise such right of purchase solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the shares
of Common Stock offered hereby. To the extent that the U.S. Underwriters
exercise such option, each of the U.S. Underwriters will become obligated,
subject to certain conditions, to purchase the same proportion of such
additional shares as the number of shares set forth opposite such U.S.
Underwriter's name in the above table bears to 5,200,000 shares of Common Stock.
Under the terms of the Underwriting Agreement, the Company and the Selling
Shareholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, the Selling Shareholders, the Company's executive officers and
directors and certain other shareholders of the Company have agreed that they
will not, without the prior written consent of the Representative, for a period
of days from the date of this Prospectus, offer, sell,
<PAGE>
contract to sell, grant any option to purchase or otherwise dispose of or
transfer any shares of Common Stock or securities convertible or exchangeable
for Common Stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any such Common Stock
(other than the granting by the Company of stock options pursuant to the
Company's existing stock option plans and the issuing by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date of this Prospectus) except for the shares of
Common Stock offered and sold in connection with the Equity Offering.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to which
each U.S. Underwriter has represented and agreed that, with respect to the
shares included in the U.S. Offering and with certain exceptions, (i) it is not
purchasing any Common Stock for the account of anyone other than a U.S. or
Canadian person (as defined below) and (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Common Stock or distribute any
prospectus relating to the Common Stock outside the U.S. or Canada or to anyone
other than a U.S. or Canadian Person, and any dealer to whom it may sell any of
the Common Stock will represent that it is not purchasing any of the Common
Stock for the account of anyone other than a U.S. or Canadian Person and will
agree that it will not offer or resell such Common Stock, directly or
indirectly, outside the U.S. or Canada or to anyone other than a U.S. or
Canadian Person or to any other dealer who does not represent and agree.
Pursuant to the Agreement Between U.S. Underwriters and International Managers,
each International Manager has represented and agreed that, with respect to the
shares included in the International Offering and with certain exceptions, (1)
it is not purchasing any Common Stock for the account of any U.S. or Canadian
Person and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Common Stock or distribute any prospectus relating to the
Common Stock in the U.S. or Canada or to any U.S. or Canadian Person, and any
dealer to whom it may sell any of the Common Stock will represent that it is not
purchasing any of the Common Stock for the account of any U.S. or Canadian
Person and will agree that it will not offer or resell such Common Stock,
directly or indirectly, in the U.S. or Canada or to any U.S. or Canadian Person
or to any other dealer who does not so represent and agree. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions among the U.S. Underwriters and International Managers. As used
herein, 'U.S. or Canadian Person' means any resident or national of the U.S. or
Canada, or any corporation, pension, profit-sharing or other trust, or other
entity organized under or governed by the laws of the U.S. or Canada or any
political subdivision thereof (other than a branch located outside the U.S. or
Canada of any U.S. or Canadian Person) and includes any U.S. or Canadian branch
of a person who is not otherwise a U.S. or Canadian Person, and 'U.S.' means the
United States of America, its territories, its possessions and all areas subject
to its jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or sold,
and has agreed not to offer or sell, any Common Stock, directly or indirectly,
in Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of Common Stock in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
Canada or to, or for the benefit of, any resident of Canada in contravention of
the securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province or territory of Canada in
which such offer is made, and that such dealer will deliver to any other dealer
to whom it sells any of such Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented that (i) it has not offered
or sold and will not offer or sell any shares of Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for
<PAGE>
the purposes of their businesses or otherwise in circumstances that do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 (the 'Regulations'); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the Common Stock in, from, or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the Common Stock to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements) (No. 2)
(Exemptions) Order 1995 or is a person to whom such document may otherwise
lawfully be issued or passed on.
No registration, filing, or other action has been or will be made or taken
in any jurisdiction by the Company, the Selling Shareholders or the
International Managers that would permit an offering to the general public of
the shares offered hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page thereof.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the International
Manager of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price and
currency of settlement of any shares so sold shall be the public offering price
set forth on the cover page of this Prospectus, in U.S. dollars, less an amount
not greater than the per share amount of the concession to the dealers set forth
above.
The Company and the Selling Shareholders have been advised by the
Representative that the Underwriters do not intent to confirm sales to any
account over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was determined by negotiations amount the
Company, the Selling Shareholders and the Representative. Among the principal
factors considered in such negotiations were the history of and the prospects
for the industry in which Paracelsus and Champion compete, the ability of the
Company's management, the past and present operations of Paracelsus and
Champion, the historical results of operations of Paracelsus and Champion, the
historical trading prices for Champion Common Stock, the prospects for future
earnings of the Company, the general condition of the securities markets at the
time of the Equity Offering and the recent market prices of securities of
generally comparable companies.
Immediately after giving effect to the Merger, affiliates of DLJ will
beneficially own shares of Common Stock representing % of the issued and
outstanding Common Stock. In addition, DLJ and its affiliates are parties to the
Participants Agreement and hold in the aggregate approximately $5.2 million
aggregate principal amount of the Champion Series D Notes. DLJ is also acting as
the lead managing underwriter for the Notes Offering. DLJ has acted as
Champion's financial advisor in the Merger and has performed investment banking
and other services for Paracelsus in the past including acting as a lead manager
in the sale of $75.0 million of the Existing Senior Subordinated Notes in
October 1993 and has received usual and customary fees for such services. In
addition, DLJ has performed investment banking and other services for Champion
in the past and has received usual and customary fees for such services.
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Paracelsus Financial Statements as of and for the years ended September 30, 1993,
1994 and 1995
Report of Ernst & Young LLP Independent Auditors.................................. F-4
Consolidated Balance Sheets -- September 30, 1994 and 1995........................ F-5
Consolidated Statements of Income -- Years ended September 30, 1993, 1994 and
1995............................................................................. F-6
Consolidated Statements of Shareholder's Equity -- Years ended September 30, 1993,
1994 and 1995.................................................................... F-7
Consolidated Statements of Cash Flows -- Years ended September 30, 1993, 1994 and
1995............................................................................. F-8
Notes to Consolidated Financial Statements........................................ F-10
Paracelsus Financial Statements as of and for the Six Months ended March 31, 1995
and 1996 (unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1995 and March 31, 1996.... F-21
Consolidated Statements of Income (unaudited) -- Six Months ended March 31, 1995
and 1996......................................................................... F-22
Consolidated Statements of Cash Flows (unaudited) -- Six Months ended March 31,
1995 and 1996.................................................................... F-23
Notes to Unaudited Condensed Consolidated Financial Statements.................... F-24
Davis Hospital and Medical Center, Pioneer Valley Hospital, and Santa Rosa Medical
Center Combined Financial Statements as of and for the years ended December 31,
1994 and 1995
Report of Ernst & Young LLP Independent Auditors.................................. F-26
Combined Balance Sheets -- December 31, 1994 and 1995............................. F-27
Combined Statements of Income and Changes in Retained Earnings -- Years ended
December 31, 1994 and 1995....................................................... F-28
Combined Statements of Cash Flows -- Years ended December 31, 1994 and 1995....... F-29
Notes to Combined Financial Statements............................................ F-30
Davis Hospital and Medical Center, Pioneer Valley Hospital, and Santa Rosa Medical
Center Combined Financial Statements for the Three Months ended March 31, 1995 and
1996 (unaudited)
Unaudited Combined Balance Sheet -- March 31, 1996................................ F-34
Unaudited Combined Statements of Income and Changes in Retained Earnings -- Three
Months ended March 31, 1995 and 1996............................................. F-35
Unaudited Combined Statements of Cash Flows -- Three Months ended March 31, 1995
and 1996......................................................................... F-36
Champion Financial Statements as of and for the years ended December 31, 1993, 1994
and 1995
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-37
Consolidated Balance Sheet -- December 31, 1994 and 1995.......................... F-38
Consolidated Statement of Operations -- Years Ended December 31, 1993, 1994 and
1995............................................................................. F-39
Consolidated Statement of Stockholders' Equity -- Years Ended December 31, 1993,
1994 and 1995.................................................................... F-40
Consolidated Statement of Cash Flows -- Years Ended December 31, 1993, 1994 and
1995............................................................................. F-41
Notes to Consolidated Financial Statements........................................ F-42
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Dakota Heartland Health System
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-61
Balance Sheet -- December 31, 1994 and 1995....................................... F-62
Statement of Income -- Year Ended December 31, 1995............................... F-63
Statement of Partners' Equity -- Years Ended December 31, 1994 and 1995........... F-64
Statement of Cash Flows -- Year Ended December 31, 1995........................... F-65
Notes to Financial Statements..................................................... F-66
Jordan Valley Hospital
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-69
Balance Sheet -- September 30, 1995............................................... F-70
Statement of Income and Changes in Owners' Equity -- For the Period from January
1, 1995 through September 30, 1995............................................... F-71
Statement of Cash Flows -- For the Period from January 1, 1995 through September
30, 1995......................................................................... F-72
Notes to Financial Statements..................................................... F-73
Salt Lake Regional Medical Center
Report of Coopers & Lybrand L.L.P. Independent Accountants........................ F-77
Consolidated Balance Sheets -- May 31, 1994 and April 13, 1995.................... F-78
Consolidated Statements of Income -- Years Ended May 31, 1993 and 1994 and for the
Period from June 1, 1994 through April 13, 1995.................................. F-79
Consolidated Statements of Equity -- Years Ended May 31, 1993 and 1994 and for the
Period from June 1, 1994 through April 13, 1995.................................. F-80
Consolidated Statements of Cash Flows -- Years Ended May 31, 1993 and 1994 and for
the Period from June 1, 1994 through April 13, 1995.............................. F-81
Notes to Consolidated Financial Statements........................................ F-82
Champion Financial Statements as of and for the Three Months ended March 31, 1995
and 1996 (Unaudited)
Condensed Consolidated Balance Sheet.............................................. F-89
Condensed Consolidated Statement of Operations.................................... F-90
Condensed Consolidated Statement of Cash Flows.................................... F-91
Notes to Condensed Consolidated Financial Statements.............................. F-92
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial Statements
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Fiscal Year Ended September 30, 1995................................... PF-2
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Six Months Ended March 31, 1995........................................ PF-3
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Statement of
Income -- Six Months Ended March 31, 1996........................................ PF-4
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Balance Sheet --
March 31, 1996................................................................... PF-5
Notes to Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial
Statements....................................................................... PF-6
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Fiscal
Year Ended September 30, 1995.................................................... PF-14
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six
Months Ended March 31, 1995...................................................... PF-15
Paracelsus Unaudited Pro Forma Condensed Combining Statement of Income -- Six
Months Ended March 31, 1996...................................................... PF-16
Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet -- March 31,
1996............................................................................. PF-17
Notes to Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements.. PF-18
Champion Unaudited Pro Forma Condensed Combining Statement of Income and Unaudited
Historical Condensed Balance Sheet
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Year Ended
September 30, 1995............................................................... PF-23
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months
Ended March 31, 1995............................................................. PF-24
Champion Unaudited Pro Forma Condensed Combining Statement of Income -- Six Months
Ended March 31, 1996............................................................. PF-25
Champion Unaudited Historical Condensed Balance Sheet -- March 31, 1996........... PF-26
Notes to Champion Unaudited Pro Forma Condensed Combining Statements of Income.... PF-27
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
Paracelsus Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Paracelsus
Healthcare Corporation and subsidiaries as of September 30, 1994 and 1995, and
the related consolidated statements of income, shareholder's equity and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paracelsus
Healthcare Corporation and subsidiaries at September 30, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, as of
October 1, 1994, the Company changed its method of accounting for marketable
securities.
ERNST & YOUNG LLP
Los Angeles, California
December 14, 1995
F-4
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 1,452,000 $ 2,949,000
Marketable securities (NOTE 5).............................................. 16,960,000 10,387,000
Accounts receivable, less allowance for uncollectible accounts and
contractual adjustments of $56,507,000 in 1994 and $56,958,000 in 1995
(NOTE 4)................................................................... 68,244,000 81,039,000
Notes and other receivables (NOTE 6)........................................ 9,287,000 12,502,000
Supplies.................................................................... 10,602,000 10,565,000
Deferred income taxes (NOTE 2).............................................. 17,420,000 16,485,000
Other current assets........................................................ 6,493,000 4,510,000
---------------- ----------------
Total current assets...................................................... 130,458,000 138,437,000
Property and equipment (NOTES 3 AND 10):
Land and improvements....................................................... 24,699,000 23,366,000
Buildings and improvements.................................................. 144,066,000 137,966,000
Equipment................................................................... 101,559,000 99,748,000
Construction in progress.................................................... 636,000 7,332,000
---------------- ----------------
270,960,000 268,412,000
Less accumulated depreciation and amortization.............................. 97,123,000 102,746,000
---------------- ----------------
173,837,000 165,666,000
Marketable securities (NOTE 5)................................................ -- 12,169,000
Other assets (NOTE 6)......................................................... 25,706,000 28,360,000
---------------- ----------------
Total assets.................................................................. $ 330,001,000 $ 344,632,000
---------------- ----------------
---------------- ----------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Bank drafts outstanding..................................................... $ 2,179,000 $ 4,991,000
Accounts payable and accrued expenses....................................... 22,640,000 27,384,000
Accrued wages and benefits.................................................. 27,863,000 28,354,000
Accrued interest............................................................ 3,845,000 3,877,000
Current maturities of long-term debt and
capital lease obligations.................................................. 5,269,000 8,658,000
Current portion of self-insurance reserves.................................. 5,802,000 4,792,000
---------------- ----------------
Total current liabilities................................................. 67,598,000 78,056,000
Long-term debt and capital lease obligations,
less current maturities (NOTE 3)............................................. 112,449,000 113,070,000
Self-insurance reserves, less current portion (NOTE 9)........................ 23,117,000 25,176,000
Deferred income taxes (NOTE 2)................................................ 29,108,000 23,255,000
Minority interests............................................................ 214,000 126,000
Commitments and contingencies (NOTE 8)
Shareholder's equity:
Common stock, no stated value:
Authorized shares -- 1,000
Issued and outstanding shares -- 450...................................... 4,500,000 4,500,000
Additional paid-in capital.................................................. 390,000 390,000
Unrealized gains on marketable securities, net of taxes (NOTE 5)............ -- 137,000
Retained earnings........................................................... 92,625,000 99,922,000
---------------- ----------------
Total shareholder's equity................................................ 97,515,000 104,949,000
---------------- ----------------
Total liabilities and shareholder's equity.................................... $ 330,001,000 $ 344,632,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------------
1993 1994 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total operating revenues (NOTE 10).......................... $ 435,102,000 $ 507,864,000 $ 509,729,000
Costs and expenses:
Salaries and benefits..................................... 174,849,000 209,772,000 209,672,000
Supplies.................................................. 34,245,000 42,890,000 40,780,000
Purchased services........................................ 48,951,000 55,078,000 58,113,000
Provision for bad debts................................... 26,629,000 33,110,000 39,277,000
Other operating expenses.................................. 100,287,000 114,096,000 99,777,000
Depreciation and amortization............................. 14,587,000 16,565,000 17,276,000
Interest.................................................. 10,213,000 12,966,000 15,746,000
Restructuring and unusual charges (NOTE 11)............... -- -- 5,150,000
---------------- ---------------- ----------------
Total costs and expenses.................................... 409,761,000 484,477,000 485,791,000
---------------- ---------------- ----------------
Income before minority interests, income taxes and
extraordinary loss......................................... 25,341,000 23,387,000 23,938,000
Minority interests.......................................... (2,683,000) (2,517,000) (1,927,000)
---------------- ---------------- ----------------
Income before income taxes and extraordinary loss........... 22,658,000 20,870,000 22,011,000
Income taxes (NOTE 2)....................................... 10,196,000 8,567,000 9,024,000
---------------- ---------------- ----------------
Income before extraordinary loss............................ 12,462,000 12,303,000 12,987,000
Extraordinary loss (net of income tax benefit of $346,000)
(NOTE 3)................................................... -- (497,000) --
---------------- ---------------- ----------------
Net income.................................................. $ 12,462,000 $ 11,806,000 $ 12,987,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------------- ADDITIONAL GAINS ON
OUTSTANDING PAID-IN MARKETABLE RETAINED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
----------- ------------ ---------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1992........................... 450 $ 4,500,000 $ 390,000 $ -- $ 72,576,000 $ 77,466,000
Dividends to shareholder........ -- -- -- -- (1,214,000) (1,214,000)
Net income...................... -- -- -- -- 12,462,000 12,462,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1993........................... 450 4,500,000 390,000 -- 83,824,000 88,714,000
Dividends to shareholder........ -- -- -- (3,005,000) (3,005,000)
Net income...................... -- -- -- 11,806,000 11,806,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1994........................... 450 4,500,000 390,000 -- 92,625,000 97,515,000
Dividends to shareholder........ -- -- -- -- (5,690,000) (5,690,000)
Cumulative effect of a change in
accounting for marketable
securities, net of taxes....... -- -- -- (67,000) -- (67,000)
Change in unrealized gains on
marketable securities, net of
taxes.......................... -- -- -- 204,000 -- 204,000
Net income...................... -- -- -- 12,987,000 12,987,000
--- ------------ ---------- ----------- ------------- ---------------
Balances at September 30,
1995........................... 450 $ 4,500,000 $ 390,000 $ 137,000 $ 99,922,000 $ 104,949,000
--- ------------ ---------- ----------- ------------- ---------------
--- ------------ ---------- ----------- ------------- ---------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------------
1993 1994 1995
-------------- ---------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 12,462,000 $ 11,806,000 $ 12,987,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 14,587,000 16,565,000 17,276,000
Gain from disposal of facilities............................ -- -- (9,026,000)
Deferred income taxes....................................... (3,399,000) (5,226,000) (4,989,000)
Extraordinary loss.......................................... -- 497,000 --
Minority interests.......................................... 2,683,000 2,517,000 1,927,000
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable....................................... 43,780,000 (9,028,000) (12,261,000)
Supplies and other current assets......................... (2,873,000) (2,368,000) 2,020,000
Notes and other receivables............................... (1,066,000) (2,519,000) (3,215,000)
Accounts payable and other current liabilities............ (1,897,000) 9,410,000 8,079,000
Income taxes payable...................................... (1,568,000) -- --
Self-insurance reserves..................................... 7,151,000 5,457,000 1,049,000
-------------- ---------------- --------------
Net cash provided by operating activities..................... 69,860,000 27,111,000 13,847,000
INVESTING ACTIVITIES
Purchase of available-for-sale securities..................... (8,631,000) (8,329,000) (5,527,000)
Maturities of held-to-maturity securities..................... -- -- 139,000
Acquisitions, net of cash acquired............................ (9,477,000) -- (3,010,000)
Proceeds from disposal of facilities.......................... -- 1,698,000 18,564,000
Additions to property and equipment........................... (14,676,000) (14,342,000) (15,835,000)
Decrease in minority interests................................ (2,752,000) (2,651,000) (2,015,000)
Increase in other assets...................................... (6,622,000) (12,691,000) (2,986,000)
-------------- ---------------- --------------
Net cash used in investing activities......................... (42,158,000) (36,315,000) (10,670,000)
FINANCING ACTIVITIES
Long-term borrowings.......................................... 59,452,000 125,410,000 55,003,000
Payments of long-term debt and capital lease obligations...... (85,509,000) (108,618,000) (50,993,000)
Payments of subordinated promissory note payable.............. -- (4,335,000) --
Dividends to shareholder...................................... (1,214,000) (3,005,000) (5,690,000)
-------------- ---------------- --------------
Net cash provided by (used in) financing activities........... (27,271,000) 9,452,000 (1,680,000)
-------------- ---------------- --------------
Increase in cash and cash equivalents......................... 431,000 248,000 1,497,000
Cash and cash equivalents at beginning of year................ 773,000 1,204,000 1,452,000
-------------- ---------------- --------------
Cash and cash equivalents at end of year...................... $ 1,204,000 $ 1,452,000 $ 2,949,000
-------------- ---------------- --------------
-------------- ---------------- --------------
</TABLE>
F-8
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------------------
1993 1994 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Details of unrealized gains on marketable securities:
Marketable securities............................................ $ -- $ -- $ 208,000
Deferred taxes................................................... -- -- 71,000
-------------- ------------- -------------
Increase in shareholder's equity................................. $ -- $ -- $ 137,000
-------------- ------------- -------------
-------------- ------------- -------------
Exchange of land and building.................................... $ -- $ 1,074,000 $ --
-------------- ------------- -------------
-------------- ------------- -------------
Leases capitalized............................................... $ -- $ 713,000 $ --
-------------- ------------- -------------
-------------- ------------- -------------
Details of businesses acquired in purchase transactions:
Fair value of assets acquired.................................... $ 22,225,000 $ -- $ 3,010,000
Liabilities assumed, including capital lease obligations and note
payable to bank................................................. 10,766,000 -- --
-------------- ------------- -------------
Cash paid for acquisitions....................................... 11,459,000 -- 3,010,000
Cash acquired in acquisitions.................................... 1,982,000 -- --
-------------- ------------- -------------
Net cash paid for acquisitions................................... $ 9,477,000 $ -- $ 3,010,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paracelsus Healthcare Corporation (the "Company") owns, leases and operates
22 acute care, psychiatric and specialty hospitals, four skilled nursing
facilities and 13 medical office buildings. In addition, the Company is a
partner in seven partnerships (six being general and one being limited
partnerships), with ownership equal to or in excess of 50% in five, and less
than 50% in two. In May 1994, the founder, Chairman of the Board and sole
shareholder of the Company passed away with ownership of the Company and the
role of Chairman of the Board succeeding to his son, Dr. Manfred George
Krukemeyer, who is a citizen of the Federal Republic of Germany.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned or majority owned subsidiaries and partnerships. All
significant intercompany transactions and balances are eliminated in
consolidation. Minority interests represent income allocated to the minority
partners' investment.
OPERATING REVENUES
Operating revenues include healthcare services provided to patients which
are reported on an accrual basis in the period in which the services are
provided at established rates, net of third-party reductions related to
contractual adjustments for Medicare, Medicaid, managed care and other programs.
Contractual adjustments totaled $307,868,000, $394,110,000 and $407,888,000, for
1993, 1994 and 1995, respectively.
Contractual adjustments include differences between established billing
rates and amounts estimated by management as reimbursable under various
fixed-price, cost reimbursement and other contractual arrangements. In addition,
other activities including investment earnings, gains on disposal of facilities
(see Note 10), rental income and income from partnerships, all of which are used
exclusively for healthcare-related services provided by the Company, are
considered operating revenues.
Normal estimation differences between final settlements and amounts
recognized in previous years are reported as contractual adjustments in the
current year. The administrative procedures for the cost-based programs preclude
final determination of the payments due or receivable until after the Company's
cost reports are audited or otherwise reviewed by and settled with the
respective program agencies. The Company's estimate for final settlements of all
years through 1995 has been reflected in the consolidated financial statements.
Approximately 57%, 60% and 63% of the Company's gross revenues are for services
to Medicare, Medicaid, and Blue Cross patients for 1993, 1994 and 1995,
respectively.
MARKETABLE SECURITIES
As of October 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting principle.
The adoption of SFAS No. 115 had no effect on net income, but decreased
marketable securities as of October 1, 1994, by $102,000, decreased
shareholder's equity by $67,000 and increased deferred tax assets by $35,000.
Management determines the appropriate classification of marketable
securities (corporate bonds and government securities) at the time of purchase.
Marketable securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
F-10
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Held-to-maturity securities are stated at amortized cost. Marketable securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholder's
equity. The Company also determined that available-for-sale securities are
available for use in current operations and, accordingly, classified such
securities as current assets without regard to the securities' contractual
maturity dates.
The amortized cost of marketable securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in operating revenues.
Realized gains and losses, and declines in value judged to be other-
than-temporary are included in operating revenues. The cost of securities sold
is based on the specific identification method.
SUPPLIES
Supplies consisting of drugs and other supplies are stated at cost
(first-in, first-out method) which is not in excess of market.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
respective assets.
ORGANIZATION AND OTHER COSTS
Organization, loan and other costs (included in other assets) have been
capitalized and are amortized over periods ranging from 24 to 480 months. The
balance of organization, loan, and other costs at September 30, 1994 and 1995,
amounted to $16,469,000 and $18,224,000, respectively. The related accumulated
amortization at September 30, 1994 and 1995, amounted to $5,766,000 and
$4,835,000, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The statement also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
on October 1, 1996, and, based on current circumstances, does not believe the
effect of the adoption will be material.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consists principally of investments in marketable
securities and commercial premiums receivable. The Company's investments in
marketable securities are managed by professional investment managers within
guidelines established by the Board of Directors, which, as a matter of policy,
limit the amounts which may be invested in any one issuer. Concentrations of
credit risk with respect to accounts receivable are limited since a majority of
the receivables are due from the Medicare and Medicaid programs. Management does
not believe that there are any credit risks associated with these governmental
agencies. Commercial insurance, managed care and private receivables consist of
receivables from various payors, subject to differing economic conditions, and
do not represent any concentrated credit risks to the Company. Furthermore,
management continually monitors and adjusts its reserves and allowances
associated with these receivables.
F-11
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with
original maturities of three months or less.
2. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal.......................... $ 10,664,000 $ 11,144,000 $ 11,018,000
State............................ 2,931,000 2,649,000 2,995,000
-------------- -------------- --------------
13,595,000 13,793,000 14,013,000
Deferred:
Federal.......................... (3,434,000) (4,080,000) (4,419,000)
State............................ 35,000 (1,146,000) (570,000)
-------------- -------------- --------------
(3,399,000) (5,226,000) (4,989,000)
-------------- -------------- --------------
$ 10,196,000 $ 8,567,000 $ 9,024,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
During 1992, the Company changed its method of reporting income for tax
purposes from the cash basis to accrual basis. Under the cash basis, the Company
deferred approximately $72,000,000 of taxable income for periods ending prior to
October 1, 1991. Of the amounts deferred, $14,431,000, $11,429,000 and
$11,794,000 were included in 1993, 1994 and 1995 taxable income, respectively.
The effect of the change in reporting has been to increase the Company's income
for tax purposes, consistent with federal and state regulations, through 1997.
F-12
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
2. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation............................................. $ 21,833,000 $ 21,083,000
Change in method of reporting taxable income......................... 9,960,000 3,765,000
Accrued malpractice claims........................................... (4,969,000) (3,839,000)
Unrealized gains on marketable securities............................ -- 71,000
Other -- net......................................................... 2,284,000 2,175,000
-------------- --------------
Total deferred tax liabilities..................................... 29,108,000 23,255,000
Deferred tax assets:
Change in method of reporting taxable income......................... (3,853,000) (5,487,000)
Accrued malpractice claims........................................... 1,079,000 717,000
Allowance for bad debts.............................................. 10,813,000 10,959,000
Accrued bonuses...................................................... 2,064,000 2,337,000
Accrued workers' compensation claims................................. 424,000 404,000
Accrued vacation pay................................................. 1,933,000 1,870,000
Accrued expenses..................................................... 4,960,000 5,685,000
-------------- --------------
Total deferred tax assets.......................................... 17,420,000 16,485,000
-------------- --------------
Net deferred tax liabilities....................................... $ 11,688,000 $ 6,770,000
-------------- --------------
-------------- --------------
</TABLE>
A reconciliation of the differences between federal income taxes computed at
the statutory rate and the total provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate................................. 34.8% 35.0% 35.0%
State taxes, net of federal income tax benefit......... 7.0% 6.0% 6.0%
Effect of federal income tax rate increase on prior
years deferred taxes.................................. 3.2% -- --
--- --- ---
Effective income tax rate............................ 45.0% 41.0% 41.0%
--- --- ---
--- --- ---
</TABLE>
The Company made income tax payments of $15,863,000, $14,787,000 and
$11,656,000 during 1993, 1994 and 1995, respectively.
F-13
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Note payable with banks, making available $125,000,000 under a
revolving credit facility, collateralized by 55% of the common
stock of the Company. The revolving facility is available for three
years for up to $125,000,000 (increased to $230,000,000 effective
December 8, 1995 -- see Note 13). Interest on each facility accrues
at a rate equal to the sum of (a) either the reference rate, an off
shore dollar rate or a CD rate (as selected by the Company) plus
(b) the applicable margin. The average interest rate at September
30, 1995, was 6.0% (See Note 8).................................... $ 22,000,000 $ 27,500,000
Senior subordinated notes, interest payable semiannually on April 15
and October 15 of each year at 9.875%, with a maturity date of
October 15, 2003................................................... 75,000,000 75,000,000
Mortgages payable, $56,000 due monthly through December 1998,
including interest from 9.5% to 12.5%, collateralized by trust
deeds on buildings and land with a net book value of $9,194,000 at
September 30, 1995................................................. 4,755,000 4,629,000
Note payable to bank, due in May 1996, interest at prime plus 1.0%
(9.75% at September 30, 1995), collateralized by the accounts
receivable of the facility......................................... 3,259,000 3,259,000
Note payable, due in varying amounts through 1996, at varying
interest rates..................................................... 511,000 505,000
Capital lease obligations........................................... 12,193,000 10,835,000
---------------- ----------------
117,718,000 121,728,000
Less current maturities............................................. 5,269,000 8,658,000
---------------- ----------------
$ 112,449,000 $ 113,070,000
---------------- ----------------
---------------- ----------------
</TABLE>
On October 17, 1993, the Company completed a $75,000,000 public offering of
9.875% Senior Subordinated Notes (the "Notes") due 2003. The Notes, which are
subordinated to all senior indebtedness of the Company, are redeemable at the
option of the Company beginning October 15, 1998, at 104.94% of face value,
declining annually to 100% of face value on or after October 15, 2000, or at the
option of the holder upon the occurrence of a change in control, as defined. The
net proceeds from the offering were used to repay the 14.375% Senior
Subordinated Notes of $18,650,000 at a redemption price of 102.05% plus accrued
interest, and the outstanding balance under the Credit Facility of $54,500,000.
The extinguishment of the 14.375% Senior Subordinated Notes resulted in a loss
of $497,000 (net of income tax benefit of $346,000) which was recorded as an
extraordinary loss in 1994.
The Company's interest rate swap agreement, which converted the variable
interest rate on a portion of its revolving credit facility to a fixed interest
rate, terminated during May 1994. The interest rate swap agreement fixed the
interest rate on $20,000,000 of its bank debt at 7.8%. Each
F-14
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
quarter the Company paid or received an amount equal to the difference between
the fixed interest rate and the LIBOR rate. Net interest payments of $400,000
were recognized as an adjustment to interest expense in 1994.
The credit facility and the senior subordinated notes require the Company,
among other things, to maintain specified financial ratios, and restrict the
sale, lease or disposal of its assets.
Maturities of long-term debt and principal payments under capital lease
obligations as of September 30, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- ----------------------------------------------------------------------------
<S> <C>
1996...................................................................... $ 8,658,000
1997...................................................................... 1,560,000
1998...................................................................... 1,409,000
1999...................................................................... 489,000
2000...................................................................... 330,000
Thereafter................................................................ 109,282,000
----------------
$ 121,728,000
----------------
----------------
</TABLE>
The Company made interest payments of $12,458,000, $9,988,000 and
$15,789,000 during 1993, 1994 and 1995, respectively.
Property and equipment includes $13,534,000 and $12,566,000 at September 30,
1994 and 1995, respectively, for leases that have been capitalized. The
amortization of these assets is included in depreciation expense.
Future minimum payments under capital lease obligations as of September 30,
1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
- ----------------------------------------------------------------------------
<S> <C>
1996...................................................................... $ 2,193,000
1997...................................................................... 2,083,000
1998...................................................................... 1,880,000
1999...................................................................... 972,000
2000...................................................................... 780,000
Thereafter................................................................ 8,915,000
----------------
Total minimum lease payments.............................................. 16,823,000
Amounts representing interest............................................. 5,988,000
----------------
Present value of net minimum lease payments (including current maturities
of $1,371,000)........................................................... $ 10,835,000
----------------
----------------
</TABLE>
4. COMMERCIAL PAPER NOTES
During 1993, PHC Funding Corporation II, a subsidiary of the Company formed
in March 1993, entered into an agreement with an unaffiliated trust (the
"Trust") to sell the hospital's eligible accounts receivable ("Eligible
Receivables") on a nonrecourse basis to the Trust. A special purpose subsidiary
of a major lending institution agreed to provide up to $65,000,000 in commercial
paper financing to the Trust to finance the purchase of the Eligible Receivables
from PHC Funding Corporation II. Eligible Receivables held by the Trust secure
the commercial paper financing. The Commercial Paper Notes have a term of not
more than 120 days. Eligible receivables sold to the Trust at
F-15
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
4. COMMERCIAL PAPER NOTES (CONTINUED)
September 30, 1994 and 1995, totaled $65,000,000. Interest expense charged to
the Trust related to the commercial paper financing is passed through to the
Company and included as interest expense in the Company's consolidated financial
statements.
