<PAGE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM
________________________ TO ________________________
COMMISSION FILE NUMBER 0-13991
-------------------
HALLMARK HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 63-0817574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3707 FM 1960 WEST, SUITE 500,
HOUSTON, TEXAS 77068
(Address of principal executive
offices) (Zip code)
</TABLE>
(713)537-5230
(Registrant's telephone number, including area code)
The registrant's former address was 300 Galleria Parkway, Suite 650, Atlanta,
Georgia 30339
(Former name, former address and former fiscal year, if changed since last
report)
-------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes_X_ No____
The number of shares of the Registrant's Common Stock outstanding at November
11, 1994:
Class A common stock, $0.05 par value -- 10,000
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1994 and June 30, 1994....................... 3
Condensed Consolidated Statements of Operations for the three months ended September 30, 1994 and
1993............................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1994 and
1993............................................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
Part II -- Other Information
Item 3. Defaults Upon Senior Securities.............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 12
Item 6. Exhibits and Reports on Form 8-K............................................................. 12
</TABLE>
Signatures
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLMARK HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1994
SEPTEMBER 30, -----------
1994
-------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 21,996 $ 18,082
Marketable securities, at cost which approximates market.................................. 1,363 1,675
Patient accounts receivable, less allowance for doubtful accounts of $3,786 and $4,083 at
September 30, 1994 and June 30, 1994, respectively....................................... 21,409 20,396
Inventories............................................................................... 4,206 4,212
Other current assets...................................................................... 6,061 5,875
Deferred tax asset........................................................................ 4,138 4,757
------------- -----------
Total current assets.................................................................... 59,173 54,997
------------- -----------
Property and equipment:
Land and improvements..................................................................... 7,600 7,555
Buildings and improvements................................................................ 101,867 101,798
Equipment................................................................................. 56,750 56,202
Construction in progress.................................................................. 1,147 687
------------- -----------
167,364 166,242
Less: accumulated depreciation and amortization........................................... (64,449) (62,222)
------------- -----------
102,915 104,020
Other assets................................................................................ 13,283 14,003
------------- -----------
$ 175,371 $ 173,020
------------- -----------
------------- -----------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 9,374 $ 9,634
Accrued payroll, vacation and related taxes............................................... 4,125 3,651
Other accrued liabilities................................................................. 12,347 11,924
Current maturities of long-term debt and capital lease obligations........................ 139 247
------------- -----------
Total current liabilities............................................................... 25,985 25,456
Long-term debt and capital lease obligations................................................ 87,561 87,574
Other long-term liabilities................................................................. 17,785 17,448
Deferred income taxes....................................................................... 9,653 9,653
Commitments and contingencies
Redeemable preferred stock.................................................................. 1,390 1,303
Common stockholders' equity:
Common stock
Class A, $0.05 par value, authorized 25,000,000 shares; issued and outstanding 3,308,582
and 2,982,482 shares at September 30, 1994 and June 30, 1994, respectively............. 165 149
Class B, $0.05 par value, authorized 2,500,000 shares; issued and outstanding 38,299 and
64,102 shares at September 30, 1994 and June 30, 1994, respectively.................... 2 3
Additional paid-in capital.............................................................. 54,785 54,469
Accumulated deficit..................................................................... (21,955) (23,035)
------------- -----------
Total common stockholders' equity....................................................... 32,997 31,586
------------- -----------
$ 175,371 $ 173,020
------------- -----------
------------- -----------
</TABLE>
See accompanying notes
3
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Net patient service revenues............................................................. $ 45,402 $ 45,290
Other revenues........................................................................... 2,183 2,038
--------- ---------
Total Revenues..................................................................... 47,585 47,328
Expenses:
Salaries and benefits.................................................................. 20,037 20,298
Supplies............................................................................... 5,783 5,764
Provision for bad debts................................................................ 2,843 3,191
Other operating expenses............................................................... 12,146 12,671
Interest............................................................................... 2,521 837
Depreciation and amortization.......................................................... 2,393 2,399
--------- ---------
Total Expenses..................................................................... 45,723 45,160
--------- ---------
Income before income taxes and cumulative effect of accounting change.................. 1,862 2,168
Provision for income taxes............................................................. 782 911
--------- ---------
Income before cumulative effect of accounting change................................... 1,080(a) 1,257(b)
Cumulative effect of accounting change................................................. -- 805
--------- ---------
Net Income............................................................................. 1,080 2,062
Accretion of preferred stock redemption requirement.................................... 123 100
--------- ---------
Net income applicable to common stock.................................................. $ 957 $ 1,962
--------- ---------
--------- ---------
Weighted average common and common equivalent shares outstanding......................... 3,764 3,728
--------- ---------
--------- ---------
Net income per common and common equivalent share:
Income before cumulative effect of accounting change................................... $ 0.29(a) $ 0.34(b)
Cumulative effect of accounting change................................................. -- 0.21
--------- ---------
Net income per common and common equivalent share........................................ $ 0.29 $ 0.55
--------- ---------
--------- ---------
<FN>
- - - ------------------------
(a) Included in 1994 operating results is an estimated $430,000 ($0.12 per
share) in merger related savings.
(b) Included in 1993 operating results is a $801,000 ($0.21 per share) deferred
debt restructuring credit, which had the effect of reducing reported
interest expense by $1,381,000 before taxes. No similar reduction of
interest expense occurred in 1994.