5. MARKETABLE SECURITIES
The following table summarizes marketable securities at September 30, 1995:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
Fixed maturity securities:
Corporate bonds.......................... $ 435,000 $ 16,000 $ -- $ 451,000
U.S. Government bonds...................... 1,098,000 60,000 -- 1,158,000
Mortgage-backed bonds...................... 984,000 16,000 -- 1,000,000
Obligations of states and political
subdivisions.............................. 7,662,000 128,000 12,000 7,778,000
-------------- ----------- ----------- --------------
$ 10,179,000 $ 220,000 $ 12,000 $ 10,387,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
Held-to-maturity securities:
Fixed maturity securities:
Corporate bonds.......................... $ 1,857,000 $ 62,000 $ -- $ 1,919,000
Mortgage-backed bonds...................... 10,312,000 -- 408,000 9,904,000
-------------- ----------- ----------- --------------
$ 12,169,000 $ 62,000 $ 408,000 $ 11,823,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
The maturity distribution of the Company's marketable securities at
September 30, 1995, is as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------ ------------------------------
ESTIMATED FAIR ESTIMATED FAIR
AMORTIZED COST VALUE AMORTIZED COST VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Fixed maturities due:
After one through five years........ $ 4,977,000 $ 5,091,000 $ -- $ --
After five through ten years........ 4,217,000 4,296,000 -- --
After ten years..................... 985,000 1,000,000 12,169,000 11,823,000
-------------- -------------- -------------- --------------
$ 10,179,000 $ 10,387,000 $ 12,169,000 $ 11,823,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
During the year ended September 30, 1995, proceeds from maturities of
held-to-maturity securities totaled $139,000. There were no realized gains or
losses in 1995.
6. TRANSACTIONS BETWEEN SHAREHOLDER AND COMPANY
The Company has a Know-How contract with an affiliate in Germany owned by
the Shareholder. This contract provides for the transfer of certain specified
Know-How to the Company relating to the operation of healthcare facilities and
the healthcare industry in general. The contract limited payments to $400,000
per year, subject to annual revisions. On October 1, 1994, the Know-How contract
was amended to limit the Know-How payments to the lesser of 3/4 percent of the
Company's net operating revenue, as defined, or $400,000. Such payments totaled
$400,000 per year for 1993, 1994 and 1995. In addition, the Company reimbursed
the affiliate $147,000, $153,000 and $89,000 for other services during 1993,
1994 and 1995, respectively.
F-16
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
6. TRANSACTIONS BETWEEN SHAREHOLDER AND COMPANY (CONTINUED)
During November 1993, the Company paid in full the subordinated promissory
note payable to shareholder of $4,335,000. In addition, the Company loaned the
shareholder $3,200,000 at 8 percent interest due annually with the principal and
unpaid interest due November 1996. In May 1994, the shareholder loan was amended
to increase shareholder borrowings to $5,000,000. In addition, principal of
$1,000,000 and accrued interest are due annually beginning May 1, 1995. The
principal portion of the loan due after one year is included in other assets.
7. PENSION PLANS
The Company has an Employees' Retirement Savings Plan covering substantially
all employees. Eligible employees may contribute up to 20% of pretax
compensation limited to an annual maximum in accordance with the Internal
Revenue Code. The Company will match $.50 for each $1.00 of employee
contributions up to 4% of employees' gross pay. The expense incurred in
connection with the plan was $1,180,000, $1,512,000 and $1,592,000 for 1993,
1994 and 1995, respectively.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease commitments for noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30 REAL ESTATE EQUIPMENT TOTAL
- -------------------------------------------------------- -------------- ------------- --------------
<S> <C> <C> <C>
1996.................................................. $ 11,111,000 $ 2,684,000 $ 13,795,000
1997.................................................. 10,881,000 2,025,000 12,906,000
1998.................................................. 10,318,000 1,457,000 11,775,000
1999.................................................. 9,946,000 373,000 10,319,000
2000.................................................. 9,897,000 237,000 10,134,000
Thereafter............................................ 16,074,000 190,000 16,264,000
-------------- ------------- --------------
Total minimum lease payments.......................... $ 68,227,000 $ 6,966,000 $ 75,193,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
Certain of these leases include renewal options, contain normal cost
escalation clauses and require payment of property taxes, insurance and
maintenance costs. The aggregate rental expense was $11,911,000, $17,677,000 and
$19,234,000 for 1993, 1994 and 1995, respectively.
In August 1994, Dr. Krukemeyer borrowed $15,000,000 from a lending
institution (the "Lending Institution") and pledged 45 percent of his stock in
the Company to secure the borrowing. To facilitate Dr. Krukemeyer's arrangements
with the Lending Institution, the Company amended its $125,000,000 Revolving
Credit Facility Agreement (the "Credit Agreement" -- see Note 3) with certain
financial institutions (the "Financial Institutions") pursuant to which the
Financial Institutions agreed to release 45 percent of their collateral interest
in the Company's stock. In the event that either the Company defaults under the
Credit Agreement or Dr. Krukemeyer defaults under his obligation to the Lending
Institution, the Lending Institution would have the right to foreclose on its 45
percent collateral interest in the Company's stock.
In connection with the extension of credit to Dr. Krukemeyer by the Lending
Institution, the Company entered into agreements with the Lending Institution
agreeing to pay, to the extent permitted by the Credit Agreement and Indenture
governing the Company's outstanding 9.875 percent Senior Subordinated Notes due
2003, (i) transfer payments, such as dividends and Know-How payments to Dr.
Krukemeyer in an amount equal to 50 percent of the consolidated net income of
the Company and its subsidiaries on a quarterly basis, and (ii) salary and bonus
payments to Dr. Krukemeyer equal to a minimum of $2,000,000 per year.
F-17
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is defending itself against a lawsuit filed by Aetna Life
Insurance Company ("Aetna") alleging false diagnosis and billings submitted for
treatment of Aetna patients at the Company's psychiatric facilities. Management
denies these allegations and believes the ultimate resolution of the lawsuit
will not have a material adverse effect on the Company's consolidated financial
position.
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's facilities and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. Management
believes the ultimate resolution of the proceedings presently pending against
the Company will not have a material adverse effect on the Company's
consolidated financial position.
9. SELF-INSURANCE RESERVES
Effective October 1, 1992, the Company formed a wholly owned subsidiary,
Hospital Assurance Company Ltd. ("HAC") to insure general and professional
liability and workers' compensation claims up to $500,000 and $250,000 per
occurrence, respectively. Between October 1, 1987 and the formation of HAC, the
Company was self-insured for the first $500,000 of general and professional
liability claims. The Company has third-party excess insurance coverage over the
first $500,000 per occurrence up to $100,000,000. Accrued self-insurance
reserves include estimates for reported and unreported claims based upon
actuarial projections. The general and professional liability reserves for 1993,
1994 and 1995, are discounted at 6.5%, 6.5% and 7.0%, respectively.
The excess insurance coverage provides for a retrospective adjustment to
premiums to cover losses incurred by the insurance company for all policy years.
This general premium adjustment is not to exceed 100% of the standard premium
for each individual policy year. The potential maximum general premium
adjustment for the period October 1, 1987, through September 30, 1995, is
$14,807,000. No general premium adjustment has been made through September 30,
1995, and no significant adjustment is anticipated based upon current claim
projections.
10. ACQUISITIONS AND DISPOSITIONS
On September 30, 1995, the Company sold Womans Hospital in Mississippi to
the facility's lessee for $17,800,000 in cash which resulted in a gain of
$9,189,000 (included in operating revenues). Previously, in August 1994, the
Company divested the operations of Womans Hospital and entered into an operating
lease agreement with the lessee which granted the lessee an option to purchase
the facility at a cash flow multiple defined in the lease agreement. Also, in
August 1994, the lessee purchased land and a medical office building from the
Company for approximately $1,000,000. In October 1993, the Company acquired the
land and medical office building along with cash of $698,000 in exchange for
land it held with a carrying value of $1,772,000.
On September 5, 1995, the Company acquired the real and personal property
assets, and inventory of Jackson County Hospital, a 44-bed acute facility in
Gainesboro, Tennessee, for $582,000 in cash. The Company is operating the
facility under the name of Cumberland River Hospital -- South.
During August 1995, the Company sold the real and personal property assets
and inventory of Advanced Healthcare Diagnostic Services, a mobile diagnostic
imaging company, for $764,000 in cash which resulted in a loss of $163,000
(included in operating revenues).
On August 1, 1995, the Company purchased the accounts receivable, equipment
and intangible assets of Keith Medical Group, an outpatient medical clinic
located in Hollywood, California, for $2,428,000.
F-18
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
10. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On June 30, 1994, the Company assumed an operating lease of the real and
personal property assets of a 60-bed rehabilitation hospital located in Chico,
California, and for approximately $400,000 acquired working capital and
equipment.
On August 31, 1993, the Company purchased the real and personal property
assets of Desert Palms Community Hospital in Palmdale, California for
approximately $4,500,000 in cash. The funds were borrowed from the Company's
credit facility.
On June 30, 1993, the Company executed an operating lease of the real
property assets of Halstead Hospital in Halstead, Kansas. The Company also
entered into a capital lease for the purchase of substantially all of the
personal property at a cost of $3,000,000. American Health Properties, a real
estate investment trust that invests primarily in acute care hospitals, is the
lessor under both the real property operating lease and the capital lease.
On March 1, 1993, the Company entered into an operating lease for the lease
of the real property assets of Elmwood Medical Center in Jefferson, Louisiana.
American Health Properties is also the lessor under the real property operating
lease. The Company also acquired substantially all the personal property at a
cost of $9,432,000, including the assumption of existing capital leases.
The following table summarizes the unaudited pro forma consolidated results
of the Company and its material acquisitions and dispositions as though the
acquisitions and dispositions occurred at the beginning of each of the periods
presented giving effect to investment earnings on the proceeds from the sale of
Womans Hospital, the conversion of the Womans real property operating lease to a
sale, and the amortization of the excess of the purchase price over the fair
value of assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred for the years ended September 30, 1994 and 1995, had the acquisitions
and dispositions occurred at the beginning of each period and is not intended to
be indicative of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Operating revenues.................................................. $ 501,702 $ 498,889
Income before income taxes and extraordinary loss................... 19,803 11,004
Income before extraordinary loss.................................... 11,674 6,493
</TABLE>
11. RESTRUCTURING AND UNUSUAL CHARGES
On April 24, 1995, the Company closed the Bellwood Health Center psychiatric
facility due to declining admissions. The facility's patients were transferred
to another of the Company's psychiatric facilities. Management is currently
evaluating the disposition of the physical plant. In connection with the
closure, the Company recorded a restructuring charge of $973,000 for employee
severance benefits and contract termination costs. In addition, during 1995, the
Company paid certain executives special bonuses of $4,177,000 for services
provided to the Company. The special bonuses were accounted for as an unusual
charge.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
F-19
<PAGE>
PARACELSUS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of the Company's financial instruments
at September 30 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 1,452,000 $ 1,452,000 $ 2,949,000 $ 2,949,000
Long-term debt:
9.875% senior subordinated notes.............. 75,000,000 73,626,000 75,000,000 79,440,000
Mortgages payable............................. 4,755,000 4,899,000 4,629,000 4,684,000
</TABLE>
The carrying amount of the Company's notes payable under revolving credit
facility were reasonable approximations of their fair value.
It was not practical to estimate the fair value of notes and other
receivables because of the lack of a quoted market price and the inability to
estimate fair value without incurring excessive costs. Management believes there
has been no impairment of the carrying value of notes and other receivables.
13. SUBSEQUENT EVENTS
On November 28, 1995, the Company entered into an Asset Exchange Agreement
and a Stock Purchase Agreement (the "Exchange Transaction") to acquire
substantially all of the assets and operations of Pioneer Valley Hospital
("Pioneer"), a 139-bed hospital located in West Valley City, Utah, Davis
Hospital and Medical Center, a 120-bed hospital located in Layton, Utah, and
Santa Rosa Medical Center, a 129-bed hospital located in Milton, Florida, in
exchange for $38,500,000 in cash, and its Peninsula Medical Center, a 119-bed
hospital located in Ormond Beach, Florida, Elmwood Medical Center ("Elmwood"), a
135-bed hospital located in Jefferson, Louisiana, and Halstead Hospital
("Halstead"), a 190-bed hospital located in Halstead, Kansas. Coincident with
the Exchange Transaction, the Company will purchase the real property of Elmwood
and Halstead from a real estate investment trust ("REIT") for $52,000,000,
exchange the Elmwood and Halstead real property for Pioneer's real property, and
sell the Pioneer real property to the REIT (the "Real Property Purchase and Sale
Transaction"). The Exchange Transaction and the Real Property Purchase and Sale
Transaction are expected to close in January 1996 and are not expected to result
in a material gain or loss.
On December 8, 1995, the Company entered into a new Credit Facility which
increased the Company's Credit Facility from $125,000,000 to $230,000,000. The
Credit Facility is being increased to finance future acquisitions, refinance the
existing Credit Facility borrowings and for general corporate purposes,
including working capital and capital expenditures. The new Credit Facility
contains pricing terms more favorable to the Company, will be secured by the
stock of the Paracelsus subsidiaries and extends the conversion feature to a
term loan on November 30, 1998.
F-20
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 2,949 $ 3,149
Marketable securities............................................................................. 10,387 10,051
Accounts receivable, net.......................................................................... 81,039 88,141
Notes and other receivables....................................................................... 12,502 11,980
Supplies.......................................................................................... 10,565 10,634
Deferred income taxes............................................................................. 16,485 26,463
Other current assets.............................................................................. 4,510 4,798
------------- -----------
Total current assets............................................................................ 138,437 155,216
Property and equipment.............................................................................. 268,412 275,577
Less accumulated depreciation and amortization...................................................... 102,746 109,848
------------- -----------
165,666 165,729
Marketable securities............................................................................... 12,169 14,606
Other assets........................................................................................ 28,360 32,665
------------- -----------
Total Assets.................................................................................... $344,632 $368,216
------------- -----------
------------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Bank drafts outstanding........................................................................... $ 4,991 $ 3,135
Accounts payable and other current liabilities.................................................... 59,615 68,627
Current maturities of long-term debt and capital lease obligations................................ 8,658 5,186
Current portion of self-insurance reserves........................................................ 4,792 4,853
------------- -----------
Total current liabilities....................................................................... 78,056 81,801
Long-term debt and capital lease obligations less current maturities................................ 113,070 139,475
Self-insurance reserves, less current portion....................................................... 25,176 25,827
Deferred income taxes............................................................................... 23,255 24,607
Minority interests.................................................................................. 126 141
Shareholder's equity:
Common stock...................................................................................... 4,500 4,500
Additional paid-in capital........................................................................ 390 390
Unrealized gains on marketable securities......................................................... 137 42
Retained earnings................................................................................. 99,922 91,433
------------- -----------
Total shareholder's equity...................................................................... 104,949 96,365
------------- -----------
Total liabilities and shareholder's Equity...................................................... $344,632 $368,216
------------- -----------
------------- -----------
</TABLE>
Note: The balance sheet at September 30, 1995 has been derived from the audited
financial statements at that date and includes all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Total operating revenues................................................................ $ 252,356 $ 260,590
Costs and expenses:
Salaries and benefits................................................................. 108,575 113,162
Supplies.............................................................................. 21,432 19,363
Purchased services.................................................................... 28,118 34,174
Provision for bad debts............................................................... 19,283 20,191
Other operating expenses.............................................................. 46,730 46,906
Depreciation and amortization......................................................... 8,734 7,972
Interest expense...................................................................... 7,652 7,685
Settlement costs...................................................................... -- 22,356
----------- -----------
Total costs and expenses............................................................ 240,524 271,809
Income (loss) before minority interests and
income taxes........................................................................... 11,832 (11,219)
Minority interests...................................................................... (1,204) (1,072)
----------- -----------
Income (loss) before income taxes....................................................... 10,628 (12,291)
Provision for income taxes (benefit).................................................... 4,357 (5,040)
----------- -----------
Net income (loss)....................................................................... $ 6,271 $ (7,251)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
F-22
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................................ $ 6,271 $ (7,251)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.......................................................... 8,734 7,972
Deferred income taxes.................................................................. (2,931) (8,576)
Minority interests..................................................................... 1,204 1,072
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (7,608) (7,102)
Supplies and other current assets.................................................... 466 (357)
Notes and other receivables.......................................................... (129) 522
Bank drafts outstanding.............................................................. (342) (1,856)
Accounts payable and other current liabilities....................................... (3,445) 9,012
Self-insurance reserves.............................................................. 2,893 712
---------- ----------
Net cash (used in) provided by operating activities...................................... 5,113 (5,852)
INVESTING ACTIVITIES
Purchase of marketable securities........................................................ (2,470) (2,246)
Additions to property and equipment...................................................... (5,322) (7,123)
Decrease in minority interests........................................................... (1,250) (1,057)
Increase in other assets................................................................. (1,998) (5,217)
---------- ----------
Net cash used in investing activities.................................................... (11,040) (15,643)
FINANCING ACTIVITIES
Long-term borrowings..................................................................... 32,500 31,500
Payments of long-term debt and capital lease obligations................................. (24,278) (8,567)
Dividends to shareholder................................................................. (1,640) (1,238)
---------- ----------
Net cash provided by financing activities................................................ 6,582 21,695
---------- ----------
Increase in cash and cash equivalents.................................................... 655 200
Cash and cash equivalents at beginning of period......................................... 1,452 2,949
---------- ----------
Cash and cash equivalents at end of period............................................... $ 2,107 $ 3,149
---------- ----------
---------- ----------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes........................................................................... $ 5,977 $ 5,048
---------- ----------
---------- ----------
Interest............................................................................... $ 7,041 $ 7,534
---------- ----------
---------- ----------
DETAILS OF UNREALIZED (LOSSES) GAINS ON MARKETABLE SECURITIES:
Marketable securities.................................................................. 5 (145)
Deferred taxes......................................................................... 2 (50)
---------- ----------
Increase (decrease) in shareholder's equity.............................................. $ 3 $ (95)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
F-23
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein have
been prepared by Paracelsus Healthcare Corporation (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in December 1995. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2. MARKETABLE SECURITIES
On November 15, 1995, the FASB staff issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report, the
Company chose to reclassify securities from held-to-maturity to
available-for-sale. At the date of transfer the amortized cost of those
securities was $2,000,000 and the unrealized loss on those securities was
$13,000, which was included in shareholder's equity.
NOTE 3. CONTINGENCIES
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's facilities and maintains insurance and, where appropriate, reserves
with respect to the possible liability arising from such claims. Management
believes the ultimate resolution of the proceedings presently pending against
the Company(or any of its subsidiaries) will not have a material effect on the
Company's financial position, results of operations, or cash flows.
NOTE 4. ACQUISITIONS/CLOSURES
On April 11, 1996, the Company entered into an Asset Purchase Agreement to
acquire a 125-bed acute care hospital located in Salt Lake City, Utah and its
surrounding campus for approximately $70 million in cash. The transaction is
expected to close in May 1996.
On April 12, 1996, the Company entered into an Agreement and Plan of Merger
("the Merger Agreement") with Champion Healthcare Corporation ("Champion"). The
Merger Agreement provides for, among other things, the merger (the "Merger") of
PC Merger Sub., Inc. a newly organized wholly owned subsidiary of the Company,
with and into Champion. Prior to the effective date of the Merger, the Company's
Common Stock will be split. At the effective date of the Merger, the holders of
Champion Common Stock will receive one right, and the holders of Champion
Preferred Stock will receive two rights, to receive one share of the Company's
Common Stock. Following the Merger, the Company's sole shareholder will own
approximately 60 percent of the Company's Common Stock and the stockholders of
Champion will own approximately 40 percent of the Company's Common Stock. The
Merger must be approved by the Stockholders of Champion. Concurrent with the
Merger Agreement, the Company will enter into a Dividend and Note Agreement
which will provide a dividend
F-24
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 4. ACQUISITIONS/CLOSURES (CONTINUED)
distribution to the Company' sole shareholder, who will in turn loan to the
Company a portion of the proceeds from the dividend distribution. The Merger
will be accounted for using the purchase method of accounting and is expected to
close in August 1996.
On March 15, 1996 the Company closed Desert Palms Community Hospital, an
acute care hospital located in Palmdale, California.
On November 28, 1995, the Company entered into an Asset Exchange Agreement
and a Stock Purchase Agreement (the "Exchange Transaction") to acquire Pioneer
Valley Hospital Hospital ("Pioneer"), a 139-bed hospital located in West Valley
City, Utah, Davis Hospital and Medical Center, 120-bed hospital located in
Laydon, Utah, and Santa Rosa Medical Center, a 129-bed hospital located in
Milton, Florida, in exchange for $38,500,000 in cash, and its Peninsula Medical
Center, a 119-bed hospital located in Ormond Beach, Florida, Elmwood Medical
Center ("Elmwood"), a 135-bed hospital located in Jefferson, Louisiana, and
Halstead Hospital ("Halstead"), a 190-bed hospital located in Halstead, Kansas.
Coincident with the Exchange Transaction, the Company will purchase the real
property of Elmwood and Halstead from a real estate investment trust ("REIT"),
exchange the Elmwood and Halstead real property for Pioneer's real property, and
sell the Pioneer real property to the REIT (the "Real Property Purchase and Sale
Transaction"). The Exchange Transaction and the Real Property Purchase and Sale
Transaction are expected to close in May 1996 and are not expected to result in
a material gain or loss.
NOTE 5. SETTLEMENT COSTS
During March 1996, the Company settled two lawsuits in connection with the
operation of its psychiatric programs. The Company recognized a charge for
settlement costs totaling $22,356,000 in the quarter ended March 31, 1996, for
the payment of legal fees associated with these two lawsuits, the settlement
payments, and the write off of certain psychiatric accounts receivables. The
Company did not admit liability in either case but resolved its dispute through
the settlements in order to re-establish a business relationship and/or avoid
further legal costs in connection with the disputes.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Davis Hospital and Medical Center
Pioneer Valley Hospital and
Santa Rosa Medical Center
We have audited the accompanying combined balance sheets of Davis Hospital
and Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center (the
"Hospitals") (all of which are wholly owned subsidiaries of Columbia/HCA
Healthcare Corporation) as of December 31, 1994 and 1995, and the related
statements of income and changes in retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Hospitals' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Davis Hospital and
Medical Center, Pioneer Valley Hospital and Santa Rosa Medical Center at
December 31, 1994 and 1995, and the combined results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
May 17, 1996
F-26
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................................................... $ 456 $ 656
Accounts receivable, less allowance for doubtful accounts of $4,554 in 1994 and $6,641 in
1995..................................................................................... 14,494 13,658
Inventories............................................................................... 1,933 2,243
Prepaid expenses and other................................................................ 614 1,088
--------- ---------
Total current assets........................................................................ 17,497 17,645
Property, plant and equipment, less accumulated depreciation................................ 50,723 49,215
Prepaid lease............................................................................... 5,101 6,864
Leasehold value, less accumulated amortization of $2,209 in 1994 and $2,498 in 1995......... 3,191 2,902
Other assets................................................................................ 4,206 4,264
--------- ---------
Total assets................................................................................ $ 80,718 $ 80,890
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities............................................ $ 7,056 $ 7,356
Intercompany liabilities.................................................................... 44,765 40,266
Shareholder's equity:
Common stock, Class B, $1 par value - 3,000 shares authorized and issued.................. 3 3
Additional paid in capital................................................................ 8,259 8,259
Retained earnings......................................................................... 20,635 25,006
--------- ---------
Total shareholder's equity.................................................................. 28,897 33,268
--------- ---------
Total liabilities and shareholder's equity.................................................. $ 80,718 $ 80,890
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-27
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED STATEMENTS OF INCOME AND
CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
---------------------
1994 1995
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Total operating revenues.................................................................. $ 99,096 $ 105,307
Costs and expenses:
Salaries, wages, and benefits........................................................... 35,370 39,088
Supplies................................................................................ 13,452 14,680
Purchased services...................................................................... 9,368 10,158
Other operating expenses................................................................ 11,486 12,376
Provision for doubtful accounts......................................................... 6,019 7,515
Depreciation and amortization........................................................... 6,154 5,570
Interest expense........................................................................ 3,835 3,280
Management fees......................................................................... 1,984 5,400
--------- ----------
Total costs and expenses.................................................................. 87,668 98,067
--------- ----------
Income before income taxes................................................................ 11,428 7,240
Income taxes.............................................................................. 4,514 2,869
--------- ----------
Net income................................................................................ 6,914 4,371
Retained earnings at beginning of year.................................................... 13,721 20,635
--------- ----------
Retained earnings at end of year.......................................................... $ 20,635 $ 25,006
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................. $ 6,914 $ 4,371
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 6,154 5,570
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (388) 836
Prepaid expenses, inventory and other current assets.................................... (183) (784)
Accounts payable and other liabilities.................................................. 201 300
--------- ---------
Net cash provided by operating activities................................................... 12,698 10,293
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment.................................................. (5,883) (4,171)
Disposals of property, plant and equipment.................................................. 53 109
(Increase) decrease in net leasehold value and other long-term assets....................... 1,170 (1,532)
--------- ---------
Net cash used in investing activities....................................................... (4,660) (5,594)
CASH FLOWS FROM FINANCING ACTIVITIES
Net transfers to Columbia................................................................... (7,583) (4,499)
--------- ---------
Increase in cash............................................................................ 455 200
Cash at beginning of year................................................................... 1 456
--------- ---------
Cash at end of year......................................................................... $ 456 $ 656
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest payments......................................................................... $ 3,835 $ 3,280
Income tax payments....................................................................... 4,514 2,869
Significant noncash transaction:
Prepayment of lease through intercompany balances......................................... -- 2,000
</TABLE>
See accompanying notes.
F-29
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION
Davis Hospital and Medical Center, Pioneer Valley Hospital and Santa Rosa
Medical Center (the "Hospitals") are indirect wholly owned subsidiaries of
Columbia/HCA Healthcare Corporation ("Columbia"). The Hospitals provide health
care services to patients in and around their respective communities in Utah
(Davis Hospital and Medical Center and Pioneer Valley Hospital) and Florida
(Santa Rosa Medical Center). The Hospitals receive payment for patient services
from the federal government primarily under the Medicare program, state programs
under their respective Medicaid programs, health maintenance organizations,
preferred provider organizations and other private insurers and directly from
patients.
In connection with a Federal Trade Commission consent order resulting from
Columbia's merger with Health Trust, Inc. ("HTI"), Columbia agreed to sell the
Hospitals to Paracelsus Healthcare Corporation ("Paracelsus"). The Hospitals and
related entities were exchanged for three Paracelsus hospitals and related
entities as well as an additional cash payment as defined by the agreement. The
transaction closed on May 16, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF COMBINATION
The combined financial statements presented herein will be referred to for
the years ended December 31, but will include the financial statements of Davis
Hospital and Pioneer Valley Hospital for the years ended December 31, and Santa
Rosa Medical Center for the years ended August 31.
OPERATING REVENUES AND RECEIVABLES
Operating revenues are based on established billing rates less allowances
and discounts for patients covered by Medicare, Medicaid and various other
discount arrangements. Payments received under these programs and arrangements,
which are based on either predetermined rates or the cost of services, are
generally less than the Hospital's customary charges, and the differences are
recorded as contractual adjustments or policy discounts at the time service is
rendered. These contractual adjustments totaled $49,738,000 and $56,580,000 for
1994 and 1995, respectively.
Normal estimation differences between final settlements and amounts
recognized in previous years are reported as contractual adjustments in the
current year. The administrative procedures for cost-based programs preclude
final determination of the payments due or receivable until after the Hospitals'
cost reports are audited or otherwise reviewed by and settled with the
respective program agencies. The Hospitals' estimate for final settlements of
all years through 1995 has been reflected in the combined financial statements.
F-30
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Patient revenues under the Medicare and Medicaid programs amounted to
approximately 43% and 40% of total patient revenues in 1994 and 1995,
respectively. The Hospitals do not believe that there are any credit risks
associated with receivables due from governmental agencies. Concentrations of
credit risk from other payors is limited by the number of patients and payors.
INTERCOMPANY LIABILITIES
Intercompany liabilities represent, in part, the net excess of funds
transferred to or paid on behalf of the Hospitals over funds transferred to the
centralized cash management account of Columbia. Generally, this balance is
increased by automatic cash transfers from the account to reimburse the
Hospitals' bank accounts for operating expenses and to pay the Hospitals' debt,
completed construction project additions, fees and services provided by Columbia
and other operating expenses, such as payroll, interest, insurance, and income
taxes. Generally, the balance is decreased through daily cash deposits by the
Hospitals to the account. Management fees represent an allocation of home office
and regional expenses of Columbia.
At December 31, 1994 and 1995, intercompany balances also include certain
long-term debt balances amounting to $33,553,000 and $29,616,000, respectively,
which were allocated to the Hospitals by Columbia. All principal and interest
payments on the debt allocated from Columbia are made by the Hospitals through
Columbia. The Hospitals were charged interest on the allocated debt at rates
ranging from 11.9% to 10% during 1994 and 1995.
INVENTORIES
Inventories consisting of drugs and other supplies are stated at cost
(first-in, first-out method) which is not in excess of market.
PROPERTY AND EQUIPMENT
Depreciation is computed by the straight-line method over the estimated
useful life of the assets. Depreciation rates for buildings and improvements are
equivalent to useful lives ranging generally from 10 to 20 years. Estimated
useful lives of equipment vary generally from 4 to 10 years.
INCOME TAXES
Columbia files consolidated federal and state income tax returns which
include the accounts of the Hospitals. The provision for income taxes is
determined utilizing maximum federal and state statutory rates applied to income
before income taxes adjusted for certain items which are not deductible. Income
tax benefits or liabilities are reflected in the intercompany liabilities. All
income tax payments are made by the Hospitals through Columbia.
GENERAL AND PROFESSIONAL LIABILITY RISKS
Columbia assumes the liability for all general and professional liability
claims incurred and maintains the related reserve; accordingly, no reserve for
liability risks is recorded on the accompanying combined balance sheets. Prior
to April 24, 1995, Columbia maintained self-insurance coverage for general and
professional liability risks of the Hospitals. Davis Hospital and Medical Center
maintained reserves for general and professional liability risk up to certain
deductible limits during 1994.
F-31
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Costs attributable to the Hospitals were allocated based on actuarially
determined estimates. Effective April 24, 1995, the cost of general and
professional liability coverage were allocated by Columbia's captive insurance
company to the Hospitals based on actuarially determined estimates. The cost for
1994 and 1995 was approximately $1,046,000 and $1,137,000, respectively.
The Hospitals participate in a self-insured program for workers'
compensation and health insurance administered by Columbia. The cost, based on
the Hospitals' experience, was approximately $1,798,000 and $2,826,000 for 1994
and 1995, respectively.
LITIGATION AND OTHER MATTERS
The Hospitals are subject to claims and suits arising in the ordinary course
of business. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material effect on the Hospitals'
financial position, results of operations or cash flows.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements................................................... $ 1,831 $ 1,824
Buildings and improvements.............................................. 39,825 40,507
Equipment............................................................... 41,938 45,957
--------- ---------
83,594 88,288
Less accumulated depreciation........................................... 34,493 39,363
--------- ---------
49,101 48,925
Construction in progress................................................ 1,622 290
--------- ---------
$ 50,723 $ 49,215
--------- ---------
--------- ---------
</TABLE>
4. RETIREMENT PLANS
The Hospitals participate in Columbia's defined contribution retirement
plans, which cover substantially all employees. Benefits are determined
primarily as a percentage of a participant's earned income. Retirement expense
was approximately $1,676,000 in 1994 and $1,293,000 in 1995.
5. LEASES
Operating lease rental expense relating primarily to the rental of buildings
and equipment was approximately $2,662,000 and $3,367,000 in 1994 and 1995,
respectively.
F-32
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
5. LEASES (CONTINUED)
Future minimum rental commitments under noncancelable operating leases (with
an initial or remaining term in excess of one year) at December 31, 1995, are as
follows (in thousands):
<TABLE>
<CAPTION>
1996........................................ $ 3,133
<S> <C>
1997........................................ 3,069
1998........................................ 3,048
1999........................................ 2,666
2000........................................ 1,774
Thereafter.................................. 9,098
---------
Total minimum rental commitments............ $ 22,788
---------
---------
</TABLE>
6. PREPAID LEASE
Santa Rosa Medical Center is party to a prepaid lease agreement with Santa
Rosa County to lease certain real property and improvements. Effective September
1, 1994, the initial 20-year lease term, scheduled to terminate in the year
2005, was extended to the year 2025 for $2,000,000. In connection with the lease
extension, Santa Rosa Medical Center agreed to make capital improvements through
December 31, 2004, aggregating not less than $5,000,000.
Leasehold value in the accompanying combined balance sheets represents the
difference between market rent and contract rent, discounted to present value
over the initial lease term, at the date of acquisition of the Hospital by HTI.
Leasehold value is being amortized over the remaining initial lease term on a
straight-line basis.
7. AFFILIATED COMPANIES
The Hospitals incur expenses for management services provided by Columbia.
Due to the related nature of these entities, the amounts paid may not have been
the same if similar activities had been undertaken with unrelated parties.
F-33
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash........................................................................ $ 206
Accounts receivable, less allowance for doubtful accounts................... 15,664
Inventories................................................................. 2,019
Prepaid expenses and other.................................................. 1,040
--------------
Total current assets.......................................................... 18,929
Property, plant and equipment, less accumulated depreciation.................. 47,561
Prepaid lease................................................................. 5,961
Leasehold value, less accumulated amortization................................ 2,757
Other assets.................................................................. 4,063
--------------
Total assets.................................................................. $ 79,271
--------------
--------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities.............................. $ 8,750
Intercompany liabilities...................................................... 36,324
Shareholder's equity:
Common stock, Class B, $1 par value -- 3,000 shares authorized and issued... 3
Additional paid in capital.................................................. 8,259
Retained earnings........................................................... 25,935
--------------
Total shareholder's equity.................................................... 34,197
--------------
Total liabilities and shareholder's equity.................................... $ 79,271
--------------
--------------
</TABLE>
See accompanying notes.
F-34
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED STATEMENTS OF INCOME AND
CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total operating revenues.................................................................... $ 26,861 $ 28,075
Costs and expenses:
Salaries, wages, and benefits............................................................. 9,712 10,658
Supplies.................................................................................. 3,862 3,980
Purchased services........................................................................ 2,232 2,908
Other operating expenses.................................................................. 3,190 3,202
Provision for doubtful accounts........................................................... 1,495 1,777
Depreciation and amortization............................................................. 1,568 1,581
Interest expense.......................................................................... 854 576
Management fees........................................................................... 583 1,857
--------- ---------
Total costs and expenses.................................................................... 23,496 26,539
--------- ---------
Income before income taxes.................................................................. 3,365 1,536
Income taxes................................................................................ 1,329 607
--------- ---------
Net income.................................................................................. 2,036 929
Retained earnings at beginning of period.................................................... 20,635 25,006
--------- ---------
Retained earnings at end of period.......................................................... $ 22,671 $ 25,935
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-35
<PAGE>
DAVIS HOSPITAL AND MEDICAL CENTER
PIONEER VALLEY HOSPITAL
SANTA ROSA MEDICAL CENTER
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................. $ 2,036 $ 929
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 1,568 1,581
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (1,842) (2,006)
Prepaid expenses and inventories........................................................ (322) 272
Accounts payable and other current liabilities.......................................... 114 1,394
--------- ---------
Net cash provided by operating activities................................................... 1,554 2,170
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment.................................................. (950) --
Disposals of property, plant and equipment.................................................. -- 73
Decrease in net leasehold value and other long term assets.................................. (750) 1,249
--------- ---------
Net cash used in investing activities....................................................... (1,700) 1,322
CASH FLOWS FROM FINANCING ACTIVITIES
Net transfers (to) from Columbia............................................................ 58 (3,942)
--------- ---------
Increase in cash............................................................................ (88) (450)
Cash at beginning of period................................................................. 456 656
--------- ---------
Cash at end of period....................................................................... $ 368 $ 206
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid during the period for:
Interest payments......................................................................... $ 854 $ 576
Income tax payments....................................................................... 1,329 607
</TABLE>
See accompanying notes.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Champion Healthcare Corporation
We have audited the accompanying consolidated balance sheet of Champion
Healthcare Corporation as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Champion
Healthcare Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 27, 1996
F-37
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 48,424 $ 7,583
Restricted cash........................................................................ 5,000 --
Accounts receivable, less allowance for doubtful accounts of $4,959 and $10,118 in 1994
and 1995, respectively................................................................ 17,115 33,262
Supplies inventory..................................................................... 1,942 3,470
Prepaid expenses and other current assets.............................................. 4,899 6,264
---------- ----------
Total current assets................................................................... 77,380 50,579
Property and equipment:
Land................................................................................... 4,510 6,418
Buildings and improvements............................................................. 48,888 115,688
Equipment.............................................................................. 25,016 42,343
Construction in progress............................................................... 8,839 4,666
---------- ----------
Total property and equipment......................................................... 87,253 169,115
Less allowances for depreciation and amortization...................................... 5,340 10,733
---------- ----------
Total property and equipment, net.................................................... 81,913 158,382
Investment in Dakota Heartland Health System............................................. 40,088 48,145
Goodwill, net of accumulated amortization of $37 and
$1,051 in 1994 and 1995, respectively................................................... 5,947 20,933
Intangible assets, net of accumulated amortization of $1,647 and
$2,052 in 1994 and 1995, respectively................................................... 5,718 7,438
Other assets............................................................................. 5,507 5,783
---------- ----------
Total assets......................................................................... $ 216,553 $ 291,260
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................................... $ 4,221 $ 1,166
Current portion of capital lease obligations........................................... 560 1,301
Accounts payable....................................................................... 10,637 13,952
Due to third parties................................................................... 2,241 8,829
Accrued and other liabilities.......................................................... 8,446 15,490
---------- ----------
Total current liabilities............................................................ 26,105 40,738
Long-term debt........................................................................... 102,626 159,670
Capital lease obligations................................................................ 2,658 2,777
Other long-term liabilities.............................................................. 11,037 10,177
Commitments and contingencies (Notes 3 and 13)
Redeemable preferred stock............................................................... 76,294 46,029
Common stock, $.01 par value:
Authorized - 25,000,000 shares, 4,223,975 and 11,868,230 shares issued and outstanding
in 1994 and 1995, respectively........................................................ 42 119
Common stock subscribed, 100,000 and 80,000 shares in 1994 and 1995, respectively........ 50 40
Common stock subscription receivable..................................................... (50) (40)
Paid in capital.......................................................................... 15,998 47,643
Accumulated deficit...................................................................... (18,207) (15,893)
---------- ----------
Total liabilities and stockholders' equity........................................... $ 216,553 $ 291,260
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net patient service revenue................................................ $ 86,728 $ 99,613 $ 163,500
Other revenue.............................................................. 3,104 4,580 4,020
----------- ----------- -----------
Net revenue............................................................ 89,832 104,193 167,520
Expenses:
Salaries and benefits.................................................... 36,698 41,042 72,188
Supplies................................................................. 11,641 12,744 21,113
Other operating expenses................................................. 24,033 29,767 44,594
Provision for bad debts.................................................. 5,669 7,812 12,016
Interest................................................................. 2,725 6,375 13,618
Depreciation and amortization............................................ 3,524 4,010 9,290
Equity in earnings of Dakota Heartland Health System..................... -- -- (8,881)
Asset write-down......................................................... 15,456 -- --
----------- ----------- -----------
Total expenses......................................................... 99,746 101,750 163,938
----------- ----------- -----------
Income (loss) before income taxes and extraordinary items................ (9,914) 2,443 3,582
Provision for income taxes................................................. 1,009 200 150
----------- ----------- -----------
Income (loss) before extraordinary items................................. (10,923) 2,243 3,432
Extraordinary items:
Loss on early extinguishment of debt, net of tax benefit of $634 for
1993.................................................................... (1,230) -- (1,118)
----------- ----------- -----------
Net income (loss)........................................................ $ (12,153) $ 2,243 $ 2,314
----------- ----------- -----------
----------- ----------- -----------
Loss applicable to common stock.......................................... $ (13,805) $ (2,467) $ (9,017)
----------- ----------- -----------
----------- ----------- -----------
Loss per common share:
Loss before extraordinary items.......................................... $ (11.21) $ (1.69) $ (1.86)
Extraordinary items...................................................... (1.10) -- (0.26)
----------- ----------- -----------
Loss per common share.................................................. $ (12.31) $ (1.69) $ (2.12)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ADDITIONAL
-------------------------- ---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SUBSCRIBED RECEIVABLE CAPITAL DEFICIT
------------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1993........... 1,100,000 $ 11 $ 50 $ (50) $ (2,363)
Preferred stock dividends accrued,
including accretion of issuance
costs................................ (1,652)
Exercise of bridge loan warrants...... 26,250
Net loss.............................. (12,153)
------------- ----- --- --- ----------- ------------
BALANCES AT DECEMBER 31, 1993......... 1,126,250 11 50 (50) (16,168)
Exercise of bridge loan warrants...... 83,044 1
Shares issued in AmeriHealth
acquisition.......................... 3,014,681 30 $ 16,426
Preferred stock dividends accrued,
including accretion of issuance
costs................................ (428) (4,282)
Net income............................ 2,243
------------- ----- --- --- ----------- ------------
BALANCES AT DECEMBER 31, 1994......... 4,223,975 42 50 (50) 15,998 (18,207)
Preferred stock dividends accrued,
including accretion of issuance
costs................................ (5,982)
Dividends declared pursuant to the
Recapitalization..................... (5,349)
Issuance of warrants.................. 668
Exercise of options/stock
subscriptions........................ 38,411 1 (10) 10 108
Shares issued pursuant to the
Recapitalization, net of issuance
costs................................ 7,605,844 76 42,200
Net income............................ 2,314
------------- ----- --- --- ----------- ------------
BALANCES AT DECEMBER 31, 1995......... 11,868,230 $ 119 $ 40 $ (40) $ 47,643 $ (15,893)
------------- ----- --- --- ----------- ------------
------------- ----- --- --- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income (loss).......................................................... $ (12,153) $ 2,243 $ 2,314
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary loss, net.................................................. 1,230 -- 1,118
Equity in earnings of Dakota Heartland Health System,
net of distributions.................................................... -- -- (8,056)
Depreciation and amortization............................................ 3,524 4,010 9,290
Deferred income taxes.................................................... (1,171) 1,600 --
Provision for bad debts.................................................. 5,669 7,812 12,016
Asset write-down......................................................... 15,456 -- --
Changes in operating assets and liabilities,
excluding acquisitions:
Accounts receivable.................................................... (6,842) (9,088) (14,864)
Supplies inventory..................................................... (446) (264) 144
Prepaid expenses and other current assets.............................. (169) (4,154) 2,103
Other assets........................................................... (1,654) (908) (3,210)
Accounts payable, income taxes payable and other accrued liabilities... 1,935 (1,968) 12,037
----------- ---------- ----------
Net cash provided by (used in) operating activities.................. 5,379 (717) 12,892
----------- ---------- ----------
Investing activities:
Purchase of facilities................................................... (5,813) -- (59,810)
Net payment for investment in partnership................................ -- (20,000) (2,000)
Cash acquired in acquisitions............................................ -- 4,341 361
Additions to property and equipment...................................... (4,726) (12,561) (42,822)
Proceeds from sales of property and equipment............................ -- -- 1,704
Investment in note receivable............................................ -- (757) (2,524)
----------- ---------- ----------
Net cash used in investing activities................................ (10,539) (28,977) (105,091)
----------- ---------- ----------
Financing activities:
Proceeds from issuance of long-term obligations.......................... 63,091 19,133 143,532
Payments related to issuance of long-term debt obligations and other
financing costs......................................................... (2,396) -- (3,927)
Payments on long-term obligations........................................ (28,516) (2,300) (94,715)
Payments on obligations assumed through acquisitions..................... -- (10,911) --
Proceeds from issuance of redeemable preferred stock and stock
warrants................................................................ 34,345 11,223 793
Payments related to preferred and common stock issuance.................. (882) -- (38)
Cash restricted under collateral agreement............................... -- (5,713) --
Cash released under collateral agreement................................. -- -- 5,713
----------- ---------- ----------
Net cash provided by financing activities............................ 65,642 11,432 51,358
----------- ---------- ----------
(Decrease) increase in cash and cash equivalents..................... 60,482 (18,262) (40,841)
Cash and cash equivalents at beginning of year............................. 6,204 66,686 48,424
----------- ---------- ----------
Cash and cash equivalents at end of year................................... $ 66,686 $ 48,424 $ 7,583
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATIONAL BACKGROUND
Champion Healthcare Corporation (the "Company"), a Delaware corporation, is
engaged in the ownership and management of general acute care and specialty
hospitals and related health care facilities. At December 31, 1995, including
hospital partnerships, the Company owns and/or operates seven acute care
hospitals, two psychiatric hospitals and a skilled nursing facility. See Note 16
"Subsequent Events" for a discussion of recent acquisition activity.
Including hospital partnerships, the seven general acute care hospitals
owned and/or operated by the Company provide a range of medical and surgical
services typically available in general acute care hospitals. These services
include inpatient care such as intensive and cardiac care, diagnostic services,
radiological services and emergency services. All of the hospitals provide an
extensive range of outpatient services, including ambulatory surgery, laboratory
and radiology. The Company's two psychiatric hospitals provide child, adolescent
and adult comprehensive psychiatric and chemical dependency treatment programs,
with inpatient, day hospital, outpatient and other ambulatory care.
Effective December 31, 1995, the Company and its preferred shareholders
entered into the 1995 Recapitalization Agreement to reduce the complexity of the
Company's capital structure and eliminate the accrual of future dividends on its
outstanding preferred stock and the resulting impact on earnings per share. As a
result of the Recapitalization Agreement, common shares outstanding increased
from 4,262,386 to 11,868,230 and preferred shares outstanding decreased from
10,452,370 to 2,605,714. The transactions comprising the 1995 Recapitalization
Agreement are herein collectively referred to as the "Recapitalization." See
Note 8 "Stockholders' Equity" for a discussion of the terms of the
Recapitalization.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
all wholly-owned and majority-owned subsidiaries and majority-owned
partnerships. The Company uses the equity method of accounting when it has a 20%
to 50% interest in other companies and partnerships. Under the equity method,
the Company records its original investment at cost and adjusts its investment
for its undistributed share of the earnings or losses of the equity investee.
All significant intercompany transactions and accounts have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of net revenue and expenses during the
period. Actual results could differ from those estimates. The most significant
areas which require the use of management's estimates relate to the
determination of estimated third-party payor settlements, allowance for
uncollectable accounts receivable, income tax valuation allowance and reserves
for professional liability risk.
NET PATIENT SERVICE REVENUE
The Company's facilities have entered into agreements with third-party
payors, including US government programs and managed care health plans, under
which the Company is paid based upon established charges, cost of services
provided, predetermined rates by diagnosis, fixed per diem rates or discounts
from established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third party payors.
Payments for services rendered to patients covered by the
F-42
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Medicare and Medicaid programs are generally less than billed charges.
Provisions for contractual adjustments are made to reduce charges to these
patients to estimated receipts based upon each program's principle of
payment/reimbursement (either prospectively determined or retrospectively
determined costs). Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. In management's opinion,
adequate allowance has been provided for possible adjustments that might result
from final settlements under these programs. Allowance for contractual
adjustments under these programs are deducted from accounts receivable in the
accompanying consolidated balance sheet.
OTHER REVENUE
Other revenue includes income from non-patient hospital activities such as
cafeteria sales and interest income, among others.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments,
primarily US government backed securities and certificates of deposit, purchased
with an original maturity of three months or less. The Company maintains its
cash in bank deposits which, at times, may exceed federally insured limits.
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")
on January 1, 1995. All investments accounted for under SFAS No. 115 are
classified as available-for-sale, and the implementation of this statement had
no impact on net income.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients. Current earnings are
charged with an allowance for doubtful accounts based on experience and other
circumstances that may affect the ability of patients to meet their obligations.
Accounts deemed uncollectable are charged against that allowance.
SUPPLIES INVENTORY
Inventory consists primarily of pharmaceuticals and supplies and is stated
at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for new facilities
and equipment and those that substantially increase the useful life of existing
property and equipment are capitalized. Ordinary maintenance and repairs are
charged to expense when incurred. Upon disposition, the assets and related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is included in the statement of operations.
Depreciation is computed using the straight-line method at rates calculated
to amortize the cost of assets over their estimated useful lives ranging from 3
to 40 years.
F-43
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents costs in excess of net assets acquired and is amortized
on a straight line basis over a period of 20 years. Intangible assets consist of
deferred financing costs, non-compete agreements and various other intangible
assets. Deferred financing costs are amortized on a straight-line basis over the
term of the applicable debt. Costs related to non-compete agreements and other
intangibles are amortized on a straight-line basis over two to five years.
Amortization expense for 1993, 1994 and 1995 was approximately $1,209,000,
$1,000,000, and $2,724,000, of which approximately $139,000, $395,000, and
$845,000 relate to deferred financing costs.
CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
Through December 31, 1995, the Company reflected accumulated unpaid and
undeclared dividends on its cumulative redeemable preferred stock as an increase
in the related issue with corresponding charges to additional paid-in capital,
to the extent available, and accumulated deficit. Pursuant to the
Recapitalization, all accrued preferred dividends at December 31, 1995
(approximately $12,614,000) were paid by the issuance of common stock at an
agreed price of $7.00 per share. Additionally, the holders of Series C and D
preferred stock have waived all dividends accruing after December 31, 1995. See
Note 8 "Stockholders' Equity" for a discussion of the terms of the
Recapitalization.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income taxes are recorded to reflect the tax consequence
on future years of temporary differences between the tax basis of the assets and
liabilities and their financial amounts at year-end.
LOSS PER SHARE
Loss per common and common equivalent share amounts are calculated by
dividing loss applicable to common stock by the weighted average number of
common shares outstanding during each period, as restated for the two-for-one
stock split on July 7, 1993, and assuming the exercise, when dilutive, of all
stock options and warrants having an exercise price less than the average stock
market price of the common stock using the treasury stock method. Common stock
equivalents and other potentially dilutive securities have not been considered
because their effect was antidilutive in all years. Weighted average shares
outstanding used to determine earnings per common and common equivalent share
were 1,122,000, 1,457,000, and 4,255,000 in 1993, 1994 and 1995, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year financial statements
to conform to the 1995 presentation. These reclassifications had no effect on
the results of operations previously reported.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 121, which is effective for fiscal years beginning after December 15, 1995,
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company does not believe that the adoption of this statement
will have a material effect on its financial statements.
F-44
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. Entities will be allowed to
measure compensation expense for stock-based compensation under SFAS 123 or APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to
account for such compensation under APB Opinion No. 25 will be required to make
pro forma disclosures of net income and earnings per share as if SFAS 123 had
been applied. The Company is presently evaluating which alternative it will
adopt under SFAS 123 and has not yet quantified the potential impact on the
Company of adopting this new standard.
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS
PHYSICIANS AND SURGEONS HOSPITAL
The Company acquired Physicians and Surgeons Hospital in Midland, Texas on
May 1, 1993 for approximately $5,800,000 in cash and the assumption of
$1,200,000 in debt. The acquisition was accounted for as a purchase transaction
with operations reflected in the consolidated financial statements beginning May
1, 1993. The Company replaced P&S in the fourth quarter of 1995 with the newly
constructed 101 bed Westwood Medical Center. Total construction cost for the new
facility was approximately $39,017,000.
PSYCHIATRIC HEALTHCARE CORPORATION
On October 21, 1994, the Company acquired Psychiatric Healthcare Corporation
("PHC"), a privately held corporation headquartered in Birmingham, Alabama, by
the merger of PHC with and into a wholly-owned subsidiary of the Company. PHC
owned and operated two free-standing psychiatric hospitals with a combined total
of 219 beds located in Springfield, Missouri and Alexandria, Louisiana, and
owned a third free-standing psychiatric hospital located in Sherman, Texas, that
was closed and held for sale at the date of acquisition. The net purchase price,
including contingent consideration of $2,000,000 paid in 1995 and the assumption
of long term debt, was approximately $24,600,000. The Company paid no cash to
PHC shareholders. Total consideration paid by the Company consisted of the
assumption of approximately $14,880,000 in long-term debt and the issuance of
the following securities to PHC shareholders: (i) 264,306 shares of Series D
preferred stock, (ii) $7,123,000 of 11% Senior Subordinated Notes with 213,690
detachable warrants to acquire common stock and (iii) options, which were
subsequently exercised, to acquire an additional 7,561 shares of Series D
Preferred Stock and $202,000 principal amount of 11% Senior Subordinated Notes
with 6,060 detachable warrants. The payment of contingent consideration had been
subject to the Company's receipt of up to $2,000,000 from a combination of the
sale of the Sherman, Texas facility, a recovery from a lawsuit and certain
specified Medicaid payments. All conditions for the payment of contingent
consideration were substantially met in 1995, including the sale of Sherman
Hospital for approximately $1,300,000 in March 1995. The acquisition was
accounted for as a purchase transaction with operations reflected in the
consolidated financial statements effective October 1, 1994. The Company has
completed its analysis of the assets acquired and liabilities assumed and has
allocated approximately $8,800,000 in excess purchase price to goodwill, which
is currently being amortized over a 20 year period.
AMERIHEALTH, INC.
On December 6, 1994, the Company merged with AmeriHealth, Inc. ("AHH"), a
Delaware corporation, with AHH being the surviving corporation resulting from
the merger (the "Combined Company"). The merger was accounted for as a
recapitalization of the Company with the Company as
F-45
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
the acquiror (a reverse acquisition). Concurrent with the merger, the name of
the Combined Company was changed to Champion Healthcare Corporation, and the
Combined Company adopted the Company's certificate of incorporation provisions.
Pursuant to the merger, the Combined Company: (a) paid a cash distribution
of $0.085 cents per share to all common stockholders of AHH, (b) issued one
share of its Combined Company common stock for each 5.70358 shares of the
approximately 17.2 million outstanding shares of AHH's Common Stock, (c) issued
one share of Combined Company common stock for each of the approximately 1.2
million then outstanding shares of the Company common stock, and (d) issued one
share of newly authorized Combined Company preferred stock for each of the then
outstanding shares of the Company's preferred stock. The terms of the new voting
shares of Combined Company preferred stock are identical to those of the
Company's preferred stock outstanding prior to the merger. In addition, holders
of the outstanding shares of AHH's $2.125 Increasing Rate Cumulative Convertible
Preferred Stock were canceled in exchange for cash equal to the redemption price
of such shares plus all unpaid dividends which totaled approximately $47,000.
The net purchase price, including the assumption of approximately $17,700,000 in
debt, was approximately $38,876,000. The acquisition was accounted for as a
purchase transaction with operations reflected in the consolidated financial
statements effective December 1, 1994. The Company has completed its analysis of
the assets acquired and liabilities assumed and has allocated approximately
$8,946,000 in excess purchase price to goodwill, which is currently being
amortized over a 20 year period.
PARTNERSHIP WITH DAKOTA HOSPITAL
On December 21, 1994, a wholly owned subsidiary of the Company that owned
Heartland Medical Center, a 142 bed general acute care facility in Fargo, North
Dakota, entered into a partnership with Dakota Hospital ("Dakota"), a
not-for-profit corporation that owned a 199 bed general acute care hospital also
in Fargo, North Dakota. The partnership is operated as Dakota Heartland Health
System ("DHHS"). Also on December 21, 1994, the Company entered into an
operating agreement with the partnership and Dakota to manage the combined
operations of the two hospitals. Under the terms of the partnership agreement,
the Company is obligated to advance funds to DHHS to cover any and all operating
deficits of DHHS. DHHS began operations on December 31, 1994.
The Company and Dakota contributed their respective hospitals debt and lien
free (except for capitalized lease obligations), including certain working
capital components, and the Company contributed an additional $20,000,000 in
cash, each in exchange for 50% ownership in the partnership. A $20,000,000
special distribution was made to Dakota after capitalization of the partnership
in accordance with the terms of the partnership agreement. The Company will
receive 55% of the net income and distributable cash flow ("DCF") of the
partnership until such time as it has recovered on a cumulative basis an
additional $10,000,000 of DCF in the form of an "excess" distribution. As of
December 31, 1995, the Company has received $825,000 in cash distributions from
DHHS.
The partnership is administered by a Governing Board comprised of six
members appointed by Dakota, three members appointed by the Company and three
members appointed by mutual consent of the Dakota members and the Company
members. Certain Governing Board actions require the majority approval of each
of the Company and Dakota members. Because the partners through the partnership
agreement have delegated substantially all management of the partnership to the
Company through the operating agreement, the authority of the Governing Board is
limited.
Beginning July 1996, Dakota has the right to require the Company to purchase
its partnership interest free of debt or liens for a cash purchase price equal
to 5.5 times Dakota's pro rata share of earnings before depreciation, interest,
income taxes and amortization, as defined in the partnership agreement, less
Dakota's pro-rata share of the partnership's long-term debt. DHHS had earnings
F-46
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
before depreciation, interest, income taxes and amortization of approximately
$19,000,000 for the year ended December 31, 1995. Beginning January 1998, the
purchase price for Dakota's partnership interest shall not be less than
$50,000,000. After receipt of written notice of Dakota's intent to sell its
partnership interest, the Company would have 12 months to complete the purchase.
Should the Company not complete the purchase during this period, Dakota has the
right to, among others, (i) terminate the operating agreement and engage an
outside party to manage the hospital, (ii) replace the Company's designees to
the Governing Board and (iii) enter into a fair market value transaction to sell
substantially all of the partnership's assets.
The Company accounts for its investment in DHHS under the equity method. The
following table summarizes certain financial information of DHHS as of December
31, 1994 and 1995, and for the year ended December 31, 1995 (dollars in
thousands). DHHS began operations on December 31, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenue.......................................... $ 106,011
Net income........................................... 16,148
Company's equity in the earnings of DHHS............. 8,881
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets....................................... $ 28,220 $ 39,008
Non-current assets................................... 44,298 55,854
Current liabilities.................................. 12,212 19,980
Non-current liabilities.............................. 129 57
Partners' equity..................................... 60,177 74,825
</TABLE>
SALT LAKE REGIONAL MEDICAL CENTER
On April 13, 1995, the Company acquired Salt Lake Regional Medical Center
("SLRMC") from Columbia/HCA Healthcare Corporation ("Columbia"). SLRMC is
comprised of a 200 bed tertiary care hospital and five clinics and is located in
Salt Lake City, Utah. Total acquisition cost for SLRMC was approximately
$61,042,000, which consisted of approximately $56,816,000 in cash and additional
consideration due to Columbia of approximately $1,767,000, as well as the
assumption of approximately $2,459,000 in capital lease obligations. Cash
consideration included approximately $11,783,000 for certain working capital
components, resulting in a net purchase price of approximately $49,259,000. The
Company funded the asset purchase from available cash and approximately
$30,000,000 in borrowings under its then outstanding credit facility. The
acquisition was accounted for as a purchase transaction with operations
reflected in the consolidated financial statements beginning April 14, 1995.
JORDAN VALLEY HOSPITAL
On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan")
from Columbia. Jordan is a 50 bed acute care hospital located in West Jordan,
Utah, a suburb of Salt Lake City. The Company acquired Jordan in exchange for
Autauga Medical Center, an 85 bed acute care hospital, and Autauga Health Care
Center, a 72 bed skilled nursing facility, both in Prattville, Alabama, plus
preliminary cash consideration paid to the seller of approximately $10,750,000,
which included approximately $3,750,000 for certain net working capital
components, subject to adjustment, and reimbursement of certain capital
expenditures made previously by the seller. The transaction did not result in a
gain or loss. The Alabama facilities were acquired as part of the Company's
acquisition of AmeriHealth, Inc. on December 6, 1994.
F-47
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND OTHER INVESTMENTS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following selected unaudited pro forma financial information for the
years ended December 31, 1994 and 1995 assumes that the acquisition of SLRMC
occurred on January 1, 1994. The selected unaudited pro forma financial
information for the year ended December 31, 1994, assumes that the acquisitions
of AHH and PHC, and the formation of the DHHS partnership occurred on January 1,
1994. The pro forma financial information below does not purport to be
indicative of the results that actually would have been obtained had the
operations been combined during the periods presented, and is not intended to be
a projection of future results or trends.
<TABLE>
<CAPTION>
1994 1995
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenue......................................................... $ 195,915 $ 189,540
----------- -----------
----------- -----------
Equity in earnings of DHHS.......................................... $ 5,443 $ 8,881
----------- -----------
----------- -----------
Income (loss) before extraordinary item............................. $ (3,198) $ 3,999
----------- -----------
----------- -----------
Net income (loss)................................................... $ (3,198) $ 2,881
----------- -----------
----------- -----------
Loss applicable to common stock..................................... $ (8,196) $ (8,450)
----------- -----------
----------- -----------
Loss per common share before extraordinary item..................... $ (1.94) $ (1.72)
----------- -----------
----------- -----------
Loss per common share............................................... $ (1.94) $ (1.99)
----------- -----------
----------- -----------
Weighted average number of common shares outstanding................ 4,224 4,255
----------- -----------
----------- -----------
</TABLE>
NOTE 4. ASSET WRITE-DOWN
In December 1993, the Company ceased providing medical services at Gulf
Coast Hospital ("GCH"), one of two Company-owned hospitals located in Baytown,
Texas, which it had acquired from HCA Health Services of Texas, Inc. on
September 1, 1992. The Company intended to use GCH for limited administrative
purposes only until it could arrange a sale. As a result, the Company wrote down
the GCH assets by $15,456,000, which reflected the estimated fair value of the
facility under limited use less ongoing operating costs and various rental
concessions previously granted the tenants. The book value of GCH prior to the
write-down was $16,681,000. The remaining net historical cost of $1,225,000
represented the equipment moved to the other Baytown campus. In June 1994, the
Company sold the former HCA facility to a physician group for nominal
consideration. The Company believes that assets associated with its other campus
in Baytown have not been impaired as the result of this change in operations.
NOTE 5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following at December 31,
1994 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Accrued salaries and wages.............................................. $ 1,303 $ 3,851
Accrued vacation........................................................ 1,148 2,516
Accrued interest........................................................ 1,256 3,156
Other................................................................... 4,739 5,967
--------- ---------
Total accrued and other liabilities................................... $ 8,446 $ 15,490
--------- ---------
--------- ---------
</TABLE>
F-48
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1994 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Revolving Loan................................................................ $ 47,700
Term Loan..................................................................... $ 18,500 --
11% Senior Subordinated Notes (face amount of $99,089, net of a discount of
$642 at December 31, 1995)................................................... 62,703 98,447
Health Care REIT, Inc......................................................... 12,770 11,120
Wilmington Savings Fund Society............................................... 9,766 --
Other notes payable........................................................... 3,108 3,569
----------- -----------
Total debt.................................................................. 106,847 160,836
Less current portion.......................................................... (4,221) (1,166)
----------- -----------
Total long-term debt...................................................... $ 102,626 $ 159,670
----------- -----------
----------- -----------
</TABLE>
On June 12, 1995, the Company issued $35,000,000 face amount (less a
discount of approximately $668,000) of Senior Subordinated Notes (the "Notes")
maturing on December 31, 2003. The Notes bear interest at an annual effective
rate of 11.35% (11% stated rate). Interest is payable quarterly, and the stated
rate increases from 11% to 11.5% on March 31, 1996. The Notes include detachable
warrants for the purchase of 525,000 shares of common stock. The Notes are
subject to redemption on or after December 31, 1995, at the Company's option, at
prices declining from 112.5% of principal amount at December 31, 1995, to par at
December 31, 2002. Additionally, there is a requirement to repurchase all
outstanding Notes in the event of a change in control of the Company, at the
holder's option, based on a declining redemption premium ranging from 112.5% to
103% of principal. Proceeds from the issuance of Notes were used to paydown
approximately $31,500,000 principal amount outstanding under the Revolving Loan
with the remainder retained for general corporate purposes. The Notes are
uncollateralized obligations and are subordinated in right of payment to certain
senior indebtedness of the Company. Approximately $668,000 of the proceeds from
the issuance of the Notes were allocated to the warrants.
On May 31, 1995, the Company refinanced and paid a $50,000,000 term and
revolving credit facility ("old credit facility") obtained in November 1993 with
a $100,000,000 revolving credit facility (the "Revolving Loan") with Banque
Paribas, as agent, AmSouth Bank of Alabama, Bank One of Texas, N.A., CoreStates
Bank, N.A., and NationsBank of Texas, N.A. Amounts available under the Revolving
Loan are subject to certain limitations, and the total amount available under
the Revolving Loan declines to $80,000,000 on the third anniversary date. The
Revolving Loan also provides for short term letters of credit of up to
$5,000,000. The Revolving Loan matures no later than March 31, 1999, and bears
interest at a lender defined incremental rate plus, at the Company's option, the
LIBOR or Prime rate. The incremental rate to be applied is based upon the
Company meeting certain operational performance targets, as defined, and ranges
from 2.5% to 3.0% with respect to the LIBOR rate option and from 1.0% to 1.5%
with respect to the Prime rate option. The interest rates on the Revolving Loan
and old credit facility were 8.85% and 9.12%, respectively, at December 31, 1995
and 1994. The Company currently has approximately $649,000 outstanding under
letters of credit. Proceeds from the refinancing were used to pay approximately
$48,000,000 principal amount outstanding under the Company's old credit facility
and approximately $9,533,000 principal amount of debt held by Wilmington Savings
Fund Society ("WSFS"). The interest rate on the WSFS Loan was 11.5% and 10.5% at
May 31, 1995 (the date of payment) and December 31, 1994, respectively. With the
exception of certain assets collateralizing debt assumed in the Company's 1994
acquisition of PHC, the Revolving Loan is collateralized by substantially all of
the Company's assets. The terms of the Revolving Loan eliminated the requirement
under the Company's previous bank credit facility to maintain a
F-49
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
cash collateral account with the lender in the amount of $5,000,000. The
Company's future acquisitions and divestitures may require, in certain
circumstances, consent by lenders under this agreement.
In connection with the Company's refinancing and payment of its old credit
facility, the Company wrote off unamortized deferred financing costs of
$1,118,000, which had no tax effect. This amount has been recorded as an
extraordinary loss in the accompanying consolidated statement of operations. The
Company also prepaid the WSFS Loan with no material financial impact.
On December 30, 1994, pursuant to commitments obtained from the original
purchasers of the 11% Senior Subordinated Notes issued on December 31, 1993, the
Company issued an additional $19,133,000 of Notes with detachable warrants for
the purchase of 573,990 shares of common stock. No value was allocated to the
warrants at the time of issuance because the interest rate on the Notes was
considered a market rate and the exercise price was greater than the estimated
fair value of the common stock. The Notes bear interest at an effective annual
rate of 11%. All other terms of the Notes are substantially the same as those
discussed above.
In connection with the Company's acquisition of PHC, the Company issued
approximately $7,123,000 principal amount of Notes, and assumed approximately
$12,970,000 of mortgage financing on the PHC facilities, $257,000 in capitalized
leases, $159,000 in notes payable and a working capital credit facility with a
balance of approximately $1,494,000, which was repaid from available cash of the
Company and PHC. The Notes bear interest at an effective annual rate of 11%. All
other terms of the Notes are substantially the same as those discussed above.
The mortgage notes are payable to Health Care REIT, Inc. and bear interest
at an annual rate that increases yearly from 13.44% at December 31, 1995, to
15.4% at November 1, 2001. Thereafter, the mortgage bears interest at an annual
rate equal to the seven year US Treasuries rate plus 500 basis points.
Approximately $10,125,000 principal balance of the mortgage matures on December
1, 2008, with principal payments on that portion commencing in December 1995,
based on 25 year amortization. The remaining balance of the mortgage requires
quarterly principal payments of $200,000 through 1997. The Company sold the
Sherman, Texas facility for approximately $1,300,000 on March 22, 1995. In
connection with the sale, the Company made a required principal payment of
$850,000 on the mortgage collateralized by this facility and obtained a release
of collateral from the lender. The remaining principal balance is now
collateralized by the Company's hospital in Alexandria, Louisiana.
Other notes payable bear interest at rates ranging from 5.1% to 11.8% and
are generally collateralized by the underlying assets to which they relate.
On November 5, 1993, the Company refinanced its subsidiary term and
revolving credit loans obtained in August 1991, with a $50,000,000 credit
facility comprised of a $20,000,000 term loan and a $30,000,000 revolving credit
facility (collectively, the "old credit facility," as referred to above). In
connection with the refinancing, a prepayment premium and unamortized deferred
financing costs of $1,230,000, net of an income tax benefit of $634,000, were
written off and recorded as an extraordinary loss.
The Company capitalized approximately $1,462,000 and $294,000 in interest
costs associated with the construction of a hospital and other medical related
facilities at December 31, 1995 and 1994, respectively. The Company had no
capitalized interest for the year ended December 31, 1993.
The Revolving Loan, Notes and Mortgages referenced above contain restrictive
covenants which include, among others, restrictions on additional indebtedness,
the payment of dividends and other
F-50
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
distributions, the repurchase of common stock and related securities under
certain circumstances, and the requirement to maintain certain financial ratios.
The Company was in compliance with or has obtained permanent waivers for all
loan covenants to which it was subject as of December 31, 1994 and 1995.
Maturities of debt as of December 31, 1995, were as follows (dollars in
thousands):
<TABLE>
<S> <C>
1996............................................................. $ 1,166
1997............................................................. 2,514
1998............................................................. 885
1999............................................................. 47,785
2000............................................................. 79
Thereafter....................................................... 108,407
---------
$ 160,836
---------
---------
</TABLE>
NOTE 7. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consisted of the following at December 31, 1994
and 1995 (See Note 8 "Stockholders' Equity" for a discussion of the effect of
the Recapitalization on the outstanding series of preferred stock):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Series D - Cumulative convertible redeemable preferred stock, $.01 par, 2,200,000 shares
authorized; 2,105,258 and 2,156,903 shares issued and outstanding at December 31, 1994 and
1995, respectively ($39,787 and $38,824 liquidation value in 1994 and 1995,
respectively)............................................................................. $ 38,754 $ 37,982
Series C - Cumulative convertible redeemable preferred stock, $.01 par, 500,000 shares
authorized; 448,811 shares issued and outstanding at December 31, 1994 and 1995 ($8,778
and $8,079 liquidation value in 1994 and 1995, respectively).............................. 8,740 8,047
Series BB - Cumulative convertible redeemable preferred stock, $.01 par; 1,577,547 shares
issued and outstanding at December 31, 1994............................................... 21,551 --
Series A-1 - Cumulative convertible redeemable preferred stock, $.01 par; 2,769,109 shares
issued and outstanding at December 31, 1994............................................... 3,206 --
Series A - Cumulative convertible redeemable preferred stock, $.01 par; 3,500,000 shares
issued and outstanding at December 31, 1994............................................... 4,043 --
--------- ---------
$ 76,294 $ 46,029
--------- ---------
--------- ---------
</TABLE>
SERIES D
The Series D cumulative convertible redeemable preferred stock ("Series D")
is convertible, at the holder's option, into the common stock at a price of
$9.00 per share until redemption date. The conversion price is subject to
adjustment upon the sale or issuance of additional common stock, including stock
rights, options and convertible securities, for consideration less than the
conversion price in effect immediately prior to the sale or issuance in
question. Redemption of Series D shares will occur only on the redemption date
of June 1, 2000, at the redemption price of $18.00 per share. If all outstanding
shares of Series D and Series C can not be redeemed at the same time, then
redemption of such shares will be prorated with preference given to Series D, as
defined. Series D shares are entitled to liquidation payments of $18.00 per
share. If the Company is unable to pay fully the Series D and Series C
stockholders, then liquidation of such shares will be prorated with preference
given to
F-51
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED)
Series D, as defined. Series D will participate in any dividends declared on
common stock on an as converted basis. At December 31, 1995, the Series D shares
were convertible into 4,313,806 shares of common stock.
The Company issued 51,645 shares of Series D preferred stock to PHC
shareholders in 1995 pursuant to the exercise of options and the issuance of
contingent consideration due under the terms of the PHC purchase agreement. On
October 21, 1994, the Company issued 212,661 shares of Series D preferred stock
to PHC shareholders in connection with its acquisition of PHC. On December 30,
1994, the Company issued 623,453 shares of Series D preferred stock pursuant to
existing commitments for the original purchasers of Series D. Cash proceeds from
the December 30, 1994, issuance were $11,222,000.
SERIES C
The Series C cumulative convertible redeemable preferred stock ("Series C")
is convertible, at the holder's option, into common stock at a price of $9.00
per share until the redemption date. The conversion price is adjustable upon the
same terms and conditions as Series D preferred stock. Redemption of Series C
shares will occur only on the redemption date of June 1, 2000, at the redemption
price of $18.00 per share. Series C will participate in any dividends declared
on common stock on an as converted basis. If all outstanding shares of Series D
and Series C can not be redeemed at the same time, then redemption of such
shares will be prorated with preference given to Series D, as defined. Series C
shares are entitled to liquidation payments of $18.00 per share. If the Company
is unable to pay fully the Series D and Series C stockholders, then liquidation
of such shares will be prorated with preference given to Series D, as defined.
At December 31, 1995, Series C shares were convertible into 897,622 shares of
common stock.
The Company has the right to convert all or any shares of Series D and C
into common stock upon the anticipated completion of a public offering of common
stock for net proceeds of not less than $25,000,000 at a per share offering
price of not less than $10.00 per share.
VOTING RIGHTS FOR SERIES C AND D PREFERRED STOCK. Series C and D preferred
stock have voting rights on all matters according to the number of common shares
into which each Series is convertible at the time of any shareholders' vote. The
issuance of a new class of stock or the increase of shares within an existing
class of stock that either ranks on parity with or is superior to a given series
of preferred stock as to dividends, redemption and liquidation requires the
following approvals by the then outstanding class or classes: (1) 75% of Series
C voting together as a class, and (2) 75% of Series D voting as a class. No
amendment of voting powers, designations, preferences or rights and no
amendments of Articles or Bylaws that materially adversely affect the rights of
Series C and D preferred stock shall occur without the following approvals by
the then outstanding class or classes: (1) 90% of Series C voting together as a
class and (2) 90% of the Series D voting as a class. Upon the occurrence of an
event of default, the preferred stock shareholders will have the right to
enlarge the Board of Directors and elect a controlling number of directors.
Pursuant to the Recapitalization, all outstanding shares Series A, A-1, and
BB preferred stock, under their existing terms, were converted into common stock
at December 31, 1995, along with all accrued dividends as of December 31, 1995.
In total, including additional consideration for the actions taken pursuant to
the Recapitalization, the holders of Series A, A-1, and BB preferred stock
received 5,889,523 shares of common stock. See Note 8 "Stockholders' Equity" for
a discussion of the terms of the Recapitalization.
F-52
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. REDEEMABLE PREFERRED STOCK (CONTINUED)
SERIES BB
The Series BB cumulative convertible redeemable preferred stock ("Series
BB") was convertible, at the holder's option, into common stock at a price of
$5.90 per share until redemption date and were mandatorily redeemable on June
30, 2000, at $11.80 per share plus any accrued and unpaid dividends. Dividends
had accrued at a rate of 8% of the stated value of $11.80 per share and were
payable in cash under certain events, including, among others, a change in
control or a successful secondary public offering of the Company's common stock.
SERIES A-1
Series A-1 cumulative convertible redeemable preferred stock ("Series A-1")
was convertible, at the holder's option, into common stock at a conversion rate
of 1 share of common stock for each four shares of Series A-1 preferred stock.
Series A-1 shares were mandatorily redeemable, at the holder's option, at $1.00
per share within 90 days of receipt of written notice of a change of control or
a default event (as defined). Dividends on Series A-1 accrued at a rate of $.08
per share per annum. Dividends were payable in common stock and/or cash in the
event of a change of control, as define, subject to the Company's existing
agreement with senior secured lenders and the approval of two-thirds of all
outstanding Series BB, C and D preferred stock. The Series A-1 preferred
stockholders were entitled to liquidation payments of $1.00 per share plus all
accrued but unpaid dividends, or ratable payments among all Series A and A-1
preferred stockholders if such amounts were not available for payment by the
Company. Liquidation payments were subject to the prior liquidation rights of
the Series BB through D preferred stockholders.
SERIES A
Series A cumulative convertible redeemable preferred stock ("Series A") was
convertible, at the holder's option, into common stock at a conversion rate of 1
share of common stock for each 3.685 shares of Series A Preferred Stock. All
other rights and preferences that apply to Series A-1 preferred stock apply to
Series A preferred stock.
F-53
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED STOCK
The changes in redeemable preferred stock for the years ended December 31,
1993, 1994 and 1995 were as follows (dollars in thousands, except share data):
<TABLE>
<CAPTION>
SERIES D SERIES C SERIES BB
------------------ ------------------ --------------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
--------- ------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.......................... 1,287,597 $ 15,272
Exercise of stock warrants........................ 289,950 3,422
Issuance of preferred stock -- Series C
(net of $46 in issue costs)...................... 448,811 $ 8,033
Issuance of preferred stock -- Series D
(net of $837 in issue costs)..................... 1,269,144 $22,008
Preferred dividends accrued, including accretion
of issuance costs................................ 56 1,301
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1993........................ 1,269,144 22,008 448,811 8,089 1,577,547 19,995
Issuance of preferred stock -- Series D
(net of $327 in issue costs)..................... 836,114 14,723
Preferred dividends accrued, including accretion
of issuance costs................................ 2,023 651 1,556
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1994........................ 2,105,258 38,754 448,811 8,740 1,577,547 21,551
Issuance of preferred stock -- Series D........... 51,645 930
Preferred dividends accrued, including accretion
of issuance costs................................ 3,222 653 1,559
Dividends declared pursuant to the
Recapitalization................................. 3,610 751 739
Recapitalization.................................. (8,534) (2,097) (1,577,547) (23,849)
--------- ------- --------- ------- ---------- --------
BALANCE, DECEMBER 31, 1995........................ 2,156,903 $37,982 448,811 $ 8,047 -- $ --
--------- ------- --------- ------- ---------- --------
--------- ------- --------- ------- ---------- --------
<CAPTION>
SERIES A-1 SERIES A
------------------- -------------------
SHARES AMOUNTS SHARES AMOUNTS
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.......................... 2,769,109 $2,876 3,500,000 $3,598
Exercise of stock warrants........................
Issuance of preferred stock -- Series C
(net of $46 in issue costs)......................
Issuance of preferred stock -- Series D
(net of $837 in issue costs).....................
Preferred dividends accrued, including accretion
of issuance costs................................ 128 167
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1993........................ 2,769,109 3,004 3,500,000 3,765
Issuance of preferred stock -- Series D
(net of $327 in issue costs).....................
Preferred dividends accrued, including accretion
of issuance costs................................ 202 278
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1994........................ 2,769,109 3,206 3,500,000 4,043
Issuance of preferred stock -- Series D...........
Preferred dividends accrued, including accretion
of issuance costs................................ 234 314
Dividends declared pursuant to the
Recapitalization................................. 110 139
Recapitalization.................................. (2,769,109) (3,550 ) (3,500,000) (4,496 )
---------- ------- ---------- -------
BALANCE, DECEMBER 31, 1995........................ -- $ -- -- $ --
---------- ------- ---------- -------
---------- ------- ---------- -------
</TABLE>
F-54
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCKHOLDERS' EQUITY
RECAPITALIZATION
Effective December 31, 1995, the Company, pursuant to the 1995
Recapitalization Agreement, entered into several transactions to reduce the
complexity of the Company's capital structure and eliminate the accrual of
future dividends on its outstanding preferred stock and the resulting impact on
earnings per share. As a part of these transactions (i) all outstanding shares
of Series A, A-1, and BB preferred stock, pursuant to their terms, converted
into 4,797,161 shares of common stock, (ii) all accrued dividends at December
31, 1995, totaling approximately $12,614,000 on all classes of the Company's
outstanding preferred stock were paid by issuing 1,801,900 shares of common
stock at an agreed upon price of $7.00 per share, and (iii) the holders of
Series C and D preferred stock agreed to waive the future accrual of
preferential dividends. As a further part of these transactions, the Company
issued an additional 1,006,783 shares of common stock to all holders of its then
outstanding preferred stock as consideration for actions taken and agreed to
reduce the exercise prices of one series of warrants totaling 680,104 from $5.90
to $5.25 per share and two series of warrants totaling 2,447,670 from $9.00 to
$7.00 per share until May 13, 1996, after which the exercise prices revert to
their prior amounts. Warrant holders have the right to tender subordinated debt
in lieu of cash, where applicable. Shareholders approved the Recapitalization
and an Amended Certificate of Incorporation at a special shareholders meeting
held on February 12, 1996. As a result of the Recapitalization, common shares
outstanding at December 31, 1995, increased from 4,262,386 to 11,868,230, and
preferred shares outstanding decreased from 10,452,370 to 2,605,714. Other than
for fractional shares, no cash consideration was paid under the terms of the
Recapitalization. On a pro forma basis, assuming the Recapitalization had
occurred on January 1, 1995, primary and fully diluted earnings per share would
have been $0.27 and $0.19, respectively, for the year ended December 31, 1995.
Under the terms of the Company's amended Certificate of Incorporation, the
Company is authorized to issue 25,000,000 shares of common stock, and 2,700,000
shares of preferred stock, divided into two series as follow: (i) 500,000 shares
of Series C, and (ii) 2,200,000 shares of Series D.
COMMON STOCK
In connection with the Company's merger with AmeriHealth, Inc. ("AHH") on
December 6, 1994, the Company issued 1 share of $0.01 par value common stock in
exchange for each share of Company common stock outstanding prior to the
consummation of the merger. The stockholders' equity accounts were retroactively
restated to reflect the issuance of $0.01 par value common stock (See Note 3.
"Acquisitions and Other Investments"). Additionally, the Company paid a cash
distribution of $0.085 per share to all AHH common stockholders.
Currently, payment of any cash dividends or other distributions or
repurchases of any capital stock of the Company are prohibited.
STOCK OPTION PLANS
The Company has six nonstatutory stock option plans in which certain
officers and/or directors are eligible to participate: Employee Stock Option
Plan, dated December 31, 1991 ("Plan No. 1"), Employee Stock Option Plan No. 2,
dated May 27, 1992 ("Plan No. 2"), Employee Stock Option Plan No. 3, dated
September 1992 ("Plan No. 3"), Senior Executive Stock Option Plan No. 4, dated
January 5, 1994 ("Plan No. 4"), Selected Executive Stock Option Plan No. 5,
dated May 25, 1995, and Directors' Stock Option Plan, dated 1992 (the
"Directors' Plan") (collectively, the "Plans"). Additionally, the Company has
options issued and outstanding to certain executive officers and key employees
under other authorized plans from which additional options are not actively
being issued.
F-55
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
At the Company's annual stockholders meeting on May 25, 1995, the
stockholders approved the adoption of the Selected Executive Stock Option Plan
No. 5, which authorized 144,500 shares of common stock for issuance under the
Plan.
As a result of the Company's merger with AmeriHealth, Inc. on December 6,
1994, all AmeriHealth options then outstanding became fully vested. At December
31, 1994, 244,017 options granted to certain former AmeriHealth directors,
officers and key employees were outstanding and fully vested.
The Plans are presently administered by the Option and Compensation
Committee (the "Committee") of the Board of Directors. Officers, other key
employees and, under limited circumstances, members of the Board of Directors
are eligible to participate in Plan No. 1. Officers and executive personnel of
the Company are eligible to participate in Plans No. 2 through 5. The Directors'
Plan is available to members of the Board of Directors who are not members of
management or elected as representatives of the Company's preferred stockholders
pursuant to a voting agreement.
With the exception of Plan 1, options granted under the Plans can not be
less than 80% of the fair market value of common stock on the date of the grant.
Under Plan 1, the per share price can not be less than 100% of the fair market
value of the common stock on the date of grant. The Plans provide that no stock
option shall be exercisable later than 10 years and 1 day from the date of
grant.
The following table summarizes the activity under these stock option plans
and any special grants authorized by the Board of Directors:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ------------------
<S> <C> <C>
STOCK OPTIONS OUTSTANDING AT JANUARY 1, 1993.......................... 690,000 $1.00 to $6.25
Granted............................................................... 15,000 $5.90 to $9.00
-----------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1993........................ 705,000 $1.00 to $9.00
Granted............................................................... 367,566 $9.00
Grants to former AmeriHealth employees................................ 244,017 $1.07 to $35.65
-----------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1994........................ 1,316,583 $1.00 to $35.65
Granted............................................................... 159,000 $9.00
Exercised............................................................. (18,411) $5.35
Expired............................................................... (4,943) $3.92 to $35.65
-----------
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1995........................ 1,452,229 $1.00 to $25.67
-----------
</TABLE>
At December 31, 1995, options for the purchase of 1,044,852 common shares
were exercisable.
SHARES RESERVED. Shares covered by stock options that expire or otherwise
terminate unexercised become available for awards under the respective Plans. At
December 31, 1995, the Company had reserved 1,811,147 shares of common stock for
awards under its various stock option plans, of which 358,918 were available for
new grants.
WARRANTS
As of December 31, 1995, the Company had issued and outstanding a total of
2,858,541 warrants to purchase 3,244,412 shares of common stock at exercise
prices ranging from $0.01 per share to $9.00 per share. Such warrants expire
December 31, 1997, through December 31, 2003. Pursuant to the Recapitalization
approved by the shareholders on February 12, 1996, the exercise prices on
certain of the warrants were reduced until May 13, 1996, after which the
exercise prices revert to their prior amounts (see Recapitalization above).
F-56
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................................. $ 1,310 $ (1,600) $ 100
State................................................................... 236 200 50
--------- --------- ---------
Total current provision (benefit)..................................... 1,546 (1,400) 150
--------- --------- ---------
Deferred:
Federal................................................................. (537) 1,600 --
State................................................................... -- -- --
--------- --------- ---------
Total deferred expense (benefit)...................................... (537) 1,600 --
--------- --------- ---------
Provision for income taxes................................................ $ 1,009 $ 200 $ 150
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory rate of 34%........... $ (4,004) $ 831 $ 838
State income taxes, net of federal benefit................................ 156 132 33
Changes in valuation allowance............................................ 4,359 (849) (580)
Extraordinary item........................................................ (634) -- --
Net operating loss for which no benefit is recognizable................... 525 -- --
Other..................................................................... (27) 86 (141)
--------- --------- ---------
Provision for income taxes................................................ 375 200 150
Amount allocated to extraordinary item.................................... 634 -- --
--------- --------- ---------
Total provision for income taxes.......................................... $ 1,009 $ 200 $ 150
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the deferred tax assets and (liabilities) at December 31,
1994 and 1995 were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................................................ $ 5,894 $ 7,062
Depreciable equipment.......................................................... (12,532) (11,680)
Amounts expensed for book purposes not
currently deductible for tax.................................................. 4,237 2,779
Investments in partnerships.................................................... (800) (140)
Tax credits.................................................................... 441 388
Less valuation allowance....................................................... (2,046) (3,281)
---------- ----------
Net deferred tax liability................................................... (4,806) (4,872)
Less current portion......................................................... (1,671) (2,521)
---------- ----------
Noncurrent portion........................................................... $ (6,477) $ (7,393)
---------- ----------
---------- ----------
</TABLE>
F-57
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
The current deferred tax asset was included in prepaid expenses and other
current assets in 1995 and 1994. The noncurrent deferred tax liability in 1994
and 1995 was included in other long-term liabilities.
At December 31, 1995, the Company had net operating losses and tax credit
carryforwards for income tax purposes of approximately $18,587,000 and $388,000,
respectively, which will expire in years 1999 through 2009. The tax credit
carryforwards consist of several business credits and alternative minimum tax
("AMT") credits of approximately $68,000 and $320,000, respectively.
For federal income tax purposes, due to certain changes in ownership of
AmeriHealth, Inc., its net operating loss carryforward of $7,727,000 (included
in the Company's net operating loss carryforward) may be limited to
approximately $1,900,000 per year under the Internal Revenue Service Code. If
the available amount is not used to reduce taxes in any year, the unused amount
increases the allowable limit in subsequent years. These loss carryforwards
expire in years 1999 through 2008. AmeriHealth, Inc. also has General Business
Credit and AMT Credit carryforwards of approximately $68,000 and $100,000,
respectively, which may also be limited because of the change in ownership.
NOTE 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes paid....................................................... $ 478 $ 878 $ 95
Interest paid........................................................... 2,762 5,582 12,528
</TABLE>
NOTE 11. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) plan for qualified
employees of the Company. For those employees of the Company electing to
participate, the Company matches certain employee contributions and may make
additional discretionary contributions.
Total expense for employer contributions to the plan for 1993, 1994 and 1995
was $84,000, $258,000 and $319,000, respectively.
NOTE 12. RELATED PARTY TRANSACTIONS
Management Prescriptives, Inc. ("MPI"), a company owned by a Director of the
Company, has provided specialized consulting services to certain of the
Company's hospitals. MPI received approximately $283,000 and $421,000 in fees
from the Company for the years ended December 31, 1994 and 1995, respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements related to
buildings and equipment. Future annual minimum lease payments under
noncancelable operating leases with initial or remaining terms of one year or
more were as follows at December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
1996.............................................................. $ 2,649
1997.............................................................. 2,266
1998.............................................................. 1,842
1999.............................................................. 1,544
2000.............................................................. 1,230
Thereafter........................................................ 2,379
---------
$ 11,910
---------
---------
</TABLE>
F-58
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for 1993, 1994 and 1995 was approximately $2,348,000,
$2,648,000 and $3,530,000, respectively.
LITIGATION. The Company is from time to time subject to claims and suits
arising in the ordinary course of operations. In the opinion of management, the
ultimate resolution of such pending legal proceedings will not have a material
effect on the Company's financial position, results of operations or liquidity.
PROFESSIONAL LIABILITY. The Company is self-insured up to $1,000,000 per
occurrence for the payment of claims arising from professional liability risks.
The Company has accrued liabilities for potential professional liability risks
based on estimates for losses limited to $1,000,000 per occurrence and
$4,000,000 in the aggregate. The Company is further insured by a commercial
insurer for claims in excess of these limits up to an additional $10,000,000
over its self-insured retention. At December 31, 1994 and 1995, the Company had
accrued approximately $2,681,000 and $3,171,000, respectively, related to such
claims. In the opinion of management, any unaccrued damages awarded will not
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
NOTE 14. QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the Company's quarterly financial data for
the years ended December 31, 1994 and 1995 (dollars in thousands, except per
share data).
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue....................................................... $ 24,563 $ 23,403 $ 23,331 $ 32,896
Net income (loss)................................................. 1,473 757 1,028 (1,015)
Primary income (loss) per common share (3)........................ .21 (0.31) (0.12) (1.03)
Fully diluted income per common share (3)......................... .15 -- (1) -- (1) -- (1)
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995(1) QUARTER QUARTER(2) QUARTER QUARTER
- ------------------------------------------------------------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue....................................................... $ 28,727 $ 43,319 $ 45,789 $ 49,685
Income before extraordinary item.................................. 177 829 791 1,635
Net income (loss)................................................. 177 (289) 791 1,635
Primary loss per common share: (3)
Loss before extraordinary item per common share................. (0.31) (0.16) (0.17) (1.22)
Loss per common share........................................... (0.31) (0.42) (0.17) (1.22)
</TABLE>
- ------------------------
(1) Fully diluted earnings per share for the period has not been presented due
to the antidilutive effect of such calculation.
(2) The net loss for the second quarter of 1995 included an extraordinary loss
of approximately $1,118,000 from the early extinguishment of debt.
Additionally, results for the quarter and six months ended June 30, 1995,
and the nine months ended September 30, 1995, have been restated from
amounts previously reported in Form 10Q and 10Q/A to eliminate the tax
benefit associated with the extraordinary loss due to a revision in the
Company's estimate of the impact of net operating loss carryforwards.
(3) Earnings per share is computed independently for each quarter presented;
therefore, the sum of the per share amounts does not equal the annual per
share amount due to quarterly fluctuations in weighted average common and
common equivalent shares outstanding.
F-59
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
CREDIT RISK
The Company's revenues consist primarily of amounts due from the Medicare
and Medicaid programs in addition to amounts due from insurance carriers and
individuals. The Company determines the adequacy of a patient's third-party
payor coverage upon admission. However, it generally does not require any
collateral prior to performing services. The Company maintains reserves for
contractual allowances and potential credit losses based on past experience and
management's current expectations. Medicare and Medicaid gross revenue accounted
for approximately 39% and 12% in 1993, 39% and 18% in 1994, and 42% and 19% in
1995, respectively, of the Company's total gross revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximates fair value
due to the short term maturities of these instruments. The carrying amounts of
the Company's fixed rate long-term borrowings at December 31, 1994 and 1995,
approximate their fair value.
The carrying value of the Company's revolving credit agreement approximates
fair value because the interest rate on such agreement is variable and based on
current market rates.
NOTE 16. SUBSEQUENT EVENTS
On January 31, 1996, the Company entered into a letter of intent to sell the
149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia in exchange
for the 100 bed Poplar Springs Hospital in Petersburg, VA. Both facilities are
psychiatric hospitals. The Company anticipates receiving additional cash
consideration as a result of the sale, net of certain working capital components
and the respective facilities' long term debt. This transaction is subject to
numerous contingencies, including adequate due diligence and various regulatory
approvals; accordingly, the Company is presently unable to conclude whether
consummation of this transaction is more likely than not to occur.
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Governing Board of
Dakota Heartland Health System:
We have audited the accompanying balance sheet of Dakota Heartland Health
System (the Partnership) as of December 31, 1994 and 1995, and the related
statements of income, partners' equity and cash flows for the year ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dakota Heartland Health
System as of December 31, 1994 and 1995, and the results of its operations,
partners' equity and cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 16, 1996
F-61
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
BALANCE SHEET
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 397,300 $ 19,062,865
Patient receivables, net of allowance for uncollectible accounts of $3,439,911
and $3,396,655 in 1994 and 1995, respectively................................. 21,530,288 17,339,282
Due from partners.............................................................. 4,000,000
Supplies inventory............................................................. 1,724,706 1,602,786
Prepaid expenses and other current assets...................................... 568,052 1,003,019
-------------- --------------
Total current assets......................................................... 28,220,346 39,007,952
Property and equipment, at cost.................................................. 42,333,642 52,940,547
Other assets:
Investment in and advances to affiliates....................................... 1,964,073 1,835,223
Organizational costs, less accumulated amortization of $45,291................. -- 1,057,215
Other.......................................................................... -- 20,943
-------------- --------------
Total assets................................................................. $ 72,518,061 $ 94,861,880
-------------- --------------
-------------- --------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 3,788,183 $ 12,380,016
Estimated third-party payor settlements........................................ 3,426,079 2,008,176
Accrued salaries, wages and employee benefits.................................. 4,754,690 3,548,505
Other current liabilities...................................................... 242,563 2,043,794
-------------- --------------
Total current liabilities.................................................... 12,211,515 19,980,491
Other liabilities................................................................ 91,404 --
Minority interest................................................................ 38,478 56,877
Partners' equity................................................................. 60,176,664 74,824,512
-------------- --------------
Total liabilities and partners' equity....................................... $ 72,518,061 $ 94,861,880
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net patient service revenue.................................................. $ 99,098,598
Other revenue................................................................ 6,912,796
-------------
Net revenue................................................................ 106,011,394
-------------
Expenses:
Salaries and benefits...................................................... 38,796,941
Professional fees.......................................................... 20,446,296
Supplies................................................................... 16,299,957
Depreciation and amortization.............................................. 2,405,978
Repairs and maintenance.................................................... 1,079,489
Utilities.................................................................. 1,224,450
Insurance.................................................................. 789,648
Rents and leases........................................................... 2,003,288
Provision for uncollectible accounts....................................... 3,797,944
Property taxes............................................................. 910,264
Other...................................................................... 2,109,291
-------------
Total expenses........................................................... 89,863,546
-------------
Net income................................................................... $ 16,147,848
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
CHAMPION DAKOTA TOTAL EQUITY
-------------- --------------- ---------------
<S> <C> <C> <C>
Net assets contributed......................................... $ 16,511,768 $ 39,664,896 $ 56,176,664
Cash contribution.............................................. 20,000,000 20,000,000
Working capital contributions due from partners................ 2,000,000 2,000,000 4,000,000
Equalization of capital accounts............................... 1,576,564 (1,576,564) --
-------------- --------------- ---------------
Initial capital................................................ 40,088,332 40,088,332 80,176,664
Special distribution........................................... -- (20,000,000) (20,000,000)
-------------- --------------- ---------------
Partners' equity, December 31, 1994............................ 40,088,332 20,088,332 60,176,664
Net income..................................................... 8,881,316 7,266,532 16,147,848
Partners' distributions........................................ (825,000) (675,000) (1,500,000)
-------------- --------------- ---------------
Partners' equity, December 31, 1995............................ $ 48,144,648 $ 26,679,864 $ 74,824,512
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................. $ 16,147,848
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,405,978
Gain on sale of property, plant and equipment............................. (1,388)
Provision for uncollectible accounts...................................... 3,797,944
Minority interest......................................................... 18,399
Changes in operating assets and liabilities:
Patient receivables, net................................................ 393,062
Supplies inventory...................................................... 121,920
Prepaid expenses and other current assets............................... (434,967)
Other assets............................................................ (20,943)
Accounts payable........................................................ 8,591,833
Estimated third-party payor settlements................................. (1,417,903)
Accrued expenses........................................................ (1,206,185)
Other liabilities....................................................... 1,709,827
------------
Net cash provided by operating activities................................. 30,105,425
------------
Cash flows from investing activities:
Purchase of property and equipment.......................................... (12,967,592)
Payment for organizational costs............................................ (1,102,506)
Contribution from partners.................................................. 4,000,000
Other....................................................................... 130,238
------------
Net cash used in investing activities..................................... (9,939,860)
------------
Cash flows from financing activities:
Partners' draws............................................................. (1,500,000)
------------
Net cash used in financing activities..................................... (1,500,000)
------------
Increase in cash and cash equivalents......................................... 18,665,565
Cash and cash equivalents, beginning of year.................................. 397,300
------------
Cash and cash equivalents, end of year........................................ $ 19,062,865
------------
------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest...................................... $ 15,236
Cash paid for taxes......................................................... 447,207
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES:
On December 21, 1994, Dakota Heartland Health System, a general partnership
(the Partnership), was formed by a wholly owned subsidiary of Champion
Healthcare Corporation (Champion) that owned Heartland Medical Center, a 140-bed
general acute care facility in Fargo, North Dakota, and Dakota Hospital
(Dakota), a not-for-profit corporation that owned Dakota Hospital, a 199-bed
general acute care hospital also in Fargo, North Dakota. Champion and Dakota
contributed certain assets and liabilities, excluding long-term debt except
capital leases, of their respective hospitals, and Champion contributed an
additional $20,000,000 in cash, each in exchange for 50% ownership in the
Partnership. The Partnership then made a $20,000,000 cash distribution to
Dakota. Also on December 21, 1994, Champion entered into an operating agreement
with the Partnership to manage the combined operations of the two hospitals.
Champion will receive 55% of the net income and distributable cash flow (DCF) of
the Partnership until such time as it has recovered, on a cumulative basis, an
additional $10,000,000 of DCF in the form of an "excess" distribution (see also
Note 4).
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net income during the reporting period.
Actual results could differ from those estimates. The most significant areas
which require the use of management's estimates relate to the determination of
the estimated third-party payor settlements, the allowance for uncollectible
accounts receivable and obsolete inventory.
CASH AND CASH EQUIVALENTS:
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PATIENT RECEIVABLES:
Payments for services rendered to patients covered by third-party payor
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the third-party payor's principles of payment/ reimbursement
(either prospectively determined or retrospectively determined costs).
SUPPLIES INVENTORY:
Supplies inventory is stated at the lower of cost or market, with cost
determined substantially on the first-in, first-out basis.
PROPERTY AND EQUIPMENT:
Property and equipment acquisitions are recorded at cost at the date of
receipt. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, ranging from 4 to 25 years.
Maintenance and repairs are charged to expense as incurred while renewals and
betterments are capitalized. The costs and related accumulated depreciation on
asset disposals are removed from the accounts and any gain or loss is included
in income.
INCOME TAXES:
The Partnership's income is attributed to its partners for income tax
purposes. Accordingly, it has not accrued any liability for income taxes.
Entities owned by the Partnership have paid income taxes during 1995 totaling
$447,207.
F-66
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications have been made in the 1994 financial statements to
conform to the 1995 presentation.
2. NET PATIENT SERVICE REVENUE:
The Company's facilities have entered into agreements with third-party
payors, including U.S. government programs and managed care health plans, under
which the Company is paid based upon established charges, cost of services
provided, predetermined rates by diagnosis, fixed per diem rates or discounts or
discounts from established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third-party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third-party payors.
Payments for services rendered to patients covered by the Medicare and Medicaid
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce charges to these patients to estimated receipts
based upon each program's principle of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final settlements
under these programs are subject to administrative review and audit. The Company
records adjustments, if any, resulting from such review or audits during the
period in which these adjustments become known. Allowance for contractual
adjustments under these programs are netted in accounts receivable in the
accompanying Balance Sheet. It is management's opinion that adequate allowance
has been provided for possible adjustments that might result from final
settlements under these programs.
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of December 31, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Land and land improvements................................... $ 2,387,095 $ 2,360,412
Buildings and improvements................................... 20,087,268 21,624,868
Fixed equipment.............................................. 4,724,125 4,899,749
Major movable equipment...................................... 12,516,205 13,863,470
Minor movable equipment...................................... 1,101,633 1,003,318
Construction in progress..................................... 606,250 10,638,351
Property held for expansion.................................. 911,066 911,066
-------------- --------------
42,333,642 55,301,234
Less accumulated depreciation................................ -- 2,360,687
-------------- --------------
$ 42,333,642 $ 52,940,547
-------------- --------------
-------------- --------------
</TABLE>
F-67
<PAGE>
DAKOTA HEARTLAND HEALTH SYSTEM
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Partnership owns portions of several entities. The investments in these
entities are recorded on the equity method. The investments in and advances to
affiliated companies on the accompanying balance sheet consisted of the
following:
<TABLE>
<CAPTION>
INVESTMENTS AND ADVANCES
OWNERSHIP ----------------------------
CORPORATION PERCENTAGE 1994 1995
- ----------------------------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Orthopro, Inc.......................................................... 50% $ 203,155
Country Health, Inc.................................................... 49% 665,629 $ 805,632
Health Care Incinerators, Inc./Thom Linen.............................. 33% 193,235 210,701
Dakota Outpatient Center............................................... 50% 311,604 356,016
Dakota Day Surgery..................................................... 50% 590,450 462,874
------------- -------------
$ 1,964,073 $ 1,835,223
------------- -------------
------------- -------------
</TABLE>
During 1995, the Partnership sold its 50% interest in Orthopro, Inc.
The Partnership has a 50% interest in Dakota Outpatient Center (DOC), a
general partnership which owns and operates a medical and office building. As a
general partner, the Partnership is contingently liable on the outstanding debt
of DOC. As of December 31, 1995, the balance of the note was $2,416,564.
DOC also leases its real property to Dakota Hospital, Dakota Day Surgery
(DDS) and Dakota Clinic, Ltd. (an unrelated corporation), under noncancelable
10-year net operating leases. Future minimum annual lease payments to be paid by
the Hospital and DDS are $1,414,500 through 1998.
The Partnership also has a 50% interest in DDS, a general partnership which
provides outpatient surgical services. As a general partner, the Partnership is
contingently liable to cover any operating losses of DDS. DDS had operating
income in 1995.
5. CREDIT RISK
The Partnership's revenues consist primarily of amounts due from the
Medicare and Medicaid programs in addition to amounts due from insurance
carriers and individuals. The Partnership determines the adequacy of a patient's
third-party payor coverage upon admission. However, it generally does not
require any collateral prior to performing services. The Partnership maintains
reserves for contractual allowances and potential credit losses based on past
experience and management's current expectations. Medicare and Medicaid gross
revenue accounted for approximately 46% and 9% of the Partnership's total gross
revenue.
F-68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Jordan Valley Hospital:
We have audited the accompanying balance sheet of Jordan Valley Hospital
(the "Hospital"), (formerly known as Holy Cross Jordan Valley Hospital), as of
September 30, 1995 and the related statements of income and change in owner's
equity and cash flows for the period from January 1, 1995 through September 30,
1995. These financial statements are the responsibility of the Hospital's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jordan Valley Hospital as of
September 30, 1995 and the results of its operations and its cash flows for the
period from January 1, 1995 through December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 28, 1995
F-69
<PAGE>
JORDAN VALLEY HOSPITAL
BALANCE SHEET
SEPTEMBER 30, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash............................................................................ $ 260
Accounts receivable, less allowance for doubtful accounts of $1,615............. 4,287
Supplies inventories............................................................ 650
Prepaid expenses and other assets............................................... 223
Deferred income taxes........................................................... 597
---------
Total current assets.......................................................... 6,017
Property and equipment, net....................................................... 14,197
Note receivable................................................................... 207
---------
Total assets.................................................................. $ 20,421
---------
---------
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable................................................................ $ 692
Accrued and other liabilities................................................... 996
Accrued income taxes............................................................ 538
Due to third-party payors....................................................... 295
Due to owner.................................................................... 656
---------
Total current liabilities..................................................... 3,177
Deferred income taxes............................................................. 899
Commitments and contingencies
Owner's equity.................................................................... 16,345
---------
Total liabilities and owner's equity.......................................... $ 20,421
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE>
JORDAN VALLEY HOSPITAL
STATEMENT OF INCOME AND CHANGE IN OWNER'S EQUITY
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Net patient service revenue....................................................... $ 15,516
Other revenue..................................................................... 345
---------
Net revenue................................................................... 15,861
Operating expenses:
Salaries, wages and benefits.................................................... 5,988
Supplies........................................................................ 2,087
Other operating expenses........................................................ 3,546
Provision for bad debts......................................................... 1,762
Depreciation.................................................................... 1,065
---------
Total expenses................................................................ 14,448
---------
Income before income taxes........................................................ 1,413
Provision for income taxes........................................................ 523
---------
Net income........................................................................ 890
Owner's equity at January 1, 1995................................................. 15,455
---------
Owner's equity at September 30, 1995.......................................... $ 16,345
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
<PAGE>
JORDAN VALLEY HOSPITAL
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 890
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation..................................................................... 1,065
Provision for bad debts.......................................................... 1,762
Deferred income taxes............................................................ 127
Changes in operating assets and liabilities:
Accounts receivable............................................................ (1,460)
Supplies inventories........................................................... (31)
Prepaid expenses and other assets.............................................. 59
Accounts payable, accrued and other liabilities................................ 364
Accrued income taxes........................................................... 396
Due to third-party payors...................................................... 197
---------
Cash provided by operating activities........................................ 3,369
INVESTING ACTIVITIES
Additions to property and equipment................................................ (983)
Issuance of note receivable........................................................ (207)
---------
Cash used for investing activities........................................... (1,190)
FINANCING ACTIVITIES
Payment of debt to owner........................................................... (2,762)
---------
Cash used for financing activities........................................... (2,762)
---------
Change in cash and cash equivalents................................................ (583)
Cash and cash equivalents at beginning of period................................... 843
---------
Cash and cash equivalents at end of period......................................... $ 260
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-72
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Jordan Valley Hospital (the "Hospital") is a 50 bed tertiary care hospital
located in West Jordan, Utah. The Hospital was formerly a tax-exempt hospital,
Holy Cross Jordan Valley Hospital, which was owned by Holy Cross Health Systems
Corporation ("HCHSC"). The Hospital was acquired by HealthTrust, Inc. -- The
Hospital Company ("HTI") in August 1994. In October 1994, HTI and Columbia/ HCA
entered into an agreement and a Plan of Merger. The merger was approved by both
parties and effective in April 1995. In an agreement between the Federal Trade
Commission and Columbia/HCA, the Hospital is currently in the process of being
sold (see note 7). These financial statements are based on HCHSC historical cost
because the Columbia/HCA and HTI ownership of the hospital were temporary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments,
primarily U.S. government backed securities and certificates of deposit,
purchased with an original maturity of three months or less. The Company
maintains its cash in bank deposits which, at times, may exceed federally
insured limits.
ACCOUNTS RECEIVABLE AND NET PATIENT REVENUE
The Hospital has entered into agreements with third-party payors, including
U.S. government programs and managed care health plans, under which the Hospital
is paid based upon established charges, cost of providing services,
predetermined rates by diagnosis, fixed per diem rates or discounts from
established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third party payors.
Payments for services rendered to patients covered by the Medicare and Medicaid
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the programs' principles of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final settlements
under these programs are subject to administrative review and audit, and
provision is currently made for adjustments which may result during the period
in which such adjustments become known. Allowance for contractual adjustments
under these programs is netted in accounts receivable in the accompanying
balance sheet. Management is of the opinion that adequate allowance has been
provided for possible adjustments that might result from such final settlements.
Accounts receivable consists primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
Current earnings are charged with an allowance for doubtful accounts based
on experience and other circumstances that may affect the ability of payors to
meet their obligations. Accounts deemed uncollectible are charged against that
allowance.
SUPPLIES INVENTORIES
Inventories are stated at cost, determined principally by the first-in,
first-out (FIFO) method, and are not in excess of market value.
F-73
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded on the basis of cost, if purchased, or
fair market value at the date of donation. Depreciation of property and
equipment is recognized using the straight-line method over the expected useful
lives of the assets ranging from 8 to 40 years.
INCOME TAXES
The Hospital utilizes Statement of Financial Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted marginal tax rates currently in
effect when the differences reverse. The Hospital has recorded current and
deferred income tax expense for the period subsequent to the acquisition by HTI,
determined as if it were filing a separate tax return.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at September 30, 1995:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Buildings and improvements........................................... $ 14,765
Equipment............................................................ 9,417
-------------
24,182
Less accumulated depreciation........................................ (10,505)
-------------
13,677
Land................................................................. 497
Construction in progress............................................. 23
-------------
$ 14,197
-------------
-------------
</TABLE>
3. ACCRUED AND OTHER LIABILITIES:
Details of accrued and other liabilities at September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Accrued salaries and wages........................................... $ 563
Accrued vacation..................................................... 179
Property and sales tax............................................... 254
-------------
Total accrued and other liabilities................................ $ 996
-------------
-------------
</TABLE>
4. LEASES:
The Hospital leases certain land, buildings and equipment under operating
leases that expire at various dates through 2003. Rental expense, which includes
provisions for maintenance in some cases,
F-74
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASES: (CONTINUED)
amounted to approximately $151,000 in 1995. Future minimum rental commitments at
September 30, 1995, under noncancelable operating leases with a remaining term
of greater than one year were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ---------------------------------------------------------------------
<S> <C>
1996............................................................... $ 155
1997............................................................... 123
1998............................................................... 119
1999............................................................... 114
2000............................................................... 434
-----
Total............................................................ $ 945
-----
-----
</TABLE>
5. INCOME TAXES:
The provision for income taxes consisted of the following for the period
from January 1, 1995 through September 30, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current:
Federal............................................................ $ 364
State.............................................................. 32
-----
Total current provision.......................................... 396
Deferred:
Federal............................................................ 117
State.............................................................. 10
-----
Total deferred expense........................................... 127
-----
Provision for income taxes........................................... $ 523
-----
-----
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Federal income tax benefit at statutory rate of 34%............................ $ 480
State income taxes, net of federal benefit..................................... 43
------
Total provision for income taxes............................................. $ 523
------
------
</TABLE>
The components of the deferred taxes were as follows:
<TABLE>
<S> <C>
Allowance for bad debts........................................ $ 597
Excess of book over tax basis in property and equipment........ (899)
------
Net deferred tax liability................................... (302)
Less current asset............................................. 597
------
Noncurrent liability......................................... $ (899)
------
------
</TABLE>
F-75
<PAGE>
JORDAN VALLEY HOSPITAL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS:
As of September 30, 1995, the Hospital has a liability due to owner of
approximately $656,000. This amount represents cash advances from its owner used
for normal operations.
The Hospital obtained its primary professional liability insurance through
premiums paid to Columbia/HCA totaling approximately $249,000 for the period
from January 1, 1995 through September 30, 1995. In addition, the Hospital has
limited its liability through the purchase of umbrella coverage from third-party
insurers.
Columbia/HCA provided certain management services in the normal course of
business to the Hospital. For 1995, the expenses allocated to the Hospital were
approximately $101,000.
7. SUBSEQUENT EVENT:
In November 1995, CHC -- Salt Lake City, Inc. entered into a definitive
agreement with Columbia/HCA to acquire the Hospital in exchange for Autauga
Medical Center, an 85 bed acute care hospital, and Autauga Health Care Center, a
72 bed skilled nursing facility, both in Prattville, Alabama, plus additional
cash consideration of approximately $7,500,000. The transaction is subject to
various third-party approvals, including that of the Federal Trade Commission.
F-76
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Salt Lake Regional Medical Center
We have audited the accompanying consolidated balance sheets of Salt Lake
Regional Medical Center (formerly known as Holy Cross Hospital of Salt Lake
City), and subsidiaries (the "Hospital"), as of May 31, 1994 and April 13, 1995,
and the related consolidated statements of income, equity, and cash flows for
each of the two years in the period ended May 31, 1994 and for the period from
June 1, 1994 through April 13, 1995. These financial statements are the
responsibility of the Hospital's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Salt Lake
Regional Medical Center and subsidiaries as of May 31, 1994 and April 13, 1995,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended May 31, 1994 and for the period from June
1, 1994 through April 13, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 11, 1995
F-77
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 13,
MAY 31, 1994 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 3,277 $ 535
Investments
Operating....................................................................... 1,839
Held by trustees................................................................ 418
------------ -------------
5,534 535
Accounts receivable, less allowance for doubtful accounts of $3,098 and $2,076,
respectively....................................................................... 13,501 14,116
Other accounts receivable........................................................... 1,185 694
------------ -------------
14,686 14,810
Supplies inventories................................................................ 1,100 1,123
Prepaid expenses and other current assets........................................... 89 1,094
------------ -------------
Total current assets.......................................................... 21,409 17,562
Investment assets limited as to use, net of current portion
Held by trustees.................................................................. 902
Board designated.................................................................. 5,902
Donor restricted and other........................................................ 1,578
------------
8,382
Property and equipment:
Land.............................................................................. 1,193 737
Buildings and improvements........................................................ 31,213 32,099
Equipment......................................................................... 42,779 45,017
Construction in progress.......................................................... 619 658
------------ -------------
Total property and equipment.................................................. 75,804 78,511
Less allowances for depreciation and amortization................................. 40,426 43,819
------------ -------------
Total property and equipment, net............................................. 35,378 34,692
Other assets........................................................................ 2,398 115
------------ -------------
Total assets.................................................................. $ 67,567 $ 52,369
------------ -------------
------------ -------------
LIABILITIES
Current liabilities:
Current portion of capitalized lease obligation................................... $ 233 $ 545
Accounts payable.................................................................. 3,004 1,946
Due to third-party payors......................................................... 4,045 438
Accrued and other liabilities..................................................... 5,137 6,910
Due to HTI........................................................................ 6,015
------------ -------------
Total current liabilities..................................................... 12,419 15,854
Capitalized lease obligation, net of current portion................................ 16,857 1,914
Other long-term liabilities......................................................... 58 228
Due to HCHSC........................................................................ 2,072
Commitments and contingencies (Note 4)
Fund Balance:
General........................................................................... 34,583
Donor restricted.................................................................. 1,578
Owner's Equity:
Contributed capital............................................................... 32,663
Retained earnings................................................................. 1,710
------------ -------------
Total liabilities and equity.................................................. $ 67,567 $ 52,369
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-78
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRIL 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net patient service revenue........................................... $ 81,358 $ 86,536 $ 65,585
Other revenue......................................................... 3,565 4,328 2,792
------------ ------------ -------------
Net revenue....................................................... 84,923 90,864 68,377
Operating expenses:
Salaries, wages and benefits........................................ 36,569 37,931 26,875
Supplies............................................................ 14,842 14,917 12,423
Other operating expenses............................................ 25,929 28,173 18,449
Provision for bad debts............................................. 3,623 3,464 3,573
Interest............................................................ 1,171 929 653
Depreciation and amortization....................................... 4,252 4,529 4,067
------------ ------------ -------------
Total expenses.................................................... 86,386 89,943 66,040
Income (loss) before income taxes and extraordinary item.............. (1,463) 921 2,337
Provision for income taxes............................................ 1,027
------------ ------------ -------------
Income (loss) before extraordinary item............................... (1,463) 921 1,310
Extraordinary item -- early extinguishment of debt (no tax benefit
recognized).......................................................... 846
------------ ------------ -------------
Net income (loss)..................................................... $ (1,463) $ 921 $ 464
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-79
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRI1 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
GENERAL
Balance, beginning of period......................................... $ 37,503 $ 36,817 $ 34,583
Net income (loss) prior to the acquisition by HTI.................... (1,463) 921 (1,246)
Fund Transfers....................................................... 135 174 20
Related Party Transfers.............................................. 642 (3,329) (6,339)
Capital contribution by HCHSC........................................ 5,645
Net assets transferred to HTI........................................ (32,663)
------------ ------------ -------------
Balance, end of period............................................. 36,817 34,583 --
DONOR RESTRICTED
Balance, beginning of period......................................... 3,088 3,152 1,578
Donations, gifts and bequests........................................ 945 785 7
Grants............................................................... 42 4
Fund transfers....................................................... (135) (174) (20)
Related party transfers.............................................. (290) (201)
Investment income.................................................... 121 235 (112)
Expenditures for donor restricted purposes........................... (619) (2,223) (351)
Other................................................................ (37)
Capital distribution to HCHSC........................................ (1,065)
------------ ------------ -------------
Balance, end of period............................................. 3,152 1,578 --
OWNER'S EQUITY
Net assets contributed by HTI........................................ 32,663
Net income for the period from August 16, 1994 through April 13,
1995................................................................ 1,710
-------------
Balance, end of period............................................. 34,373
------------ ------------ -------------
Total equity, end of period........................................ $ 39,969 $ 36,161 $ 34,373
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-80
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1994
THROUGH
YEAR ENDED YEAR ENDED APRIL 13,
MAY 31, 1993 MAY 31, 1994 1995
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $ (1,463) $ 921 $ 464
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Extraordinary loss on early extinguishment of debt.................. 846
Depreciation and amortization....................................... 4,252 4,529 4,067
Loss on sale of assets.............................................. 84 24 47
Provision for bad debts............................................. 3,623 3,464 3,573
Deferred tax benefit................................................ (540)
Deferred revenue and other credits.................................. 31 (455) (58)
Changes in operating assets and liabilities:
Accounts receivable............................................... (5,273) (2,032) (14,972)
Supplies inventories.............................................. 83 (23)
Prepaid expenses and other assets................................. (706) 388 920
Due to third-party payors......................................... 2,024 631 663
Accounts payable, accrued liabilities and other liabilities....... 1,221 (1,056) 3,292
------------ ------------ -------------
Cash provided (used) by operating activities.................... 3,793 6,497 (1,721)
INVESTING ACTIVITIES
Net increase in current investments................................... 87 127 339
Net increase in investments limited as to use......................... (1,473) 1,764 6,702
Additions to property and equipment................................... (7,421) (3,427) (3,946)
Proceeds from sale of assets.......................................... 21 809 46
Other................................................................. 1,540 (859)
------------ ------------ -------------
Cash provided (used) for investing activities................... (7,246) (1,586) 3,141
FINANCING ACTIVITIES
Payments on long-term debt and refinancing............................ (204) (215) (5,853)
Issuance of debt from HCHSC........................................... 1,020
Issuance of debt from HTI............................................. 6,015
Payment of debt to HCHSC.............................................. (1,523) (2,072)
Other equity transactions, net........................................ 841 (4,729) (2,252)
------------ ------------ -------------
Cash used for financing activities.............................. (886) (3,924) (4,162)
------------ ------------ -------------
Change in cash and cash equivalents................................... (4,339) 987 (2,742)
Cash and cash equivalents at beginning of period...................... 6,629 2,290 3,277
------------ ------------ -------------
Cash and cash equivalents at end of period............................ $ 2,290 $ 3,277 $ 535
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-81
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
On April 13, 1995, CHC-Salt Lake City, Inc. (the "Company") completed its
acquisition of Salt Lake Regional Medical Center (the "Hospital") from
Healthtrust, Inc. -- The Hospital Company ("HTI"). The Hospital is comprised of
a 200 bed tertiary care hospital and five clinics and is located in Salt Lake
City, Utah. The Hospital was formerly a tax-exempt hospital, Holy Cross Hospital
of Salt Lake, which was owned by Holy Cross Health Systems Corporation
("HCHSC"). The Hospital was acquired by HTI on August 15, 1994 and was sold
pursuant to a consent decree and settlement agreement between HTI and the
Federal Trade Commission. Consummation of the sale had been subject to approval
by the Federal Trade Commission, which was received on April 7, 1995. These
financial statements are based on HCHSC historical cost because HTI ownership of
the hospital was temporary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Hospital
and its controlled ventures. All material intercompany transactions and account
balances have been eliminated in consolidation.
CASH EQUIVALENTS
Highly liquid investments, primarily U.S. government backed securities and
certificates of deposits with a maturity of three months or less when purchased,
excluding amounts for which use is limited by board or donor designation or by
trust agreements, have been defined as cash equivalents. The carrying amounts
reported in the balance sheets for cash equivalents approximate fair value.
ACCOUNTS RECEIVABLE AND NET PATIENT REVENUE
The Hospital has entered into agreements with third-party payors, including
U.S. government programs and managed care health plans, under which the Hospital
is paid based upon established charges, cost of providing services,
predetermined rates by diagnosis, fixed per diem rates or discounts from
established charges.
Net patient service revenues are recorded at estimated amounts due from
patients and third party payors for health care services provided, including
anticipated settlements under reimbursement agreements with third party payors.
Payments for services rendered to patients covered by the Medicare and Medicaid
programs are generally less than billed charges. Provisions for contractual
adjustments are made to reduce the charges to these patients to estimated
receipts based upon the programs' principles of payment/reimbursement (either
prospectively determined or retrospectively determined costs). Final settlements
under these programs are subject to administrative review and audit, and
provision is currently made for adjustments which may result during the period
in which such adjustments become known. Allowance for contractual adjustments
under these programs is netted in accounts receivable in the accompanying
balance sheet. Management is of the opinion that adequate allowance has been
provided for possible adjustments that might result from such final settlements.
Accounts receivable consists primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
Current earnings are charged with an allowance for doubtful accounts based
on experience and other circumstances that may affect the ability of payors to
meet their obligations. Accounts deemed uncollectible are charged against that
allowance. For the years ended May 31, 1993 and 1994 and for
F-82
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the period ended April 13, 1995, respectively, approximately 39%, 40% and 38% of
total patient care revenue resulted from the Medicare program, and approximately
10%, 9% and 8%, respectively, resulted from Medicaid program.
INVESTMENTS
Investments acquired by purchase are stated at cost, adjusted for
impairments in value that are deemed to be other than temporary. Market values
for investments are based on quoted market prices. Investments limited as to
use, that are required for obligations classified as current liabilities and
Board designated investments and are immediately available to the Hospital for
their stated purpose, are reported in current assets.
Board designated investments limited as to use represent certain funds from
operations and other sources designated by the Board of Directors to be used to
fund future capital asset replacements, for the retirement of certain long-term
debt or for other purposes.
Certain donations, grants and bequests are restricted by donors and are
recorded at fair market value at the date of receipt. Income from and
expenditures of restricted donations are recorded as revenue and expenses in the
period used, or as general equity transfers if use is restricted for property or
equipment purchases. Bequests receivable are recorded at a nominal amount until
the Hospital receives the bequest.
SUPPLIES INVENTORIES
Inventories are stated at cost, determined principally by the last-in,
first-out (LIFO) method, and are not in excess of market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded on the basis of cost, if purchased, or
fair market value at the date of donation. Depreciation of property and
equipment is recognized using the straight-line method over the expected useful
lives of the assets ranging from 5 and 30 years. Amortization of capital leases
is included with depreciation expense.
UNAMORTIZED DEBT ISSUANCE COSTS
Debt issuance costs are amortized using the bonds outstanding method over
the repayment term of the related debt. Amortization is included in depreciation
and amortization expense.
CHARITY CARE
Consistent with its mission prior to the acquisition by HTI, the Hospital
provides medical care to all patients regardless of their ability to pay. In
accordance with the Hospital's policies related to the provision of charity
care, patients who were unable to pay for services were identified based on
patient financial information and other subsequent analysis. The Hospital did
not pursue collection from these patients and such amounts were excluded from
net patient revenue. Charity care charges foregone were approximately $1,014,000
in 1993, $1,440,000 in 1994, and $1,228,000 in 1995.
INCOME TAXES
The Hospital utilizes Statement of Financial Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted marginal tax rates currently in
effect when the differences reverse. As described in Note 1, the Hospital had
been a tax-exempt entity prior to the acquisition by HTI. Earning for the period
from August 16, 1994 to April 13,
F-83
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
1995 were included in HTI consolidated tax return. The Hospital has recorded
current and deferred income tax expense for the period subsequent to the
acquisition by HTI, determined as if it were filing a separate tax return.
2. INVESTMENTS:
The composition of investment assets limited as to use at May 31, 1994, was
as follows:
<TABLE>
<CAPTION>
MARKET
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Investments held by trustees under loan agreements:
Cash and short-term investments.............................. $ 201 $ 201
Funds invested in direct obligations of the U.S.
Government.................................................. 1,119 1,119
Less current portion......................................... (418) (418)
--------- ---------
902 902
Board designated investments:
Cash and short-term investments.............................. 5,902 5,902
--------- ---------
5,902 5,902
Donor restricted and other investments:
Cash and short-term investments.............................. 925 935
Common trust funds and other................................. 653 653
--------- ---------
1,578 1,588
--------- ---------
$ 8,382 $ 8,392
--------- ---------
--------- ---------
</TABLE>
Investment income, which is included in other revenue, net, was
approximately $693,000, $837,000 and $47,000 for 1993, 1994 and 1995,
respectively.
Investments consisted of commercial paper, money market instruments, U.S.
Government obligations, marketable equity securities and high grade corporate
bonds. The market values of investment were determined based on quoted market
rates.
3. ACCRUED AND OTHER LIABILITIES:
Details of accrued and other liabilities at May 31, 1994 and April 13, 1995
were as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries and wages..................................... $ 1,834 $ 1,675
Accrued vacation............................................... 2,195 2,074
Income taxes payable to HTI.................................... 1,567
Other.......................................................... 1,108 1,594
--------- ---------
Total accrued and other liabilities.......................... $ 5,137 $ 6,910
--------- ---------
--------- ---------
</TABLE>
F-84
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt, which included capital leases and amounts due to HCHSC, at
May 31, 1994 and April 13, 1995, were as follows:
<TABLE>
<CAPTION>
MATURITY 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Series 1990 Salt Lake City, Utah, Flexible Rate Revenue
Bonds, principal payable at various dates through 2009,
interest payable monthly at variable rates ranging from
2.2% to 2.5%, collateralized by a renewable, irrevocable
letter of credit in the amount of $12,296,000 which expires
on February 1, 1997........................................ Various $ 7,323
Series 1986 Salt Lake City, Utah, Industrial Revenue Bonds,
principal payable annually, interest payable semiannually
at rates from 6.0% to 7.4%................................. 2018 9,480
Notes payable to owner, principal payable at various dates,
interest payable at 10.5%.................................. $ 6,015
Capital leases, principal and interest payable monthly,
interest payable monthly at rates ranging from 5.8% to
9%......................................................... Various 287 2,459
--------- ---------
17,090 8,474
Less current portion (including $6,015 for 1995 due to
HTI)..................................................... (233) (6,560)
--------- ---------
$ 16,857 $ 1,914
--------- ---------
--------- ---------
</TABLE>
The carrying amounts of the variable rate, long-term debt approximate their
fair values. The fair values of the fixed rate, long-term debt and capital lease
obligations were estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the fixed rate, long-term debt and capital lease obligations at
April 13, 1995, approximated their carrying amount.
Generally, mandatory deposits were required to be made to sinking and other
funds held by trustees for payment of principal and interest.
Prior to the acquisition by HTI, the Hospital extinguished the Series 1986
Industrial Revenue Bonds of approximately $9,480,000. The Hospital recognized an
extraordinary loss of approximately $846,000, for which no tax benefit was
recognized because HCHSC was tax-exempt. Additionally, the 1990 Series Flexible
Rate Revenue Bonds were distributed to the HCHSC concurrent with the HTI
acquisition.
OBLIGATED GROUP AND OTHER REQUIREMENTS
Under the Master Trust Indenture, HCHSC and certain of its subsidiaries,
which included the Hospital (the "Obligated Group") could issue obligations to
finance certain activities. Those members of the Obligated Group that elected to
obtain financing under the Master Trust Indenture were guarantors for the
repayment of obligations issued by other members of the Obligated Group up to
certain limits, although each issuer was considered the principal obligor.
F-85
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
The Series 1990 Utah Pooled Financing Bonds and the Series 1986 Salt Lake
City Industrial Revenue Bonds were collateralized by a Master Trust Indenture
that was collateralized by all accounts, contract rights and receipts of the
Hospital. The obligations referenced above contained restrictive covenants that
included, among others, restrictions on additional indebtedness, the payment of
dividends and other distributions, the repurchase of common stock and related
securities under certain circumstances, and the requirement to maintain certain
financial ratios. The Hospital was in compliance with all loan covenants at May
31, 1994. The obligations referenced above were not acquired by HTI in the sale
of the Hospital by HCHSC.
The Master Trust Indenture requires establishment of certain funds, not
available for general purposes, which were held with and controlled by a trustee
for payment of certain construction costs, bond issuance costs, principal and
interest and maintenance of cash reserves. Details of funds held by the trustee
at May 31, 1994 were:
<TABLE>
<CAPTION>
1994
---------------
(IN THOUSANDS)
<S> <C>
Debt service reserve fund........................................... $ 902
Bond fund........................................................... 40
Interest fund....................................................... 378
-------
1,320
Less current portion.............................................. (418)
-------
$ 902
-------
-------
</TABLE>
INTEREST COSTS
During 1993, 1994 and 1995, interest costs totaled approximately $1,171,000,
$929,000 and $653,000, respectively, of which $81,000 was capitalized during
1994. Interest paid was approximately $1,149,000, $933,000, and $579,000 in
1993, 1994 and 1995, respectively.
5. LEASES:
The Hospital leases certain land, buildings and equipment under capital and
operating leases that expire at various dates through 2000. Rental expense,
which includes provisions for maintenance in some cases, amounted to
approximately $2,318,000, $2,693,000 and $1,698,000 in 1993, 1994 and 1995,
respectively. Future minimum rental commitments at April 13, 1995, under a
capital lease and noncancelable operating leases with a remaining term of
greater than one year were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
--------- -----------
- --------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
1996........................................................ $ 801 $ 636
1997........................................................ 701 570
1998........................................................ 624 472
1999........................................................ 624 132
2000........................................................ 208 46
--------- -----------
Total minimum obligations................................... 2,958 $ 1,856
-----------
-----------
Less amounts representing interest........................ 499
---------
Present value of minimum obligations........................ 2,459
Less current portion...................................... 545
---------
Long term obligations at April 13, 1995..................... $ 1,914
---------
---------
</TABLE>
F-86
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES:
For the period from August 16, 1994 to April 13, 1995, the Hospital earned
approximately $2,737,000 in pre-tax income. The provision for income taxes
consisted of the following for the period from August 16, 1994 through April 13,
1995.
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Current:
Federal........................................................... $ 1,440
State............................................................. 127
-------
Total current provision......................................... 1,567
Deferred:
Federal........................................................... (496)
State............................................................. (44)
-------
Total deferred benefit.......................................... (540)
-------
Provision for income taxes.......................................... $ 1,027
-------
-------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Federal income tax benefit at statutory rate of 34%................. $ 795
Loss for period in which no tax benefit recognized.................. 136
State income taxes, net of federal benefit.......................... 83
Other............................................................... 13
-------
Total provision for income taxes.................................. $ 1,027
-------
-------
</TABLE>
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is based on earnings for the period in which the Hospital was
subject to federal income taxes. The components of the deferred tax assets and
(liabilities) at April 13, 1995 were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 13, 1995
---------------
(IN THOUSANDS)
<S> <C>
Allowance for bad debts....................................................... $ 768
Excess of tax over book basis in property and equipment....................... (228)
------
Net deferred tax asset...................................................... 540
Less current portion.......................................................... (768)
------
Noncurrent portion.......................................................... $ (228)
------
------
</TABLE>
The current deferred tax asset is included in prepaid expenses and other
current assets. The noncurrent deferred tax liability is included in other
long-term liabilities.
7. RELATED PARTY TRANSACTIONS:
The Hospital purchased certain services from Shared Services which is the
administrator of the Holy Cross Employees Benefit Trust (the "Benefit Trust").
The Benefit Trust provided health, life and long-term disability benefits to
employees of the Hospital. Premiums for these benefits were approximately
$2,263,000, $2,332,000 and $527,000 for 1993, 1994 and 1995, respectively.
Havican
F-87
<PAGE>
SALT LAKE REGIONAL MEDICAL CENTER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
Insurance Company ("Havican"), a subsidiary of Shared Services, is the captive
insurance company from which the Hospital obtained its primary professional
liability insurance. Premiums paid to Havican were approximately $994,000,
$1,346,000 and $240,000 for 1993, 1994 and 1995, respectively. Premiums paid to
HTI for professional liability insurance during 1995 were approximately
$177,000. In addition, the Hospital has limited its liability through the
purchase of umbrella coverage from third-party insurers.
Through August 15, 1994, the Hospital provided pension benefits for
substantially all of its full-time employees through a defined benefit pension
plan sponsored by HCHSC. The Hospital withdrew from the plan in connection with
its acquisition by HTI. The liability or asset associated with the Hospital's
withdrawal, if any, was retained by HCHSC. Pension expense for the years ended
May 31, 1993 and 1994 and the period ended April 13, 1995, were $1,065,000,
$1,050,000 and $210,000, respectively.
HCHSC provided certain management services in the normal course of business
to the Hospital. For 1993, 1994 and 1995, the expenses allocated to the Hospital
were approximately $1,356,000, $1,486,000 and $304,000, respectively.
8. SALE OF ASSETS TO HTI:
As described in Note 1, HCHSC sold the Hospital to HTI in August 1994. At
the time of the sale, HTI assumed Hospital debts in excess of assets retained of
approximately $4,580,000, which has been reflected in the financial statements
as a capital distribution from donor restricted funds of $1,065,000 and a
capital contribution to general funds of $5,645,000.
F-88
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 7,583 $ 5,670
Accounts receivable, less allowance for doubtful accounts of $10,116 and $14,041 at
December 31, 1995 and March 31, 1996, respectively................................. 33,262 36,407
Supplies inventory.................................................................. 3,470 3,872
Prepaid expenses and other current assets........................................... 6,264 6,290
------------ -----------
Total current assets............................................................ 50,579 52,239
Property and equipment, less allowances for depreciation and amortization of $10,733
and $11,901 at December 31, 1995 and March 31, 1996, respectively.................. 158,382 166,997
Investment in Dakota Heartland Health System........................................ 48,145 52,118
Other assets........................................................................ 34,154 36,668
------------ -----------
Total assets...................................................................... $ 291,260 $ 308,022
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations..................... $ 2,467 $ 2,834
Accounts payable.................................................................... 13,952 12,743
Due to third parties................................................................ 8,829 8,052
Other current liabilities........................................................... 15,490 12,860
------------ -----------
Total current liabilities........................................................... 40,738 36,489
Long-term debt and capital lease obligations........................................ 162,447 181,212
Other long-term liabilities......................................................... 10,177 10,445
Redeemable preferred stock.......................................................... 46,029 46,078
Common stock, $.01 par value:
Authorized -- 25,000,000 shares, 11,868,230 and 12,012,603 shares issued and
outstanding at December 31, 1995 and March 31, 1996, respectively................. 119 120
Common stock subscribed 80,000 shares at December 31, 1995 and March 31, 1996,
respectively....................................................................... 40 40
Common stock subscription receivable................................................ (40) (40)
Paid in capital..................................................................... 47,643 48,178
Accumulated deficit................................................................. (15,893) (14,500)
------------ -----------
Total liabilities and stockholders' equity........................................ $ 291,260 $ 308,022
------------ -----------
------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-89
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
Net patient service revenue............................................................. $ 27,625 $ 49,898
Other revenue........................................................................... 1,102 783
--------- ---------
Net revenue......................................................................... 28,727 50,681
Operating expenses:
Salaries and benefits................................................................. 12,762 22,006
Other operating and administrative.................................................... 10,913 19,232
Provision for bad debts............................................................... 2,073 3,670
Interest.............................................................................. 2,630 4,587
Depreciation and amortization......................................................... 1,532 3,016
Equity in earnings of Dakota Heartland Health System.................................. (1,478) (3,973)
--------- ---------
Total expenses...................................................................... 28,432 48,538
--------- ---------
Income before income taxes.......................................................... 295 2,143
Provision for income taxes.............................................................. 118 750
--------- ---------
Net income.......................................................................... $ 177 $ 1,393
--------- ---------
--------- ---------
Income (loss) applicable to common stock............................................ $ (1,312) $ 1,344
--------- ---------
--------- ---------
Income (loss) per common share:
Primary............................................................................. $ (.31) $ .10
--------- ---------
--------- ---------
Fully Diluted....................................................................... N/A $ .08
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-90
<PAGE>
CHAMPION HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Operating activities:
Net income.......................................................................... $ 177 $ 1,393
Equity in earnings of Dakota Heartland Health System................................ (1,478) (3,973)
Depreciation and amortization....................................................... 1,532 3,016
Provision for bad debts............................................................. 2,073 3,670
Changes in assets and liabilities, net of effects from acquisitions
Increase in assets................................................................ (1,008) (5,195)
Decrease in liabilities........................................................... (2,459) (4,477)
---------- ----------
Net cash used in operating activities........................................... (1,163) (5,566)
---------- ----------
Investing activities:
Additions to property and equipment................................................. (7,060) (2,697)
Investment in Jordan Valley Hospital................................................ (10,746)
Investment in Dakota Heartland Health System........................................ (2,000)
Investment in Salt Lake Regional Medical Center..................................... (3,000)
Proceeds from sale of property and equipment........................................ 1,300
Investment in note receivable....................................................... (793) (50)
Other............................................................................... (576) (575)
---------- ----------
Net cash used in investing activities........................................... (12,129) (14,068)
---------- ----------
Financing activities:
Proceeds from the issuance of long-term obligations................................. 18,512
Payments on long-term debt and capital lease obligations............................ (1,989) (768)
Other............................................................................... (235) (23)
---------- ----------
Net cash provided by (used in) financing activities............................. (2,224) 17,721
---------- ----------
Decrease in cash and cash equivalents........................................... (15,516) (1,913)
Cash and cash equivalents at beginning of period...................................... 48,424 7,583
---------- ----------
Cash and cash equivalents at end of period............................................ $ 32,908 $ 5,670
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-91
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements
do not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the results for the periods
presented have been reflected. Such financial statements include the accounts of
the Company and all wholly-owned and majority-owned subsidiaries and
partnerships. All significant intercompany transactions and accounts have been
eliminated in consolidation.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1995,
included in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1995.
The Company's business is seasonal in nature and subject to general economic
conditions and other factors. Accordingly, operating results for the three
months ended March 31, 1996, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. Entities will be allowed to
measure compensation expense for stock-based compensation under SFAS 123 or APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue accounting for such compensation under the provisions of APB
Opinion No. 25.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 121, which is effective for fiscal years beginning after December 15, 1995,
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company's adoption of SFAS 121 on January 1, 1996, had no
material effect on its financial statements.
2. SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATE
The Company, through a wholly-owned subsidiary, owns 50% of a partnership
operated as Dakota Heartland Health System ("DHHS"). DHHS owns and operates two
general acute care hospitals with a total of 341 beds in Fargo, North Dakota,
and the Company manages the combined operations of the two facilities pursuant
to the partnership agreement and an operating agreement with DHHS. Under the
terms of the partnership agreement, the Company is entitled to 55% of DHHS's net
income and distributable cash flow ("DCF") until such time as it has recovered
on a cumulative basis an additional $10,000,000 of DCF. The Company is also
obligated to advance funds to DHHS to cover any and all operating deficits.
F-92
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATE (CONTINUED)
The Company accounts for its investment in DHHS under the equity method. The
following table summarizes certain financial information of DHHS (dollars in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenue................................................. $ 26,088 $ 27,623
Net income.................................................. 2,687 7,223
Company's equity in the earnings of DHHS.................... 1,478 3,973
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets.............................................. $ 39,008 $ 38,095
Non-current assets.......................................... 55,854 56,226
Current liabilities......................................... 19,980 12,258
Non-current liabilities..................................... 57 15
Partners' equity............................................ 74,825 82,048
</TABLE>
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
December 31, 1995 and March 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Revolving Loan.............................................................. $ 47,700 $ 66,200
11% Senior Subordinated Notes, net of discount (face amount of $99,089 and
$98,705 at December 31, 1995 and March 31, 1996, respectively)............. 98,447 98,076
Health Care REIT, Inc....................................................... 11,120 10,908
Other notes payable and capital lease obligations........................... 7,647 8,862
------------ -----------
Total debt and capital lease obligations.................................. 164,914 184,046
Less current portion........................................................ (2,467) (2,834)
------------ -----------
Total long-term debt and capital lease obligations........................ $ 162,447 $ 181,212
------------ -----------
------------ -----------
</TABLE>
The Company is subject to various loans, notes and mortgages that contain
restrictive covenants which include, among others, restrictions on additional
indebtedness, the payment of dividends and other distributions, the repurchase
of common stock and related securities under certain circumstances, and the
requirement to maintain certain financial ratios. The Company was in compliance
with or has obtained permanent waivers for all loan covenants to which it was
subject at March 31, 1996 and December 31, 1995.
4. ACQUISITIONS
JORDAN VALLEY HOSPITAL
On March 1, 1996, the Company acquired Jordan Valley Hospital ("Jordan")
from Columbia/ HCA Healthcare Corporation ("Columbia"). Jordan is a 50 bed acute
care hospital located in West Jordan, Utah, a suburb of Salt Lake City. Jordan
was acquired in exchange for Autauga Medical Center, an 85 bed acute care
hospital, and Autauga Health Care Center, a 72 bed skilled nursing facility,
both in Prattville, Alabama, plus preliminary cash consideration paid to
Columbia of approximately $10,750,000. Cash consideration included approximately
$3,750,000 for certain net working
F-93
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
4. ACQUISITIONS (CONTINUED)
capital components, which are subject to adjustment and final settlement by the
parties, and reimbursement of certain capital expenditures made previously by
Columbia. The transaction did not result in a gain or loss. The Alabama
facilities were acquired as part of the Company's acquisition of AmeriHealth,
Inc. on December 6, 1994.
The following selected unaudited pro forma financial information for the
three months ended March 31, 1995 and 1996, assumes that the acquisition of
Jordan and Salt Lake Regional Medical Center ("SLRMC") occurred on January 1,
1995. The Company acquired SLRMC on April 13, 1995. The pro forma financial
information does not purport to be indicative of the results that actually would
have been obtained had the operations been combined during the periods
presented, and is not intended to be a projection of future results or trends.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenue...................................................................... $ 49,353 $ 51,919
--------- ---------
--------- ---------
Net income....................................................................... $ 1,313 $ 1,268
--------- ---------
--------- ---------
Income (loss) applicable to common stock......................................... $ (176) $ 1,219
--------- ---------
--------- ---------
Income (loss) per common share:
Primary........................................................................ $ (0.04) $ 0.09
--------- ---------
--------- ---------
Fully diluted.................................................................. N/A $ 0.07
---------
---------
Weighted average number of common shares outstanding:
Primary........................................................................ 4,228 12,835
--------- ---------
--------- ---------
Fully diluted.................................................................. N/A 18,184
---------
---------
</TABLE>
5. INCOME PER SHARE
Primary income per common and common equivalent share is calculated by
dividing the income attributable to common stock (net income less preferred
stock dividend requirements and accretion of preferred stock issuance costs) by
the weighted average number of common and common equivalent shares outstanding
during each period, assuming the exercise of all stock options and warrants,
when dilutive, with an exercise price less than the average market price of the
common stock using the treasury stock method. Fully diluted income per share was
not presented for the quarter ended March 31, 1995, due to the anti-dilutive
effect of such calculation. The fully diluted income per share computation for
the quarter ended March 31, 1996, assumed the conversion of 2,608,176 shares of
convertible preferred stock into a weighted average of 5,216,027 common shares,
and that no preferred dividends on the preferred stock were provided (See Note
6).
The weighted average number of shares used in computing income (loss) per
share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
Primary.......................................................... 4,277,975 12,835,211
----------- -------------
----------- -------------
Fully Diluted.................................................... N/A 18,183,900
-------------
-------------
</TABLE>
F-94
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
Effective December 31, 1995, the Company and its Preferred shareholders
entered into the 1995 Recapitalization Agreement that, among other things,
eliminated the accrual of future dividends on its outstanding Preferred Stock.
At March 31, 1996, the Company had outstanding 2,608,176 shares of Series C and
D Cumulative Convertible Redeemable Preferred Stock (collectively, "Preferred
Stock") which were convertible into 5,216,352 shares of common stock. The
Company's Certificate of Incorporation, as amended, certain preferred stock
purchase agreements, and its Senior and other debt agreements prohibit or place
limitations on the payment of cash dividends to holders of preferred and common
stock.
7. INCOME TAXES
The income tax provision recorded for the quarters ended March 31, 1995 and
1996 differs from the expected income tax provision due to permanent
differences, the provision for state income taxes and the realization of net
deferred tax assets.
8. CONTINGENCIES
LITIGATION. The Company is subject to claims and legal actions arising in
the ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
PROFESSIONAL LIABILITY. The Company is self-insured up to $1,000,000 per
occurrence for the payment of claims arising from professional liability risks.
The Company has accrued liabilities for potential professional liability risks
based on estimates for losses limited to $1,000,000 per occurrence and
$4,000,000 in the aggregate. The Company is further insured by a commercial
insurer for claims in excess of these limits up to an additional $10,000,000
over its self-insured retention. In the opinion of management, any unaccrued
damages awarded will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
9. SUBSEQUENT EVENT
Effective April 12, 1996, the Company executed a definitive Agreement and
Plan of Merger (the "Merger Agreement") with Paracelsus Healthcare Corporation,
a privately held California corporation ("Paracelsus") and PC Merger Sub., Inc.,
a newly formed Paracelsus subsidiary. The Merger Agreement provides for, among
other things, the merger of PC Merger Sub., Inc. with and into the Company (the
"Merger"). Each share of the Company's common stock will convert into one share
of Paracelsus common stock, and each share of the Company's Preferred Stock will
convert into two shares of Paracelsus common stock. Dr. Manfred George
Krukemeyer, currently the Chairman of the Board and sole shareholder of
Paracelsus, and members of Paracelsus management will own approximately 60% of
the Company, and current Company security holders will own approximately 40% of
Paracelsus common stock on a fully diluted basis. The consummation of the Merger
is conditioned upon, among other things, Dr. Krukemeyer entering into a
shareholder agreement (the "Shareholder Agreement") with Paracelsus to be
effective at the time of the Merger. The Shareholder Agreement, among other
things, set forth (i) restrictions on certain acquisitions and dispositions of
Paracelsus voting securities, (ii) certain rights and obligations relating to
board representation and (iii) certain rights of first refusal for Dr.
Krukemeyer. The Shareholder agreement will also impose other customary
standstill restrictions. The Merger is subject to a number of customary
conditions including filings with the Securities and Exchange Commission,
approval of the stockholders of the Company and Paracelsus, and antitrust
filings. In the event that the Merger Agreement is terminated, under certain
circumstances Paracelsus and the Company have agreed to pay a termination fee to
the other.
Effective April 12, 1996, the Company and holders of its 11% Senior
Subordinated Notes under agreements dated December 31, 1993, (the "Series D
Notes") and May 1, 1995, (the "Series E Notes")
F-95
<PAGE>
CHAMPION HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. SUBSEQUENT EVENT (CONTINUED)
and certain holders of its Preferred Stock entered into an Agreement in
Contemplation of the Merger, that among other things provided (i) the parties
thereto holding shares of Preferred Stock agreed to vote their Preferred Shares
for the Merger, (ii) the holders of the Series D Notes agreed among other things
(a) to waive any rights to cause the Company to purchase from such holders the
Series D Notes in the event of a change in control caused by the Merger and (b)
surrender their Series D Notes for prepayment at a premium depending upon the
year of prepayment, and (iii) the holder of the Series E Notes agreed among
other things (x) to waive any rights to cause the Company to purchase from such
holders the Series E Notes in the event of a change in control caused by the
Merger and (y) to surrender their Series E Notes for prepayment at a premium
depending upon the year of such prepayment and upon whether warrants to purchase
Company common stock are surrendered in connection with such prepayment.
Pursuant to the 1995 Recapitalization Agreement entered into by the Company
and certain of its security holders effective December 31, 1995, the Company
agreed to reduce the exercise prices of one series of $680, 104 warrants from
$5.90 to $5.25 per share and two series totaling 2,447,670 warrants from $9.00
to $7.00 per shares until May 13, 1996, after which the exercise prices revert
to their prior amounts. As of May 13, 1996, warrants have been exercised to
purchase approximately 2,370,000 shares of common stock, resulting in cash
proceeds to the Company of approximately $8,715,000 and the tender of
approximately $4,840,000 in Company subordinated notes in lieu of cash.
On January 31, 1996, the Company entered into a letter of intent to sell the
149 bed Lakeland Regional Hospital in Springfield, MO, to Columbia/HCA
Healthcare Corporation in exchange for the 100 bed Poplar Springs Hospital in
Petersburg, VA. Both facilities are psychiatric hospitals. On May 6, 1996, the
Company and Columbia mutually agreed to terminate this transaction.
F-96
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
The Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Financial Statements set forth below have been derived from the Paracelsus
Unaudited Pro Forma Condensed Combining Financial Statements and the Champion
Unaudited Pro Forma Condensed Combining Statements of Income and Unaudited
Historical Condensed Balance Sheet included elsewhere in this Prospectus. The
Paracelsus and Champion Unaudited Pro Forma Condensed Combining Financial
Statements reflect the effect of the Merger and certain related transactions, in
each case as if such transactions had occurred at the beginning of each period
presented for purposes of the pro forma income statements and operating data and
on March 31, 1996 for purposes of the pro forma balance sheet. The Paracelsus
and Champion Unaudited Pro Forma Condensed Combining Financial Statements also
give effect to certain acquisitions and dispositions by each of Paracelsus and
Champion completed since the beginning of each of the periods presented.
The Paracelsus and Champion Unaudited Pro Forma Condensed Combining
Financial Statements set forth below and the Paracelsus Unaudited Pro Forma
Condensed Combining Financial Statements and the Champion Unaudited Pro Forma
Condensed Combining Statements of Income included elsewhere herein do not
purport to present the financial position or results of operations of Paracelsus
and Champion had the transactions and events assumed therein occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be expected in the future. The Paracelsus and Champion
Unaudited Pro Forma Condensed Combining Financial Statements set forth below are
qualified in their entirety by reference to, and should be read in conjunction
with, the Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements and the Champion Unaudited Pro Forma Condensed Combining Statements
of Income and Unaudited Historical Condensed Balance Sheet included elsewhere in
this Prospectus. See "Risk Factors -- Significant Leverage," "The Merger and
Financing," "Paracelsus Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Champion Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -- Recent
Transactions," "Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements" and "Champion Unaudited Pro Forma Condensed Combining Statements of
Income and Unaudited Historical Condensed Balance Sheet."
Paracelsus reports its financial information on the basis of a September 30
fiscal year. Champion reports its financial information on the basis of a
December 31 year. The Summary Unaudited Pro Forma Financial and Operating Data
for the fiscal year ended September 30, 1995 includes Paracelsus' historical
results of operations for the fiscal year ended September 30, 1995 and
Champion's historical results of operations for the year ended December 31,
1995. The Company currently intends to adopt a December 31 year end. The Summary
Unaudited Pro Forma Financial and Operating Data for the six months ended March
31, 1995 and 1996 includes Paracelsus' and Champion's historical results of
operations for the same six month periods. The Summary Unaudited Pro Forma
Balance Sheet Data includes the historical balance sheets of Paracelsus and
Champion as of March 31, 1996. See "The Merger and Financing," "Company
Unaudited Pro Forma Condensed Combining Financial Statements," "Paracelsus and
Champion Unaudited Pro Forma Condensed Combining Financial Statements,"
"Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements" and
"Champion Unaudited Pro Forma Condensed Combining Statements of Income and
Unaudited Historical Condensed Balance Sheet."
PF-1
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARACELSUS CHAMPION FOR THE PRO FORMA FOR
PRO FORMA PRO FORMA MERGER THE MERGER
<S> <C> <C> <C> <C>
Total operating revenues........................................ $ 501,633 $ 195,633 $ (367)(1) $ 696,899
Costs and expenses:
Salaries and benefits......................................... 206,035 82,040 288,075
Supplies...................................................... 44,816 26,012 70,828
Purchased services............................................ 59,302 26,688 85,990
Provision for bad debts....................................... 41,054 14,562 55,616
Other operating expenses...................................... 92,828 25,483 (400)(2) 117,911
Depreciation and amortization................................. 17,167 10,344 4,912(3) 31,635
(788)(4)
Interest...................................................... 17,241 15,738 3,824(5) 36,803
Equity in earnings of DHHS.................................... (8,881) (8,881)
Restructuring and unusual charges............................. 4,177 4,177
----------- ----------- ------------- -------------
Total costs and expenses........................................ 482,620 191,986 7,548 682,154
----------- ----------- ------------- -------------
Income before minority interests and income taxes............... 19,013 3,647 (7,915) 14,745
Minority interests.............................................. 1,927 1,927
----------- ----------- ------------- -------------
Income before income taxes...................................... 17,086 3,647 (7,915) 12,818
Income taxes.................................................... 7,005 277 (1,936)(6) 5,346
----------- ----------- ------------- -------------
Net income...................................................... 10,081 3,370 (5,979) 7,472
Preferred dividends accrued..................................... -- (11,331) 11,331(7)
----------- ----------- ------------- -------------
Income (loss) applicable to common stock........................ $ 10,081 $ (7,961) $ 5,352 $ 7,472
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Loss per share................................................ $ (1.87) $ 0.15
----------- -------------
----------- -------------
Weighted average number of common and common equivalent shares
outstanding.................................................... 4,255 46,069(8) 50,324
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-2
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARACELSUS CHAMPION FOR THE PRO FORMA FOR
PRO FORMA PRO FORMA MERGER THE MERGER
<S> <C> <C> <C> <C>
Total operating revenues........................................ $ 250,331 $ 97,109 $ (200)(1) $ 347,240
Costs and expenses:
Salaries and benefits......................................... 106,039 42,168 148,207
Supplies...................................................... 22,082 13,703 35,785
Purchased services............................................ 27,502 12,113 39,615
Provision for bad debts....................................... 19,061 7,943 27,004
Other operating expenses...................................... 44,796 12,823 (200)(2) 57,419
Depreciation and amortization................................. 8,665 4,413 2,456(3) 15,338
(196)(4)
Interest...................................................... 8,260 6,948 1,891(5) 17,099
Equity in earnings of DHHS.................................... (2,363) (2,363)
----------- ----------- ------------- -------------
Total costs and expenses........................................ 236,405 97,748 3,951 338,104
----------- ----------- ------------- -------------
Income (loss) before minority interests
and income taxes............................................... 13,926 (639) (4,151) 9,136
Minority interests.............................................. 1,204 1,204
----------- ----------- ------------- -------------
Income (loss) before income taxes............................... 12,722 (639) (4,151) 7,932
Income taxes (benefit).......................................... 5,215 70 (1,048)(6) 4,237
----------- ----------- ------------- -------------
Net income (loss)............................................... 7,507 (709) (3,103) 3,695
Preferred dividends accrued..................................... (2,727) (2,727)(7)
----------- ----------- ------------- -------------
Income (loss) applicable to common stock........................ $ 7,507 $ (3,436) $ (376) $ 3,695
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
Income (loss) per share......................................... $ (0.81) $ 0.07
----------- -------------
----------- -------------
Weighted average number of common and common equivalent shares
outstanding.................................................... 4,244 46,083(8) 50,327
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-3
<PAGE>
PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
PARACELSUS CHAMPION FOR THE FOR THE
PRO FORMA PRO FORMA MERGER MERGER
<S> <C> <C> <C> <C>
Total operating revenues.................................... $ 265,626 $ 103,089 $ (160)(1) $ 368,555
Costs and expenses:
Salaries and benefits..................................... 111,987 43,940 155,927
Supplies.................................................. 21,604 13,113 34,717
Purchased services........................................ 33,786 13,757 47,543
Provision for bad debts................................... 20,987 6,858 27,845
Other operating expenses.................................. 46,393 13,135 (200)(2) 59,328
Depreciation and amortization............................. 8,275 6,905 2,456(3) 17,137
(499)(4)
Interest.................................................. 8,863 9,187 1,636(5) 19,686
Equity in earnings of DHHS................................ (6,609) (6,609)
Settlement costs.......................................... 22,356 22,356
----------- ----------- ------------ -----------
Total costs and expenses.................................... 274,251 100,286 3,393 377,930
----------- ----------- ------------ -----------
Income (loss) before minority interests
and income taxes........................................... (8,625) 2,803 (3,553) (9,375)
Minority interests.......................................... 1,072 1,072
----------- ----------- ------------ -----------
Income (loss) before income taxes........................... (9,697) 2,803 (3,553) (10,447)
Income taxes (benefit)...................................... (3,976) 1,037 (802)(6) (3,741)
----------- ----------- ------------ -----------
Net income (loss)........................................... (5,721) 1,766 (2,751) (6,706)
Preferred dividends accrued................................. 6,899 (6,899)(7)
----------- ----------- ------------ -----------
Income (loss) applicable to common stock.................... $ (5,721) $ (5,133) $ 4,148 $ (6,706)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Loss per share.............................................. $ (0.63) $ (0.14)
----------- -----------
----------- -----------
Weighted average number of common and common equivalent
shares outstanding......................................... 8,121 38,880(8) 47,001
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-4
<PAGE>
PARACELSUS AND CHAMPION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
PARACELSUS CHAMPION FOR THE FOR THE
PRO FORMA HISTORICAL(A) MERGER MERGER
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 3,149 $ 5,670 $(53,667)(10) $ 8,819
53,667(10)
Marketable securities................................................... 10,051 -- 10,051
Accounts receivable, less provision for bad debts....................... 100,015 36,407 136,422
Supplies................................................................ 9,652 3,872 13,524
Deferred income taxes................................................... 26,463 2,521 18,646(11) 47,630
Other current assets.................................................... 4,918 3,769 (1,000)(12) 7,687
--------- ------------- ------------- ---------
Total current assets.................................................. 154,248 52,239 17,646 224,133
Property and equipment, net of accumulated depreciation................... 195,809 166,997 38,022(13) 400,828
Investment in DHHS........................................................ 52,118 52,118
Other assets.............................................................. 57,854 36,668 60,215(13) 151,737
(3,000)(12)
--------- ------------- ------------- ---------
Total assets.......................................................... $ 407,911 $308,022 $112,883 $ 828,816
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
ADJUSTMENTS PRO FORMA
PARACELSUS CHAMPION FOR THE FOR THE
PRO FORMA HISTORICAL(A) MERGER MERGER
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and other current liabilities.......................... $ 77,411 $ 33,655 $ 4,000(14) $ 115,066
Current maturities of long-term debt.................................... 458 2,834 3,292
--------- ------------- ------------- ---------
Total current liabilities............................................. 77,869 36,489 4,000 118,358
Long-term debt and capital lease obligations.............................. 183,102 181,212 49,667(10) 413,981
Deferred income taxes..................................................... 24,607 7,394 15,589(13) 47,590
Other long-term liabilities............................................... 25,968 3,051 1,500(14) 30,519
Redeemable preferred stock................................................ 46,078 (46,078)(13)
Shareholders' equity...................................................... 96,365 33,798 (21,113)(15) 218,368
(9,604)(16)
5,478(13)
147,242(13)
(33,798)(13)
--------- ------------- ------------- ---------
Total liabilities and shareholders' equity............................ $ 407,911 $308,022 $112,883 $ 828,816
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
</TABLE>
- ------------------------
(a) There are no pro forma adjustments to the Champion historical balance sheet.
See notes to Paracelsus and Champion unaudited pro forma condensed combining
financial statements.
PF-5
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS
(1) To reflect the pro forma reduction in interest income as a result of the
repayment of a $4,000,000 promissory note due to Paracelsus, which is
expected to be paid in full by Dr. Krukemeyer contemporaneously with the
payment of the Dividend.
(2) To reflect the pro forma reduction in other operating expenses due to the
termination of the Know-how Contract upon consummation of the Merger. See
"Certain Relationships and Related Transactions -- Other Transactions."
(3) To adjust depreciation and amortization expense based on the revaluation of
Champion's depreciable assets and the increase in goodwill in connection
with the allocated purchase price (see Note 13). The acquired assets are
estimated to have an average remaining useful life of approximately 20
years based on the Company's assumption that Champion's hospital assets
consist of 65% buildings and improvements and 35% equipment with the useful
lives of such assets determined in accordance with Paracelsus' depreciation
policy (35 years, 20 years and 10 years for buildings, improvements and
equipment, respectively). Cost in excess of the fair market value of net
assets acquired ("Goodwill") is amortized on a straight line basis over a
20 year period.
(4) To record the pro forma decrease in amortization of deferred financing
costs associated with the Champion Credit Facility, Champion Notes and
certain other Champion indebtedness. Unaudited Pro Forma Condensed
Combining Statements of Income assume that no value is assigned to such
deferred financing costs in connection with the purchase price allocation.
(5) To record interest expense on the pro forma increase of approximately
$42,482,000 in the Existing Paracelsus Credit Facility to pay for various
Merger related expenditures (See Note 10) and the pro forma issuance of the
Shareholder Subordinated Note. The interest rates in effect under the
Existing Paracelsus Credit Facility were 7.9% for the year ended September
30, 1995, 7.8% for the six months ended March 31, 1995, and 6.6% for the
six months ended March 31, 1996. The Shareholder Subordinated Note will
have an annual interest rate of 6.51%. The following table summarizes the
pro forma change in interest expense.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Merger related increase in Existing Paracelsus Credit
Facility................................................. $ 3,356 $ 1,657 $ 1,402
Shareholder Subordinated Note............................. 468 234 234
------------- --------- ---------
Pro forma adjustment.................................. $ 3,824 $ 1,891 $ 1,636
------------- --------- ---------
------------- --------- ---------
</TABLE>
PF-6
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(6) To reflect the pro forma provision for income taxes at the effective rate
(41%) giving effect to the acquired operations and excluding the
amortization of Goodwill, which is non-deductible for tax purposes.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma adjustments to income before income taxes..... $ 7,915 $ 4,151 $ 3,553
Non-deductible Goodwill amortization.................... (3,193) (1,596) (1,596)
------------- --------- ---------
4,722 2,555 1,957
Effective tax rate...................................... 41% 41% 41%
------------- --------- ---------
Pro forma adjustment.................................. $ 1,936 $ 1,048 $ 802
------------- --------- ---------
------------- --------- ---------
</TABLE>
(7) To eliminate the historical dividend requirements on the Champion Preferred
Stock outstanding during the respective periods as a result of the
conversion of each share of Champion Preferred Stock into two shares of
Paracelsus Common Stock pursuant to the Merger.
PF-7
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(8) To adjust common and common equivalent shares used to calculate income
(loss) per share. The pro forma adjustment reflects the following events
related to the Merger for the fiscal year ended September 30, 1995 and the
six months ended March 31, 1995 and 1996 as more specifically described
below:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
ENDED MARCH 31,
SEPTEMBER 30, --------------------
1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Paracelsus Stock Split of each share of Paracelsus
Common Stock outstanding prior to the Effective Time
of the Merger into 66,159.426 shares of Paracelsus
Common Stock.......................................... 29,772 29,772 29,772
Dilutive effect of shares of Champion Common Stock
issued during the period in connection with (i) the
exercise of Champion Options and Champion Warrants and
(ii) the conversion of Champion Preferred Stock into
Champion Common Stock in connection with Champion's
1995 recapitalization................................. 7,613 2,809 3,892
Dilutive effect of Champion Common Stock equivalents,
based on the treasury stock method using the
historical stock prices of Champion Common Stock...... 729 837 -- (a)
Conversion of Champion Preferred Stock into two shares
of Paracelsus Common Stock in the Merger.............. 5,211 9,920 5,216
Dilutive effect of Paracelsus Options to be outstanding
upon consummation of the Merger, based on the treasury
stock method using the historical stock prices of
Champion Common Stock................................. 2,744 2,745 -- (a)
------------- --------- ---------
Pro forma adjustment................................... 46,069 46,083 38,880
------------- --------- ---------
------------- --------- ---------
</TABLE>
-------------------------------
(a) Not applicable due to anti-dilutive impact.
PF-8
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(10) To reflect the pro forma sources and uses of cash in connection with the
Shareholder Subordinated Note and other Merger-related expenditures as of
March 31, 1996, summarized as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENT ADJUSTMENT
TO CASH TO DEBT
(IN THOUSANDS)
<S> <C> <C>
Sources:
Merger related increase in Existing Paracelsus Credit Facility..... $ 42,482 $ 42,482
Shareholder Subordinated Note...................................... 7,185 7,185
Repayment of Dr. Krukemeyer's promissory note due to Paracelsus.... 4,000
----------- -----------
Pro forma adjustment -- total sources.......................... $ 53,667 $ 49,667
----------- -----------
----------- -----------
Uses:
Estimated Merger expenses.......................................... $ 6,000
Bonuses to be paid to Champion officers upon consummation of the
Merger............................................................ 3,054
Cash compensation paid in connection with the cancellation of the
Phantom Equity Plan (as defined below)............................ 20,500
Estimated severance and relocation costs........................... 3,000
Paracelsus Dividend................................................ 21,113
-----------
Pro forma adjustment -- total uses............................. $ 53,667
-----------
-----------
</TABLE>
(11) To record current deferred tax assets at the effective rate (41%) resulting
from the following Merger-related events (in thousands):
<TABLE>
<S> <C>
Compensation expense associated with the cancellation of the
Phantom Equity Plan:
Cash compensation............................................... $ 20,500
Grant of Value Options.......................................... 12,317
Estimated severance and relocation costs.......................... 3,000
Record vesting of Paracelsus employees in SERP (as defined below)
upon consummation of the Merger.................................. 4,000
Compensation expense associated with Paracelsus Options granted to
Paracelsus officers and directors................................ 3,833
---------
43,650
Income tax benefit at the effective rate of 41%................... 41%
---------
17,896
Reversal of valuation allowance on Champion deferred tax assets... 750
---------
Pro forma adjustment............................................ $ 18,646
---------
---------
</TABLE>
PF-9
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
(12) To reflect the pro forma repayment of Dr. Krukemeyer's promissory note due
to Paracelsus ($1,000,000 current, $3,000,000 long-term (see Note 10)).
(13) To record the Merger using the purchase method of accounting, including the
adjustment of Champion's balance sheet to reflect the estimated fair market
value of its property and equipment, based on the per share market price of
Champion Common Stock on April 12, 1995, the last trading day prior to the
announcement of the Merger ($10.50), less a 25% discount to reflect the
limited number of shares of Champion Common Stock that were freely tradable
at the date of the Merger. The Merger Agreement does not specify the
Champion Common Stock market price to be used in the calculation of the
purchase price. The purchase price allocation reflected in the Unaudited
Pro Forma Condensed Combining Balance Sheet is based upon the best
information currently available without a final independent appraisal of
Champion's facilities. For the purpose of allocating net acquisition costs
among the Champion assets acquired, Paracelsus has tentatively allocated
35% of the excess acquisition cost over the carrying value of Champion's
assets to property and equipment and 65% to Goodwill. It is the intention
of Paracelsus and Champion to more fully evaluate the net assets acquired
and, as a result, the allocation of acquisition cost may change. Paracelsus
and Champion do not expect the final allocation of acquisition cost to be
materially different from that assumed in the Unaudited Pro Forma Condensed
Combining Balance Sheet. The following table summarizes the calculation of
the preliminary purchase price allocation (in thousands, except market
price data):
<TABLE>
<S> <C> <C> <C>
Champion common and common equivalent shares outstanding (a)......... 21,856
Discounted per share price (b)....................................... $ 7.88
---------
Discounted market value of Champion Common Stock..................... $ 172,225
Less proceeds from options and warrants assumed exercised............ (24,983)
---------
147,242
Plus: Estimated Merger expenses................................. 6,000
Bonuses to be paid to Champion officers upon consummation
of the Merger............................................ 3,054
Prior service cost of including certain Champion officers
in SERP.................................................. 1,500
Market value of Paracelsus Options to be granted to
Champion officers........................................ 5,478
---------
Total purchase price.................................... 163,274
Less: Champion stockholders' equity............................. $ (33,798)
Champion Preferred Stock.................................. (46,078)
Reversal of valuation allowance on Champion deferred tax
assets (see Note 11)..................................... (750)
Plus assets not acquired:
Champion Goodwill......................................... 21,238
Champion deferred financing costs......................... 4,749
---------
Net assets acquired....................................... (54,639)
---------
Acquisition cost in excess of net assets acquired....... $ 108,635
---------
---------
ALLOCATION OF ACQUISITION COSTS IN EXCESS OF NET ASSETS ACQUIRED:
Acquisition costs in excess of net assets acquired allocated to
property and equipment -- 35%....................................... $ 38,022
---------
---------
Acquisition costs in excess of net assets acquired allocated to
Goodwill -- 65%..................................................... $ 70,613
Less: Champion Goodwill......................................... (21,238)
Champion deferred financing costs......................... (4,749)
---------
44,626
Pro forma increase in deferred tax liability due to step up in
property and equipment.............................................. 15,589
---------
Net pro forma adjustment to Goodwill................................. $ 60,215
---------
---------
</TABLE>
PF-10
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
- --------------------------
<TABLE>
<C> <S> <C>
(a) Champion total common and common equivalent shares consist of the
following components as of March 31, 1996:
Shares of Champion Common Stock outstanding........................... 12,013
Conversion of Champion Preferred Stock (each share of Champion
Preferred Stock into two shares of Paracelsus Common Stock in the
Merger).............................................................. 5,216
Champion Options, Champion Warrants and subscription for Champion
Common Stock Shares assumed exercised................................ 4,627
---------
Champion total common and common equivalent shares outstanding........ 21,856
---------
---------
(b) Per share discount of Champion Common Stock:
Market price of Champion Common Stock on April 12, 1996, the last
trading date prior to the announcement of the Merger................. $ 10.50
Estimated discounted value due to limited liquidity of Champion Common
Stock................................................................ 75%
---------
Discounted per share price.......................................... $ 7.88
---------
---------
</TABLE>
(14) To record a pro forma increase in current liabilities of approximately
$4,000,000 in connection with the vesting of Paracelsus employees in the
SERP and a pro forma increase in long-term liabilities of approximately
$1,500,000 as a result of the inclusion of the certain Champion officers in
the SERP.
(15) To reflect the pro forma payment of the Dividend in the amount of
$21,113,000.
(16) To reflect the pro forma reduction in shareholders' equity for the
following Merger-related events (in thousands):
<TABLE>
<S> <C>
Cash compensation paid in connection with the cancellation of the
Phantom Equity Plan (see Note 10)................................ $ 20,500
Record vesting of Paracelsus employees in SERP upon consummation
of the Merger (see Note 14)...................................... 4,000
Estimated severance and relocation costs (see Note 10)............ 3,000
---------
Total......................................................... 27,500
---------
Less income tax effect:
Income tax benefit at the effective rate of 41%................. 11,275
Grant of Value Options upon cancellation of Phantom Equity
Plan........................................................... 5,050
Options granted to Paracelsus officers.......................... 1,571
---------
Net income tax effect......................................... 17,896
---------
Pro forma adjustment to shareholders' equity.................... $ 9,604
---------
---------
</TABLE>
The Unaudited Pro Forma Condensed Combining Statements of Income for the
fiscal year ended September 30, 1995 and the six months ended March 31, 1995 and
1996, exclude the effects of the following charges resulting from the Merger (in
thousands):
<TABLE>
<S> <C>
Total charges excluded from the Unaudited Pro Forma Condensed
Combining Statements of Income (see Note 11).................... $ 43,650
Income tax benefit at the effective rate of 41%.................. (17,896)
---------
Net reduction to income (loss) applicable to common stock........ $ 25,754
---------
---------
</TABLE>
PF-11
<PAGE>
NOTES TO PARACELSUS AND CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING FINANCIAL STATEMENTS (CONTINUED)
Loss per share would have been the following if the impact of such
charges were reflected on the Unaudited Pro Forma Condensed Combining
Statements of Income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Loss per share.............................. $ (0.39) $ (0.41) $ (0.69)
------ --------- ---------
------ --------- ---------
</TABLE>
PF-12
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following tables present the Paracelsus Unaudited Pro Forma Condensed
Combining Balance Sheet as of March 31, 1996, and the Paracelsus Unaudited Pro
Forma Condensed Combining Statements of Income for the six months ended March
31, 1996 and 1995 and the fiscal year ended September 30, 1995, to reflect the
effect of the acquisition by Paracelsus of the Columbia Hospitals (Pioneer, a
139-bed hospital in West Valley City, Utah, Davis, a 120-bed hospital in Layton,
Utah, and Santa Rosa, a 129-bed hospital in Milton, Florida) on May 17, 1996,
the sale by Paracelsus of Womans Hospital, a 111-bed hospital in Jackson,
Mississippi on September 30, 1995 and the closure of the Closed Facility,
Bellwood Health Center, a psychiatric facility in Bellwood, California, on April
24, 1995. The Paracelsus Unaudited Pro Forma Condensed Combining Balance Sheet
assumes that the acquisition of the Columbia Hospitals occurred on March 31,
1996, and the Paracelsus Unaudited Pro Forma Combining Statements of Income
assume that the acquisition of the Columbia Hospitals occurred at the beginning
of each period and the sale of Womans Hospital and the closure of the Closed
Facility occurred on October 1, 1994.
Paracelsus acquired the Columbia Hospitals from Columbia for consideration
consisting of $38,500,000 in cash and the exchange of the Exchanged Hospitals
(Peninsula, a 119-bed hospital in Ormond Beach, Florida, Elmwood, a 135-bed
hospital in Jefferson, Louisiana, and Halstead, a 190-bed hospital in Halstead,
Kansas). The acquisition was accounted for as a purchase transaction. Paracelsus
financed the cash portion of the acquisition of the Columbia Hospitals from
borrowings under the Existing Paracelsus Credit Facility. Paracelsus also
engaged in the Real Property Purchase and Sale Transaction whereby it purchased
the real property of Elmwood and Halstead from a REIT, exchanged the Elmwood and
Halstead real properties with Columbia for Pioneer's real property, and sold
Pioneer's real property to the REIT.
Paracelsus sold Womans Hospital to the facility's lessee for $17,800,000 in
cash, which resulted in a gain of $9,189,000. In August of 1994, Paracelsus had
divested the operations of Womans Hospital and entered into an operating lease
agreement with the lessee, which granted the lessee the option to purchase the
facility at an amount defined in the lease agreement.
In connection with the closure of the Closed Facility, Paracelsus recorded a
restructuring charge of $973,000 for employee severance benefits and contract
termination costs.
The Paracelsus Unaudited Pro Forma Condensed Combining Financial Statements
do not purport to present the financial position or results of operations of
Paracelsus had the acquisitions occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be expected in the
future. The Paracelsus Unaudited Pro Forma Condensed Combining Financial
Statements following are qualified in their entirety by reference to, and should
be read in conjunction with, the historical consolidated financial statements of
Paracelsus and the historical combined financial statements of the Columbia
Hospitals included elsewhere herein.
PF-13
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
BELLWOOD
WOMANS HEALTH
HOSPITAL CENTER
(OCTOBER 1, (OCTOBER 1,
1994 TO 1994 TO
PARACELSUS COLUMBIA SEPTEMBER APRIL 24, PRO FORMA PARACELSUS
HISTORICAL HOSPITALS 30, 1995) 1995) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues......................... $509,729 $105,307 $(11,003) $(5,706) $(96,694)(1) $501,633
Costs and expenses:
Salaries and benefits.......................... 209,672 39,088 -- (1,731) (40,994)(1) 206,035
Supplies....................................... 40,780 14,680 -- (5) (10,639)(1) 44,816
Purchased services............................. 58,113 10,158 -- (594) (8,375)(1) 59,302
Provision for bad debts........................ 39,277 7,515 -- (843) (4,895)(1) 41,054
Other operating expenses....................... 99,777 17,776 (265) (4,208) (20,252)(2) 92,828
Depreciation and amortization.................. 17,276 5,570 (622) (183) (4,874)(3) 17,167
Interest....................................... 15,746 3,280 -- (228) (1,557)(4) 17,241
Restructuring and unusual charges.............. 5,150 -- -- (973) 4,177
---------- --------- ------------ ----------- ------------ ---------
Total costs and expenses......................... 485,791 98,067 (887) (8,765) (91,586) 482,620
---------- --------- ------------ ----------- ------------ ---------
Income before minority interests and income
taxes........................................... 23,938 7,240 (10,116) 3,059 (5,108) 19,013
Minority interests............................... (1,927) -- -- -- (1,927)
---------- --------- ------------ ----------- ------------ ---------
Income (loss) before income taxes................ 22,011 7,240 (10,116) 3,059 (5,108) 17,086
Income taxes (benefit)........................... 9,024 2,869 (4,148) 1,254 (1,994)(5) 7,005
---------- --------- ------------ ----------- ------------ ---------
Net income (loss)................................ $ 12,987 $ 4,371 $ (5,968) $ 1,805 $ (3,114) $ 10,081
---------- --------- ------------ ----------- ------------ ---------
---------- --------- ------------ ----------- ------------ ---------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-14
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA WOMANS BELLWOOD PRO FORMA PARACELSUS
HISTORICAL HOSPITALS HOSPITAL HEALTH CENTER ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues......... $ 252,356 $ 52,136 $ (922) $ (5,389) $ (47,850)(1) $ 250,331
Costs and expenses:
Salaries and benefits.......... 108,575 18,674 (1,731) (19,479)(1) 106,039
Supplies....................... 21,432 7,093 (5) (6,438)(1) 22,082
Purchased services............. 28,118 4,701 (594) (4,723)(1) 27,502
Provision for bad debts........ 19,283 3,116 (843) (2,495)(1) 19,061
Other operating expenses....... 46,730 7,215 (121) (2,261) (6,767)(2) 44,796
Depreciation and
amortization.................. 8,734 3,165 (309) (129) (2,796)(3) 8,665
Interest....................... 7,652 1,832 (114) (1,110)(4) 8,260
----------- ----------- ----------- ------------- ------------- -----------
Total costs and expenses......... 240,524 45,796 (430) (5,677) (43,808) 236,405
----------- ----------- ----------- ------------- ------------- -----------
Income (loss) before minority
interests and income taxes...... 11,832 6,340 (492) 288 (4,042) 13,926
Minority interests............... (1,204) -- -- -- -- (1,204)
----------- ----------- ----------- ------------- ------------- -----------
Income (loss) before income
taxes........................... 10,628 6,340 (492) 288 (4,042) 12,722
Income taxes (benefit)........... 4,357 2,599 (202) (118) (1,657)(5) 5,215
----------- ----------- ----------- ------------- ------------- -----------
Net income (loss)................ $ 6,271 $ 3,741 $ (290) $ 170 $ (2,385) $ 7,507
----------- ----------- ----------- ------------- ------------- -----------
----------- ----------- ----------- ------------- ------------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-15
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA PRO FORMA PARACELSUS
HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Total operating revenues................................... $ 260,590 $ 54,999 $ (49,963)(1) $ 265,626
Costs and expenses:
Salaries and benefits.................................... 113,162 21,096 (22,271)(1) 111,987
Supplies................................................. 19,363 7,769 (5,528)(1) 21,604
Purchased services....................................... 34,174 5,301 (5,689)(1) 33,786
Provision for bad debts.................................. 20,191 3,264 (2,468)(1) 20,987
Other operating expenses................................. 46,906 12,849 (13,362)(2) 46,393
Depreciation and amortization............................ 7,972 3,134 (2,831)(3) 8,275
Interest................................................. 7,685 1,377 (199)(4) 8,863
Settlement costs......................................... 22,356 -- 22,356
----------- --------- -------------- -----------
Total costs and expenses................................... 271,809 54,790 (52,348) 274,251
----------- --------- -------------- -----------
Income (loss) before minority interests and income taxes... (11,219) 209 2,385 (8,625)
Minority interests......................................... (1,072) -- (1,072)
----------- --------- -------------- -----------
Income (loss) before income taxes.......................... (12,291) 209 2,385 (9,697)
Income taxes (benefit)..................................... (5,040) 86 978(5) (3,976)
----------- --------- -------------- -----------
Net income (loss).......................................... $ (7,251) $ 123 $ 1,407 $ (5,721)
----------- --------- -------------- -----------
----------- --------- -------------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-16
<PAGE>
PARACELSUS UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARACELSUS COLUMBIA PRO FORMA PARACELSUS
HISTORICAL HOSPITALS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,149 $ 206 $ (206)(6) $ 3,149
Marketable securities.................................. 10,051 -- 10,051
Accounts receivable, less allowance for
uncollectibles........................................ 100,121 15,664 (15,770)(6)(7) 100,015
Supplies............................................... 10,634 2,019 (3,001)(6)(7) 9,652
Deferred income taxes.................................. 26,463 -- 26,463
Other current assets................................... 4,798 1,040 (920)(6)(7) 4,918
----------- --------- -------- -----------
Total current assets................................. 155,216 18,929 (19,897) 154,248
Property and equipment, net of accumulated depreciation
and amortization........................................ 165,729 47,561 (17,481)(8) 195,809
Other assets............................................. 47,271 12,781 (2,198)(6)(8) 57,854
----------- --------- -------- -----------
Total assets......................................... $ 368,216 $ 79,271 $ (39,576) $ 407,911
----------- --------- -------- -----------
----------- --------- -------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and other current liabilities......... $ 76,615 $ 8,750 $ (7,954)(6)(7) $ 77,411
Current maturities of long-term debt and capital lease
obligations........................................... 5,186 -- (4,728)(4) 458
----------- --------- -------- -----------
Total current liabilities............................ 81,801 8,750 (12,682) 77,869
Long-term debt and capital lease obligations, less
current maturities...................................... 139,475 -- 43,627(4) 183,102
Deferred income taxes.................................... 24,607 -- 24,607
Other long-term liabilities.............................. 25,968 36,324 (36,324)(6) 25,968
Shareholder's equity..................................... 96,365 34,197 (34,197)(6) 96,365
----------- --------- -------- -----------
Total liabilities and shareholder's equity........... $ 368,216 $ 79,271 $ (39,576) $ 407,911
----------- --------- -------- -----------
----------- --------- -------- -----------
</TABLE>
See notes to Paracelsus unaudited pro forma condensed combining financial
statements.
PF-17
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS
(1) To remove the historical operating results of the Exchanged Hospitals.
(2) To adjust other operating expenses for the exchange of the Exchanged
Hospitals, the acquisition, sale and leaseback of the Pioneer real property,
and the net change in allocated corporate overhead. Other operating expenses
are estimated to decrease on a pro forma basis as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED ---------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Operating expenses related to Paracelsus Hospitals..... $ (21,518) $ (9,609) $ (10,454)
Payments under operating lease arrangement to REIT..... 7,051 3,555 3,526
Decrease in Columbia Hospitals allocated corporate
overhead.............................................. (5,785) (713) (6,434)
-------- --------- ----------
Pro forma adjustment................................. $ (20,252) $ (6,767) $ (13,362)
-------- --------- ----------
-------- --------- ----------
</TABLE>
Paracelsus assumed there would be no incremental increase in corporate
overhead as a result of the acquisition of the Columbia Hospitals and the
related disposition of the Exchanged Hospitals because the overall corporate
overhead after the transaction is expected to be the same as it was before
the transactions.
(3) To adjust depreciation and amortization based on the revaluation of the
acquired depreciable assets to fair value and the increase in Goodwill in
connection with the purchase price allocation (see Note 8). The acquired
assets are estimated to have an average useful life of approximately 18
years based on an allocation of the appraised values of the assets acquired
and the useful lives of such assets in accordance with Paracelsus'
depreciation policy (35 years, 20 years and 10 years for buildings,
improvements, and equipment, respectively). The Goodwill is being amortized
over a 20 year period. Depreciation and amortization are estimated to
decrease on a pro forma basis, as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Depreciation expense related to the Exchanged
Hospitals............................................... $ (3,381) $ (1,626) $ (1,693)
Excess historical depreciation and amortization expense
for the Columbia Hospitals acquired over the
depreciation and amortization of the fair value of the
Columbia Hospitals' assets acquired..................... (1,579) (1,170) (1,138)
Adjustment for Bellwood Health Center corporate
allocation.............................................. 86 -- --
------- --------- ---------
Pro forma adjustment................................... $ (4,874) $ (2,796) $ (2,831)
------- --------- ---------
------- --------- ---------
</TABLE>
The net decrease in historical cost depreciation and amortization for each
of the periods presented resulted from the acquisition, sale and leaseback
of the Pioneer real property (See Note 2).
(4) To record the pro forma increase in the Paracelsus Existing Credit Facility
and related interest expense as a result of the acquisition of the Columbia
Hospitals, net of the effect of the sale of Womans Hospital (year ended
September 30, 1995 only). The acquisition of the Columbia Hospitals assumes
an increase in the principal amount outstanding under the Paracelsus
Existing Credit Facility by $43,627,000. Such amount is comprised of
$38,500,000 in cash consideration, $1,626,000 for payment of closing costs,
$4,728,000 to refinance current maturities of long-term
PF-18
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS (CONTINUED)
debt of the Paracelsus Hospitals not assumed by Columbia, offset in part by
a payment from Columbia of $1,764,000 for a net working capital deficit
assumed by Paracelsus, net of a $537,000 payment for a note receivable
acquired (included in Other assets). The average interest rates in effect
under the Paracelsus Existing Credit Facility were 7.90% for the fiscal year
ended September 30, 1995, and 7.80% and 6.60% for the six months ended March
31, 1995 and 1996, respectively. Interest expense on a pro forma basis
decreased, as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
FISCAL YEAR ENDED --------------------
SEPTEMBER 30, 1995 1995 1996
<S> <C> <C> <C>
Increase in interest expense to finance the acquisition
of the Columbia Hospitals............................... $ 3,447 $ 1,701 $ 1,440
Interest expense on the Columbia Hospitals debt not
assumed by Paracelsus................................... (3,280) (1,832) (1,377)
Interest expense on the Exchanged Hospitals debt assumed
by Columbia............................................. (546) (399) (262)
Adjustment for Bellwood Health Center corporate
allocation.............................................. 228 114
Reduction in interest expense assuming the proceeds from
the sale of Womans Hospital were applied to reduce
Paracelsus' credit facility............................. (1,406) (694)
------- --------- ---------
Pro forma adjustment................................... $ (1,557) $ (1,110) $ (199)
------- --------- ---------
------- --------- ---------
</TABLE>
(5) To reflect the pro forma provision for income taxes at the statutory rate
(41%) giving effect to the hospitals acquired and divested.
(6) To remove the assets not acquired, liabilities not assumed and the
shareholder's equity of the Columbia Hospitals acquired.
(7) To remove the assets and liabilities of the Exchanged Hospitals as partial
consideration for the Columbia Hospitals acquired.
(8) To record the acquisition of the Columbia Hospitals using the purchase
method of accounting, including adjustment of the balance sheet of the
Columbia Hospitals acquired to reflect the transfer of assets of the
Exchanged Hospitals and the allocation of the estimated fair values of
property and equipment acquired in excess of the carrying values. The
purchase price allocation
PF-19
<PAGE>
NOTES TO PARACELSUS UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS (CONTINUED)
reflected in the Unaudited Pro Forma Condensed Combined Balance Sheet is
based upon an independent appraisal. The following table summarizes the
calculation of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Total cash consideration, including estimated closings costs (See
Note 4)............................................................. $ 40,126
Fair value of the Exchanged Hospitals transferred to Columbia........ 31,761
---------
Total estimated purchase price..................................... 71,887
Columbia's basis in property and equipment transferred to
Paracelsus.......................................................... (47,561)
---------
Excess purchase price.............................................. 24,326
Purchase price allocated to Goodwill................................. (13,069)
---------
Purchase price allocated to property and equipment................. 11,257
Basis of the Exchanged Hospitals transferred to Columbia............. (28,738)
---------
Net pro forma adjustment......................................... $ (17,481)
---------
---------
Purchase price allocated to Goodwill................................. $ 13,069
Less: Basis in Goodwill of the Exchanged Hospitals................... (3,023)
Columbia Hospitals long-term net assets not acquired............ (12,244)
---------
Net pro forma adjustment......................................... $ (2,198)
---------
---------
</TABLE>
The Real Property Purchase and Sale Transaction was accounted for as an
exchange of assets between Paracelsus, Columbia and the REIT which had no
effect on the Paracelsus Unaudited Pro Forma Condensed Combining Balance
Sheet.
PF-20
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME AND
UNAUDITED HISTORICAL CONDENSED BALANCE SHEET
The following tables present the Unaudited Pro Forma Condensed Combining
Statements of Income for the year ended December 31, 1995 and the six months
ended March 31, 1995 and 1996, to illustrate the effect of Champion's
acquisition of Jordan Valley, a 50-bed hospital in West Jordan, Utah, on March
1, 1996, the acquisition of SLRMC, a 200-bed hospital in Salt Lake City, Utah,
on April 13, 1995, the formation of DHHS, the partnership between the wholly
owned subsidiary of Champion that owned Heartland Medical Center ("Heartland"),
a 142-bed general acute care hospital in Fargo, North Dakota, and Dakota
Hospital ("Dakota"), a not-for-profit corporation that owned a 199-bed general
acute care hospital also in Fargo, North Dakota, effective December 31, 1994 and
the AmeriHealth Merger on December 6, 1994. The Unaudited Pro Forma Condensed
Combining Statements of Income assume the acquisition of Jordan Valley occurred
at the beginning of each period. The Unaudited Pro Forma Condensed Combining
Statements of Income for the year ended December 31, 1995 and the six months
ended March 31, 1995 assume the acquisition of SLRMC occurred on January 1, 1995
and October 1, 1994, respectively. The Unaudited Pro Forma Condensed Combining
Statement of Income for the six months ended March 31, 1995 assumes the
formation of DHHS and the AmeriHealth Merger occurred October 1, 1994. The
Unaudited Historical Condensed Balance Sheet is presented for informational
purposes only.
Jordan Valley is a 50-bed acute care hospital located in West Jordan, Utah,
a suburb of Salt Lake City. Jordan Valley was acquired from Columbia in exchange
for Autauga, an 85-bed acute care hospital and a 72-bed skilled nursing
facility, both in Prattville, Alabama, plus preliminary cash consideration paid
to Columbia of approximately $10,750,000. Cash consideration included
approximately $3,750,000 for certain net working capital components, which are
subject to adjustment and final settlement by the parties, and reimbursement of
certain capital expenditures made previously by Columbia. The acquisition was
accounted for as a purchase transaction with operations reflected in the
consolidated financial statements beginning March 1, 1996.
SLRMC is comprised of a 200-bed tertiary care hospital and five clinics and
is located in Salt Lake City, Utah. SLRMC was acquired from Columbia for total
consideration of approximately $61,042,000, which consisted of approximately
$56,816,000 in cash and a note payable due to Columbia of approximately
$1,767,000, as well as the assumption of approximately $2,459,000 in capital
lease obligations. Cash consideration included approximately $11,783,000 for
certain working capital components, resulting in a net purchase price of
approximately $49,259,000. Champion funded the asset purchase from available
cash and approximately $30,000,000 in borrowings under its then outstanding
credit facility, which Champion subsequently repaid from the proceeds from the
issuance of the Champion Series E Notes. The acquisition was accounted for as a
purchase transaction with operations reflected in the consolidated financial
statements beginning April 14, 1995.
On December 6, 1994, Champion's predecessor merged with AmeriHealth. The
AmeriHealth Merger was accounted for as a recapitalization of Champion with
Champion as the acquiror (a reverse acquisition). The common shareholders of
AmeriHealth received one share of Champion common stock for every 5.70358 shares
of common stock of AmeriHealth and a cash distribution of $0.085 per AmeriHealth
common share. The common shareholders of Champion's predecessor received one
share of Champion Common Stock for each predecessor share of common stock
outstanding prior to the AmeriHealth Merger. The preferred shareholders of
Champion's predecessor received one share of Champion preferred stock for each
predecessor share of preferred stock outstanding prior to the AmeriHealth
Merger. Additionally, Champion assumed approximately $17,700,000 in debt,
resulting in a net purchase price of approximately $38,876,000. The AmeriHealth
Merger was accounted for as a purchase transaction. AmeriHealth owned and
managed two acute care hospitals with a combined total of 265 licensed beds:
Metropolitan Hospital in Richmond, Virginia with 180 beds and Autauga Medical
Center in Prattville, Alabama with 85 beds. AmeriHealth also owned a 72 bed
skilled nursing facility, Autauga Health Care Center in Prattville, Alabama.
PF-21
<PAGE>
In connection with the formation of DHHS, Champion and Dakota contributed
their respective hospitals both debt and lien free (except for capitalized
leases), and Champion contributed an additional $20,000,000 in cash, each in
exchange for 50% ownership in DHHS. In addition, each partner contributed
$2,000,000 in cash to the working capital of DHHS. A $20,000,000 special
distribution was made to Dakota after capitalization of DHHS in accordance with
the terms of the partnership agreement. The ownership interest acquired by each
partner was based on the value of the assets contributed to DHHS. Also on
December 21, 1994, Champion entered into an operating agreement with DHHS and
Dakota to manage the combined operations of the two hospitals. Under the terms
of the partnership agreement, Champion is obligated to advance funds to DHHS to
cover any and all operating deficits of DHHS. Champion will receive 55% of the
net income and distributable cash flow ("DCF") of DHHS until such time as it has
recovered on a cumulative basis an additional $10,000,000 of DCF in the form of
an "excess" distribution. Champion accounts for its investment in DHHS under the
equity method.
These Unaudited Pro Forma Condensed Combining Statements of Income do not
purport to present the financial position or results of operations of Champion
had the acquisitions occurred on the dates specified, nor are they necessarily
indicative of the results of operations that may be expected in the future. The
Unaudited Pro Forma Condensed Combining Statements of Income following are
qualified in their entirety by reference to, and should be read in conjunction
with, the historical consolidated financial statements of Champion included
elsewhere herein.
PF-22
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CHAMPION JORDAN SLRMC (3
HISTORICAL VALLEY MONTHS AND PRO FORMA CHAMPION
(1) HOSPITAL 13 DAYS) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C>
Operating revenue.......................... $ 167,520 $ 20,973 $ 22,438 $ (15,298)(2)(3) $ 195,633
Costs and expenses:
Salaries and benefits.................... 72,188 8,000 8,090 (6,238)(2) 82,040
Supplies................................. 21,113 2,751 4,012 (1,864)(2) 26,012
Purchased services....................... 23,595 2,570 2,296 (1,773)(2) 26,688
Provision for bad debts.................. 12,016 1,929 1,527 (910)(2) 14,562
Other operating expenses................. 20,999 3,531 3,611 (2,658)(2)(4) 25,483
Depreciation and amortization............ 9,290 1,128 1,372 (1,446)(2)(5) 10,344
Interest................................. 13,618 -- 45 2,075(6) 15,738
Equity in earnings of DHHS............... (8,881) -- -- (8,881)
------------ --------- ----------- -------- -----------
Total costs and expenses............... 163,938 19,909 20,953 (12,814) 191,986
------------ --------- ----------- -------- -----------
Income before income taxes............. 3,582 1,064 1,485 (2,484) 3,647
Income taxes........................... 150 394 557 (824)(7) 277
------------ --------- ----------- -------- -----------
Net income............................. 3,432 670 928 (1,660) 3,370
Preferred dividends accrued................ (11,331) -- -- (11,331)
------------ --------- ----------- -------- -----------
Loss applicable to Common Stock........ $ (7,899) $ 670 $ 928 $ (1,660) $ (7,961)
------------ --------- ----------- -------- -----------
------------ --------- ----------- -------- -----------
Loss per share......................... $ (1.86) $ (1.87)
------------ -----------
------------ -----------
Weighted average number of shares of Common
Stock and equivalents outstanding......... 4,255 4,255
------------ -----------
------------ -----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-23
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1994 FOR THE
ACQUISITION 1994 JORDAN
CHAMPION AMERIHEALTH AND INVESTMENT ACQUISITION VALLEY PRO FORMA
HISTORICAL (1) (2 MONTHS) ADJUSTMENTS AND INVESTMENT HOSPITAL SLRMC ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
Total operating
revenues.......... $ 61,623 $ 4,683 $ (10,497)(8)(9) $ 55,809 $ 11,035 $ 37,144 $ (6,879)(2)(3)
Cost and expenses:
Salaries and
benefits........ 26,951 3,662 (3,962)(9) 26,651 4,149 14,261 (2,893)(2)
Supplies......... 6,818 1,071 (1,304)(9) 6,585 1,300 6,895 (1,077)(2)
Purchase
services........ 8,804 1,195 (2,871)(9)(10) 7,128 1,006 5,030 (1,051)(2)
Provision for bad
debts........... 5,183 1,713 (529)(9) 6,367 1,263 1,979 (1,666)(2)
Other operating
expenses........ 8,886 894 (1,335)(9) 8,445 884 4,323 (829)(2)
Depreciation and
amortization.... 3,023 366 (197)(9)(11) 3,192 718 2,402 (1,899)(2)(5)
Interest......... 4,204 331 (145)(9)(12) 4,390 307 2,251(6)
Equity in
earnings of
DHHS............ (1,478) (885)(9)(13) (2,363)
------------- ------------- --------------- --------------- ----------- ----------- -------
Total costs and
expenses...... 62,391 9,232 (11,228) 60,395 9,320 35,197 (7,164)
------------- ------------- --------------- --------------- ----------- ----------- -------
Income (loss)
before income
taxes......... (768) (4,549) 731 (4,586) 1,715 1,947 285
Income taxes
(benefit)..... 70 (274) 274(7) 70 635 731 (1,366)(7)
------------- ------------- --------------- --------------- ----------- ----------- -------
Net income
(loss)........ (838) (4,275) 457 (4,656) 1,080 1,216 1,651
Preferred dividends
accrued........... (2,727) (2,727)
------------- ------------- --------------- --------------- ----------- ----------- -------
Income (loss)
applicable to
common stock.. $ (3,565) $ (4,275) $ 457 $ (7,383) $ 1,080 $ 1,216 $ 1,651
------------- ------------- --------------- --------------- ----------- ----------- -------
------------- ------------- --------------- --------------- ----------- ----------- -------
Loss per
share......... $ (1.10) $ (0.25) $ (1.74)
------------- ------------- ---------------
------------- ------------- ---------------
Weighted average
number of common
and common
equivalent shares
outstanding....... 3,244 16,924 (15,924)(14) 4,244
------------- ------------- --------------- ---------------
------------- ------------- --------------- ---------------
<CAPTION>
CHAMPION
PRO FORMA
<S> <C>
Total operating
revenues.......... $ 97,109
Cost and expenses:
Salaries and
benefits........ 42,168
Supplies......... 13,703
Purchase
services........ 12,113
Provision for bad
debts........... 7,943
Other operating
expenses........ 12,823
Depreciation and
amortization.... 4,413
Interest......... 6,948
Equity in
earnings of
DHHS............ (2,363)
-----------
Total costs and
expenses...... 97,748
-----------
Income (loss)
before income
taxes......... (639)
Income taxes
(benefit)..... 70
-----------
Net income
(loss)........ (709)
Preferred dividends
accrued........... (2,727)
-----------
Income (loss)
applicable to
common stock.. $ (3,436)
-----------
-----------
Loss per
share......... $ (0.81)
-----------
-----------
Weighted average
number of common
and common
equivalent shares
outstanding....... 4,244
-----------
-----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-24
<PAGE>
CHAMPION UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JORDAN
CHAMPION VALLEY PRO FORMA CHAMPION
HISTORICAL(1) HOSPITAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Operating revenue........................................ $ 100,366 $ 8,830 $ (6,107)(2) $ 103,089
Cost and expenses:
Salaries and benefits.................................. 43,296 3,472 (2,828)(2) 43,940
Supplies............................................... 12,730 1,174 (791)(2) 13,113
Purchased services..................................... 13,079 1,288 (610)(2) 13,757
Provision for bad debts................................ 6,701 362 (205)(2) 6,858
Other operating expenses............................... 12,560 2,380 (1,805)(2)(4) 13,135
Depreciation and amortization.......................... 6,335 303 267 (2)(5 6,905
Interest............................................... 8,799 -- 388(6) 9,187
Equity in earnings of DHHS............................. (6,609) -- (6,609)
------------ --------- -------- -----------
Total costs and expenses............................. 96,891 8,979 (5,584)(2) 100,286
------------ --------- -------- -----------
Income (loss) before income taxes.................... 3,475 (149) (523) 2,803
Income taxes (benefit)............................... 447 (55) 645(7) 1,037
------------ --------- -------- -----------
Net income (loss).................................... 3,028 (94) (1,168) 1,766
Preferred dividends accrued.............................. (6,899) -- (6,899)
------------ --------- -------- -----------
Loss applicable to Common Stock...................... $ (3,871) $ (94) $ (1,168) $ (5,133)
------------ --------- -------- -----------
------------ --------- -------- -----------
Loss per share....................................... $ (0.48) $ (0.63)
------------ -----------
------------ -----------
Weighted average number of shares of Common Stock and
equivalents outstanding................................. 8,121 8,121
------------ -----------
------------ -----------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
PF-25
<PAGE>
CHAMPION UNAUDITED HISTORICAL CONDENSED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents...................................................... $ 5,670
Accounts receivable, less allowance for uncollectibles......................... 36,407
Supplies....................................................................... 3,872
Deferred income taxes.......................................................... 2,521
Other current assets........................................................... 3,769
---------
Total current assets......................................................... 52,239
Property and equipment, net of accumulated depreciation and amortization......... 166,997
Investment in DHHS............................................................... 52,118
Other assets..................................................................... 36,668
---------
Total assets................................................................. $ 308,022
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities................................. $ 33,655
Current maturities of long-term debt and capital lease obligations............. 2,834
---------
Total current liabilities.................................................... 36,469
Long-term debt and capital lease obligations..................................... 181,212
Deferred income taxes............................................................ 7,394
Other long-term liabilities...................................................... 3,051
Redeemable preferred stock....................................................... 46,078
Stockholders' equity............................................................. 33,798
---------
Total liabilities and stockholders' equity................................... $ 308,022
---------
---------
</TABLE>
See notes to Champion unaudited pro forma condensed combining statements of
income.
There are no pro forma adjustments to the Champion unaudited condensed balance
sheet.
PF-26
<PAGE>
NOTES TO CHAMPION UNAUDITED PRO FORMA
CONDENSED COMBINING STATEMENTS OF INCOME
(1) Summarized from Champion's historical financial statements.
(2) To remove the historical operating results of Autauga.
(3) To reflect a decrease in interest earnings for the pro forma decrease in
cash. This adjustment assumes that approximately $26,248,000 of SLRMC
acquisition costs were paid from available cash at January 1, 1995. Interest
earnings are computed at 3.35% for the six months ended March 31, 1995 and
5.63% for the period January 1, 1995 through April 13, 1995. Such
percentages represent Champion's average investment rate for the period.
(4) To record a pro forma decrease of approximately $1,091,000 and $1,255,000 in
management fees charged to Jordan Valley by Columbia for the year ended
December 31, 1995, and the six months ended March 31, 1996, respectively.
Champion does not believe that overhead and other costs allocable to the
facility will be materially different from costs incurred historically by
Champion with respect to its management of Autauga.
(5) To adjust depreciation expense for the step up in basis for the depreciable
assets of Jordan Valley and SLRMC. The allocation with respect to SLRMC was
based on an independent appraisal obtained by Champion and resulted in a pro
forma decrease in depreciation expense of approximately $665,000 for the
year ended December 31, 1995 and $1,003,000 for the six months ended March
31, 1995. With respect to Jordan Valley, the acquired assets are estimated
to have an average remaining useful life of approximately 17 years based on
management's assumption that an acute care hospital's assets consist of 50%
buildings and 50% equipment with a 30-year life and a five-year life,
respectively. Based on this preliminary allocation, depreciation expense
increased approximately $190,000 and $244,000 on a pro forma basis for the
year ended December 31, 1995 and the six months ended March 31, 1996,
respectively and decreased approximately $59,000 for the six months ended
March 31, 1995.
(6) To record interest expense on the pro forma increase in the Champion Credit
Facility, the Champion Notes and notes payable as a result of its
acquisitions' of Jordan Valley and SLRMC.
With respect to Jordan Valley, the Pro Forma Condensed Combining Statement
of Income assumes Champion increased the principal amount outstanding under
its revolving credit facility by $10,750,000 as of January 1, 1995 and
October 1, 1995. Such amount is comprised of $7,000,000 in cash
consideration attributable to property and equipment and approximately
$3,750,000 for certain net working capital components, which are subject to
adjustment and final settlement by the parties. The average interest rates
in effect under the Champion Credit Facility were 9.33% for the year ended
December 31, 1995 and 8.91% and 8.81% for the six months ended 1995 and
1996, respectively.
With respect to SLRMC, the Pro Forma Condensed Combining Statement of Income
for the year ended December 31, 1995 assumes Champion financed the
acquisition of SLRMC through (i) the issuance of $30,000,000 principal
amount of Series E Notes at an effective annual interest rate of 11.35% and
(ii) a note payable to Columbia in the amount of approximately $1,767,000
bearing interest at an effective annual rate of 10%. Such debentures and
notes are assumed to have been issued on January 1, 1995.
Interest expense with respect to the above increased approximately
$2,094,000 on a pro forma basis for the year ended December 31, 1995 and
approximately $2,270,000 and $393,000 for the six months ended March 31,
1995 and 1996, respectively, less $19,000, $19,000 and $5,000, respectively,
associated with Autauga capital lease obligations.
PF-27
<PAGE>
(7) To reflect the pro forma provision for income taxes due to the inclusion of
the acquired operations and, for the six months ended March 31, 1996, to
eliminate the effect of fiscal 1995 net operating loss utilization on the
fiscal 1996 annual period. For the year ended December 31, 1995, loss
carryovers of Champion can be utilized to reduce the provision for income
taxes.
(8) To reflect a decrease in interest earnings of approximately $229,000 for
the pro forma decrease in cash as a result of Champion's $20,000,000 capital
contribution to DHHS, its $2,000,000 contribution to DHHS working capital
and with respect to the AmeriHealth Merger, the retirement of an $8,516,000
loan held by the Resolution Trust Corporation (the "RTC Loan"), net of a
discount of approximately $384,000 obtained by Champion concurrent with the
AmeriHealth Merger. Such funds were assumed expended on of October 1, 1994.
Interest earnings are computed at 3.35%, Champion's average investment rate
for the period.
(9) To remove the historical operating results of HMC for the three months
ended December 31, 1994. Champion contributed Heartland to DHHS effective
December 31, 1994.
(10) To remove approximately $1,074,000 in merger related expenses incurred by
AmeriHealth.
(11) Reflects a $42,000 pro forma increase to depreciation expense based upon
the step up in basis for the depreciable assets of AmeriHealth.
(12) Reflects a pro forma reduction in interest expense of approximately
$136,000 related to the retirement of the RTC Loan concurrent with the
AmeriHealth Merger. The Champion Unaudited Pro Forma Condensed Combining
Statement of Income assumes the RTC Loan was retired from available funds on
October 1, 1994.
(13) To record Champion's equity in the pro forma earnings of DHHS for the three
months ended December 31, 1994. DHHS began operations effective January 1,
1995.
(14) To adjust common and common equivalent shares used to calculate loss per
share. The pro forma adjustment reflects the following events:
(a) The exchange of each 5.70358 shares of AmeriHealth common and common
equivalent shares into one share of the Champion Common Stock. For the
two months ended November 31, 1994, AmeriHealth's weighted average common
and common equivalent shares would have decreased from 16,924,000 shares
to 2,967,000 shares of the Champion Common Stock.
(b) Champion purchased 880,000 shares of the AmeriHealth's common stock in a
private transaction, which were retired concurrent with the AmeriHealth
Merger, resulting in a reduction of 154,000 shares of Champion Common
Stock that would have otherwise been issued.
The common shareholders of Champion's predecessor received one share of
Champion Common Stock for each predecessor share of common stock
outstanding prior to the AmeriHealth Merger. The preferred shareholders
of Champion's predecessor received one share of Champion preferred stock
for each predecessor share of preferred stock outstanding prior to the
the AmeriHealth Merger.
The following table summarizes the adjustment to shares used in the
calculation of loss per share:
<TABLE>
<S> <C>
Adjustment to AmeriHealth's common and common equivalent shares
for the exchange ratio (a)...................................... (13,957)
AmeriHealth common shares canceled (b)........................... 726
Effect of shares of (i) AmeriHealth common stock issued in
exchange for shares of AmeriHealth preferred stock during the
period and (ii) Champion Common Stock issued in connection with
the AmeriHealth Merger.......................................... (2,693)
---------
(15,924)
---------
---------
</TABLE>
(15) Historical and pro forma earnings were inadequate to cover fixed charges by
$768,000 and $639,000, respectively, for the six months ended March 31,
1995.
PF-28
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, CHAMPION OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION OF AN
OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON IN ANY CIRCUMSTANCE IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
CHAMPION SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 9
The Merger and Financing....................... 16
Use of Proceeds................................ 17
Dividend Policy................................ 18
Capitalization................................. 19
Company Unaudited Pro Forma Condensed Combined
Financial Statements.......................... 20
Paracelsus Selected Historical Consolidated
Financial Information......................... 28
Paracelsus Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 30
Champion Selected Historical Consolidated
Financial Information......................... 35
Champion Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 37
Business....................................... 43
Management..................................... 60
Executive Compensation......................... 64
Certain Relationships and Related
Transactions.................................. 70
Principal Shareholders......................... 82
Selling Shareholders........................... 85
Description of Capital Stock................... 88
Price Range of Champion Common Stock........... 93
Shares Eligible for Future Issuance and Sale... 94
Certain United States Federal Tax Consequences
to Non-United States Holders.................. 95
Underwriting................................... 97
Validity of Common Stock....................... 100
Experts........................................ 100
Available Information.......................... 100
Index to Financial Statements and Certain Pro
Forma Financial Statements.................... F-1
</TABLE>
7,000,000 SHARES
PARACELSUS HEALTHCARE
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES
AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE
IN WHICH SUCH OFFER TO SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 28, 1996
PROSPECTUS
, 1996
7,000,000 SHARES
[LOGO]
PARACELSUS HEALTHCARE CORPORATION
COMMON STOCK
Of the 7,000,000 shares of Common Stock being offered, 1,400,000 shares are
being offered for sale outside of the United States and Canada by the
International Managers (the "International Offering") and 5,600,000 shares are
initially being offered for sale in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering"). See "Underwriting." Of the 7,000,000 shares
of Common Stock being offered, 360,000 shares are being sold by the Selling
Shareholders. See "Selling Shareholders." Paracelsus Healthcare Corporation (the
"Company") will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. The price to the public and aggregate underwriting
discounts and commissions per share will be identical for both the U.S. Offering
and the International Offering.
The shares of Common Stock offered hereby are being offered concurrently
with the Merger pursuant to which Champion Healthcare Corporation will become a
wholly owned subsidiary of the Company. Prior to the Merger, there has been no
public market for the Common Stock. Upon consummation of the Merger, there will
be 54,647,167 shares of Common Stock outstanding, 19,675,425 of which will have
been issued in the aggregate to the holders of Champion common stock in the
Merger on a one-for-one basis and the holders of Champion preferred stock on a
two-for-one basis. Champion's common stock is traded on the American Stock
Exchange under the symbol "CHC." The last reported trading price for Champion
Common Stock on June 27, 1996 was $10 3/8 per share. See "Underwriting."
Application will be made to have the Common Stock of the Company listed on
the New York Stock Exchange upon consummation of the Merger under the symbol
" ."
Concurrently with the Equity Offering, the Company is offering $250,000,000
aggregate principal amount of % Senior Subordinated Notes due 2006.
Consummation of each of the Equity Offering and the Notes Offering is contingent
upon the consummation of the Merger; however, neither the Equity Offering nor
the Notes Offering is contingent upon the consummation of the other.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $ .
(3) THE SELLING SHAREHOLDERS HAVE GRANTED TO THE U.S. UNDERWRITERS AN OPTION,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 1,050,000 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO THE
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS, SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
THE SELLING SHAREHOLDERS WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITING."
The shares of Common Stock are being offered by the several International
Underwriters when, as and if delivered to and accepted by the International
Underwriters and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of the share
certificates will be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, CHAMPION OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION OF AN
OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON IN ANY CIRCUMSTANCE IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
CHAMPION SINCE THE DATE HEREOF.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE COMMON STOCK OFFERED
HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF
SECURITIES REGULATIONS 1995, THE FINANCIAL SERVICES ACT 1986 AND THE COMPANIES
ACT 1985 WITH RESPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE COMMON
STOCK IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH.
SEE "UNDERWRITING."
--------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 9
The Merger and Financing....................... 16
Use of Proceeds................................ 17
Dividend Policy................................ 18
Capitalization................................. 19
Company Unaudited Pro Forma Condensed Combined
Financial Statements.......................... 20
Paracelsus Selected Historical Consolidated
Financial Information......................... 28
Paracelsus Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 30
Champion Selected Historical Consolidated
Financial Information......................... 35
Champion Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 37
Business....................................... 43
Management..................................... 60
Executive Compensation......................... 64
Certain Relationships and Related
Transactions.................................. 70
Principal Shareholders......................... 82
Selling Shareholders........................... 85
Description of Capital Stock................... 88
Price Range of Champion Common Stock........... 93
Shares Eligible for Future Issuance and Sale... 94
Certain United States Federal Tax Conse-
quences to Non-United States Holders.......... 95
Underwriting................................... 97
Validity of Common Stock....................... 100
Experts........................................ 100
Available Information.......................... 100
Index to Financial Statements and Certain Pro
Forma Financial Statements.................... F-1
</TABLE>
7,000,000 SHARES
PARACELSUS HEALTHCARE
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the Common Stock to be registered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 31,923
NASD filing fees................................................. 9,758
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky expenses................................................ 17,500
Trustee fees and expenses........................................ *
Miscellaneous....................................................
----------
Total........................................................ $ *
----------
----------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article IV of the Registrant's
Articles of Incorporation (Exhibit 3.1) and Article V of the Registrant's Bylaws
(Exhibit 3.2 hereto) provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the California
Corporations Code. Reference is also made to Section of the Underwriting
Agreement (Exhibit 1.1 hereto) which provides for the indemnification of
officers, directors and controlling persons of the Registrant against certain
liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement with respect to the Equity Offering between
Paracelsus, the Selling Shareholders and the underwriters named therein
2.1 Amended and Restated Agreement and Plan of Merger dated as of May 29, 1996, by and
among Paracelsus, Champion and PC Merger Sub. Inc. (filed as Exhibit 2.1 to
Champion's Current Report on Form 8-K dated June 13, 1996 and incorporated herein
by reference)
3.1* Restated Articles of Incorporation of Paracelsus
3.2* Amended and Restated Bylaws of Paracelsus
4.1* Form of Indenture between the Company and AmSouth, N.A., as Trustee (including the
form of certificate representing the % Senior Subordinated Notes due 2006)
4.2* Form of certificate representing Common Stock
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom
5.2* Opinion of Robert C. Joyner
10.1 Promissory Note Agreement, dated May 1, 1994, between Paracelsus and Dr. Hartmut
Krukemeyer in the amount of $5,000,000 (filed as Exhibit 4.1 to Paracelsus'
Quarterly Report on form 10-Q filed by Paracelsus on May 16, 1994 and incorporated
herein by reference)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
10.2 Indenture, dated as of October 15, 1993, between Paracelsus and NationsBank of
Tennessee, N.A., as Trustee (filed as Exhibit 4.2 to the Registration Statement on
Form S-1 filed by Paracelsus on August 5, 1993 (Commission File No. 33-67040) and
incorporated herein by reference)
10.3 Note, dated as of August 23, 1994, by Dr. Manfred G. Krukemeyer in favor of INC
Capital Corporation (filed as Exhibit 4.2 to Paracelsus' Current Report on Form 8-K
filed by Paracelsus on September 6, 1994 and incorporated herein by reference)
10.4 Pledge Agreement, dated as of August 23, 1994, by and between Dr. Manfred George
Krukemeyer and INC Capital Corporation (filed as Exhibit 4.2 to Paracelsus' Current
Report on Form 8-K filed by Paracelsus on September 6, 1994 and incorporated herein
by reference)
10.5 Agreement and Consent, dated as of August 23, 1994, by and between Paracelsus and
INC Capital Corporation (filed as Exhibit 4.3 to Paracelsus' Current Report on Form
8-K filed by Paracelsus on September 6, 1994 and incorporated herein by reference)
10.6 Agreement, dated as of August 23, 1994, by and among Dr. Manfred Krukemeyer,
Paracelsus, Bank of America and NationsBank (filed as Exhibit 4.4 to Paracelsus'
Current Report on Form 8-K filed by Paracelsus on September 6, 1994 and
incorporated herein by reference)
10.7 Second Amended and Restated Guaranty and Pledge Agreement, dated as of August 23,
1994, by and among Dr. Manfred G. Krukemeyer and Bank of America (filed as Exhibit
4.6 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on September 6,
1994 and incorporated herein by reference)
10.8 Pooling Agreement, dated as of April 16, 1993, among PHC Funding Corp. II ("PFC
II"), Sheffield Receivables Corporation and Bankers Trust Company, as trustee ("the
Trustee") (filed as Exhibit 10.1 to the Registration Statement on Form S-1 filed by
Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated
herein by reference)
10.9 Servicing Agreement, dated as of April 16, 1993, among PFC II, Paracelsus and the
Trustee (filed as Exhibit 10.2 to the Registration Statement on Form S-1 filed by
Paracelsus on August 5, 1993 (Commission File Number 33-67040) and incorporated
herein by reference)
10.10 Guarantee, dated as of April 16, 1993, by Paracelsus in favor of PFC II (filed as
Exhibit 10.3 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
10.11 Form of Sale and Servicing Agreement between subsidiaries of Paracelsus (the
"Hospitals") and PFC II (filed as Exhibit 10.4 to the Registration Statement on
Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040)
and incorporated herein by reference)
10.12 Form of Subordinate Note by PFC II in favor of Hospitals (filed as Exhibit 10.5 to
the Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.13 Lease, dated as of March 1, 1993, between AHP of New Orleans, Inc., as lessor and
Paracelsus Elmwood Medical Center, Inc. as lessee (filed as Exhibit 10.6 to the
Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
10.14 Lease, dated as of June 30, 1993, between AHP of New Orleans, Inc., as lessor and
Paracelsus Halstead Hospital, Inc. as lessee (filed as Exhibit 10.7 to the
Registration Statement on Form S-1 filed by Paracelsus on August 5, 1993
(Commission File Number 33-67040) and incorporated herein by reference)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.15 Service and Consulting Agreement, dated as of July 4, 1983, between Paracelsus and
European Investors Inc. and Incofinas Limited ("Consulting Agreement") (filed as
Exhibit 10.14 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
10.16 Supplemental Executive Retirement Plan (filed as Exhibit 10.15 to the Registration
Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number
33-67040) and incorporated herein by reference)
10.17 Phantom Equity Long-Term Incentive Plan (filed as Exhibit 10.16 to the Registration
Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number
33-67040) and incorporated herein by reference)
10.18 Annual Incentive Plan (filed as Exhibit 10.17 to the Registration Statement on Form
S-1 filed by Paracelsus on August 5, 1993 (Commission File Number 33-67040) and
incorporated herein by reference)
10.19 Promissory Note, dated as of December 1, 1993, of Dr. Hartmut Krukemeyer d/b/a
Paracelsus Klinik in favor of Paracelsus in the amount of $3,200,000 (filed as
Exhibit 4.11 to the Registration Statement on Form S-1 filed by Paracelsus on
August 5, 1993 (Commission File Number 33-67040) and incorporated herein by
reference)
10.20 Facility Lease dated as of June 7, 1991, between Bell Atlantic Tricon Leasing
Corporation (Landlord) and Chico Rehabilitation Hospital, Inc. (Tenant) (filed as
Exhibit 10.1 to Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on
August 11, 1994 and incorporated herein by reference)
10.21 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and Chico
Rehabilitation Hospital, Inc. (Tenant)(filed as Exhibit 10.2 to Paracelsus'
Quarterly Report on form 10-Q filed by Paracelsus on August 11, 1994 and
incorporated herein by reference)
10.22 Amendment to Lease dated June 30, 1994, between Tricon Capital (Landlord) and
Beaumont Rehab Associates Limited Partnership (Tenant) (filed as Exhibit 10.3 to
Paracelsus' Quarterly Report on Form 10-Q filed by Paracelsus on August 11, 1994
and incorporated herein by reference)
10.23 Amended and Restated Know-How contract, dated as of October 1, 1994, between
Paracelsus Klinik and Paracelsus (filed as Exhibit 10.35 to Paracelsus' Annual
Report on Form 10-K filed by Paracelsus on December 23, 1994 and incorporated
herein by reference)
10.24* Asset Purchase Agreement, dated as of March 29, 1996, between Paracelsus and FHP,
Inc.
10.25 Stock Purchase Agreement by and between Paracelsus Healthcare Corporation and
General Hospitals of Galen, Inc., dated as of November 28, 1995 (filed as Exhibit
10.40 to Paracelsus' Annual Report on Form 10-K for the fiscal year ended December
31, 1995 and incorporated herein by reference)
10.26 Asset Exchange Agreement by and between Paracelsus Halstead Hospital Inc.,
Paracelsus Elmwood Medical Center, Inc., Paracelsus Peninsula Medical Center, Inc.,
and Paracelsus Real Estate Corporation and Pioneer Valley Hospital, Inc. and
Medical Center of Santa Rosa, Inc., dated November 28, 1995 (filed as Exhibit 10.41
to Paracelsus' Annual Report on Form 10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference)
10.27 Amended and Restated Partnership Agreement of Dakota/Champion Partnership dated
December 21, 1994 (filed as Exhibit 10 to Champion's Form 8-K dated December 21,
1994 and incorporated herein by reference)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.28 Operating Agreement between Dakota/Champion Partnership and the Registrant, dated
December 21, 1994 (filed as Exhibit 10 to Champion's 8-K dated December 21, 1994
and incorporated herein by reference)
10.29 Asset Purchase Agreement, dated January 25, 1995, as amended, among Medical
Services of Salt Lake City, Inc., HealthTrust, Inc. -- The Hospital Company, CHC --
Salt Lake City, Inc. and Champion Healthcare Corporation (filed as Exhibit 10.1 to
Champion's Form 8-K dated April 13, 1995 and incorporated herein by reference)
10.30 Second Amended and Restated Credit Agreement, dated as of December 8, 1995, among
Paracelsus, Bank of America National Trust and Savings Association ("B of A"),
NationsBank of Texas, N.A., The Bank of New York, Mellon Bank, N.A., Toronto-
Diminion (Texas), Inc., Wells Fargo Bank, N.A., and the Bank of California, N.A.,
as lenders, B of A, as lead agent for lenders, and NationsBank, as co-agent (filed
as Exhibit 4.1 to Paracelsus' Current Report on Form 8-K filed by Paracelsus on
December 12, 1995 and incorporated herein by reference)
10.31 Agreement in Contemplation of Merger, dated April 12, 1996, between Champion and
the Champion investors listed therein (filed as Exhibit 10.1 to Champion's Current
Report on Form 8-K dated April 15, 1996 and incorporated herein by reference)
10.32 Series D Note Purchase Agreement, dated December 31, 1993, as amended, between
Champion and the parties listed therein (filed as Exhibit 10.1 to Champion's
Current Report on Form 8-K dated April 19, 1994 and incorporated herein by
reference)
10.33 Series E Note Purchase Agreement dated May 1, 1995, as amended, between Champion
and the parties listed therein (filed as Exhibit 4.01(d) to Champion's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995 and incorporated
herein by reference)
10.34 Form of Warrant issued pursuant to Champion Series E Note Purchase Agreement, dated
May 1, 1995, as amended (filed as Exhibit 4.01 to Champion's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and incorporated herein by
reference)
10.35 Form of Warrant issued pursuant to Champion Series D Note and Stock Purchase
Agreement dated May 27, 1995 (filed as Exhibit 10.23 to Champion's Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference)
10.36 Founders' Stock Option Agreement between James G. VanDevender and Champion dated
December 31, 1990 (filed as Exhibit 10.12 to Champion's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by reference)
10.37 Founders' Stock Option Agreement between Charles R. Miller and Champion dated
December 31, 1990 (filed as Exhibit 10.11 to Champion's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by reference)
10.38 Asset Exchange Agreement dated November 9, 1995, by and between Champion Healthcare
Holdings, CHC-Prattville, Inc. and CHC-Nursing Center, Inc. and West Jordan
Hospital Corporation (filed as Exhibit 10.1 to Champion's Form 8-K dated March 1,
1996 and incorporated herein by reference)
10.39* Amendment of the Founders' Stock Option Agreement
10.40* Registration Rights Agreement between the Company and Park Hospital GmbH
10.41* Voting Agreement between Park Hospital GmbH and Messrs. Miller and VanDevender
10.42* Services Agreement between the Company and Dr. Manfred G. Krukemeyer
10.43* Insurance Agreement between the Company and Dr. Manfred G. Krukemeyer
10.44* Non-Compete Agreement between the Company and Dr. Krukemeyer
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.45* Shareholders Agreement between the Company and Park Hospital GmbH, as guaranteed by
Dr. Krukemeyer
10.46* Dividend and Note Agreement between the Company and Park Hospital GmbH
10.47* Employment Agreement between Charles R. Miller and the Company
10.48* Employment Agreement between R.J. Messenger and the Company
10.49* Employment Agreement between James G. VanDevender and the Company.
10.50* Employment Agreement between Ronald R. Patterson and the Company
10.51* Employment Agreement between Robert C. Joyner and the Company
10.52* Paracelsus Healthcare Corporation 1996 Stock Incentive Plan
10.53* Paracelsus Healthcare Corporation Executive Officer Performance Bonus Plan
11.1* Statement re computation of per share earnings
21.1 List of Subsidiaries of Paracelsus (filed as Exhibit 21.1 to the Registration
Statement on Form S-1 filed by Paracelsus on August 5, 1993 (Commission File Number
33-67040) and incorporated herein by reference)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Skadden, Arps, Slate, Meagher & Flom (to be included in Exhibit 5.1
hereto)
23.4* Consent of Robert C. Joyner (to be included in Exhibit 5.2 hereto)
23.5* Consent of James A. Conroy
23.6* Consent of Charles R. Miller
23.7* Consent of James G. VanDevender
24.1 Power of Attorney (included on page II-7 hereto)
</TABLE>
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedules
Report of Independent Auditors
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-6
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints R.J.
Messenger, James T. Rush and Robert C. Joyner, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and to take such actions in, and file with the appropriate
authorities in, whatever states said attorneys-in-fact and agents, and each of
them, shall determine, such applications, statements, consents and other
documents as may be necessary or expedient to register securities of the Company
for sale, granting unto said attorneys-in-fact and agents full power and
authority to do so and perform such and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents or any of them, or their or his substitute
of substitutes, may lawfully do or cause to be done by virture hereof and the
registrant hereby confers like authority on its behalf.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on this 28th day of June, 1996.
PARACELSUS HEALTHCARE CORPORATION
By: /s/ JAMES T. RUSH
-----------------------------------------
Name: James T. Rush
Title: Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ DR. MANFRED GEORGE KRUKEMEYER
------------------------------------------- Chairman of the Board and Director June 28, 1996
Dr. Manfred George Krukemeyer
/s/ R.J. MESSENGER President, Chief Executive Officer,
------------------------------------------- Secretary and Director (principal June 28, 1996
R.J. Messenger executive officer)
/s/ JAMES T. RUSH Vice President, Finance and Chief
------------------------------------------- Financial Officer (principal June 28, 1996
James T. Rush financial officer)
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ SCOTT BARTON
------------------------------------------- Assistant Vice President and Corporate June 28, 1996
Scott Barton Controller (controller)
/s/ MICHAEL D. HOFMANN
------------------------------------------- Director June 28, 1996
Michael D. Hofmann
/s/ CHRISTIAN A. LANGE
------------------------------------------- Director June 28, 1996
Christian A. Lange
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Paracelsus
Healthcare Corporation as of September 30, 1994 and 1995, and for each of the
three years in the period ended September 30, 1995, and have issued our report
thereon dated December 14, 1995 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 21(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
December 14, 1995
S-1
<PAGE>
PARACELSUS HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS(2) END OF YEAR
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1993:
Allowance for doubtful accounts...... $ 18,867 $ 26,629 $ 10,034 $ (25,103) $ 30,427
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Year ended September 30, 1994:
Allowance for doubtful accounts...... $ 30,427 $ 33,110 $ 342 $ (33,041) $ 30,838
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Year ended September 30, 1995:
Allowance for doubtful accounts...... $ 30,838 $ 39,277 $ (2,585) $ (42,305) $ 25,225
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Reflects recoveries of amounts previously written off.
(2) Reflects write-offs of uncollectible accounts.
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of (i) our report dated December 14, 1995, with respect to the
consolidated financial statements of Paracelsus Healthcare Corporation as of
September 30, 1994 and 1995 and for each of the three years in the period ended
September 30, 1995, (ii) our report dated December 14, 1995 with respect to the
financial statement schedule of Paracelsus Healthcare Corporation for the years
ended December 31, 1993, 1994 and 1995, and (iii) our report dated May 17, 1996,
with respect to the combined financial statements of Davis Hospital and Medical
Center, Pioneer Valley Hospital and Santa Rosa Medical Center as of December 31,
1994 and 1995 in the registration statement (Form S-1) and related Prospectus of
Paracelsus Healthcare Corporation for the registration of 8,050,000 shares of
its common stock.
ERNST & YOUNG LLP
Los Angeles, California
June 28, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 and
related Prospectus of Paracelsus Healthcare Corporation for the registration of
8,050,000 shares of common stock of (i) our report dated February 27, 1996, with
respect to the consolidated financial statements of Champion Healthcare
Corporation as of December 31, 1994 and 1995 and for each of the three years in
the period ended December 31, 1995, (ii) our report dated February 16, 1996,
with respect to the financial statements of Dakota Heartland Health System as of
December 31, 1994 and 1995 and for the year ended December 31, 1995, (iii) our
report dated December 28, 1995, with respect to the financial statements of
Jordan Valley Hospital as of September 30, 1995 and for the period from January
1, 1995 through September 30, 1995, (iv) our report dated June 11, 1995, with
respect to the financial statements of Salt Lake Regional Medical Center as of
May 31, 1994 and April 13, 1995 and for each of the two years in the period
ended May 31, 1994 and the period from June 1, 1994 through April 13, 1995. We
also consent to the reference of our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 28, 1996