</TABLE>
See accompanying notes
4
<PAGE>
HALLMARK HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 1,080 $ 2,062
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change............................................... -- (805)
Depreciation and amortization........................................................ 2,393 2,399
Amortization of deferred debt restructuring credits.................................. -- (1,381)
Change in allowance for doubtful accounts............................................ (297) 59
Change in assets and liabilities net of effects of healthcare facilities sold:
Patient accounts receivable........................................................ (715) 72
Other assets....................................................................... 1,076 1,034
Accounts payable................................................................... (260) (978)
Other liabilities.................................................................. 1,569 570
--------- ---------
Net cash provided by operating activities.......................................... 4,846 3,032
--------- ---------
Cash flows used in investing activities:
Purchase of property & equipment, net.................................................. (1,122) (1,857)
Maturity of marketable securities...................................................... 312 --
--------- ---------
Net cash used in investing activities.................................................. (810) (1,857)
--------- ---------
Cash flows used in financing activities:
Principal payments on long-term debt and capital lease obligations..................... (122) (2,563)
--------- ---------
Net cash used in financing activities.................................................. (122) (2,563)
--------- ---------
Increase (decrease) in cash and cash equivalents......................................... 3,914 (1,388)
Cash and cash equivalents at beginning of period......................................... 18,082 4,899
--------- ---------
Cash and cash equivalents at end of period............................................... $ 21,996 $ 3,511
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
5
<PAGE>
HALLMARK HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements presented herein,
in the opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation of the results
of operations and financial position for the interim periods covered by this
report. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform to the current year's presentation. The results of operations for the
interim periods are not necessarily indicative of the results expected for the
year.
These financial statements should be read in conjunction with the audited
consolidated financial statements of Hallmark Healthcare Corporation (the
"Company" or "Hallmark") for the year ended June 30, 1994, included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
NOTE 2 -- SUBSEQUENT EVENTS
On October 5, 1994, the Company was acquired by Community Health Systems,
Inc. ("Community") through the merger of Community Acquisition Corp., a
wholly-owned subsidiary of Community, with and into the Company (the "Merger").
Under the terms of the Merger, each share of the Company's common stock and
redeemable preferred stock was converted into the right to receive 0.97 and 5.4
shares of Community's common stock, respectively. After the Merger, 10,000
shares of Hallmark common stock remained outstanding and were owned by
Community. The Merger will be accounted for by Community as a
pooling-of-interests.
As a result of the Merger, the Company gave notice of a change of control
and right to require a tender offer to purchase for cash, all or any portion of
its $80 million principal amount of 10 5/8% Senior Subordinated Notes due 2003
(the "Notes") at 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, pursuant to the indenture related thereto. As of November 10,
1994, the expiration date of the tender offer, the Company had received Notes in
the aggregate principal amount of $76,127,000 for purchase from holders thereof.
The purchase of tendered Notes will be made on November 15, 1994 and will be
funded through the use of existing cash balances and intercompany loans from
Community. The Company will record an extraordinary loss of $2.3 million in the
quarter ended December 31, 1994, consisting of $600,000 in payments of premium
and tender offer costs, and $1.7 million for the write-off of deferred loan
costs both net of related tax benefits.
NOTE 3 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1994 1994
------------- ---------
<S> <C> <C>
10 5/8% Senior Subordinated Notes due November 15, 2003................................ $ 80,000 $ 80,000
Capital lease obligations and other indebtedness....................................... 7,700 7,821
------------- ---------
Less current portion................................................................... (139) (247)
------------- ---------
Long-term debt and capital lease obligations........................................... $ 87,561 $ 87,574
------------- ---------
------------- ---------
</TABLE>
The indenture for the Senior Subordinated Notes contains certain covenants
which limit or restrict, among other items, (i) additional indebtedness,
including subordinated debt; (ii) liens; (iii) issuance of preferred stock by
the Company's subsidiaries; (iv) transactions with affiliates; (v) restricted
payments, including, but not limited to, cash dividends on the Company's equity
securities; (vi) investments and loans; (vii) application of the proceeds of
certain asset sales; and (viii) mergers, consolidations and the transfer of
substantially all of the assets of the Company to another person, all as defined
in the indenture. The Company was in compliance with these covenants
6
<PAGE>
NOTE 3 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
at September 30, 1994. The indenture also contains a provision that in the event
of a change of control, as defined, the Company shall make an offer to purchase
the notes at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest through the date of purchase. The merger with Community
constituted a change of control under the indenture and a tender offer to
purchase the Notes has been completed. As of November 10, 1994, the expiration
date for the tender offer, the Company had received Notes in the aggregate
principal amount of $76,127,000 for purchase from the holders thereof. The
Company will record an extraordinary loss of $2.3 million in the quarter ended
December 31, 1994, consisting of $600,000 in payments of premium and tender
offer costs, and $1.7 million for the write-off of deferred loan costs both net
of related tax benefits.
During fiscal 1994, the Company entered into a credit agreement with a
financial institution pursuant to which the Company may borrow up to $15,000,000
under a working capital facility and up to $10,000,000 under an acquisition
facility. Certain conditions must be satisfied prior to the Company borrowing
under the credit agreement, some of which had not been satisfied at September
30, 1994. These new credit facilities were terminated in connection with the
Merger.
At September 30, 1994, the Company had four outstanding letters of credit
totalling $6,858,000 which were issued by a commercial bank and are used to
satisfy certain security requirements of the Company's workers' compensation
insurance carrier and a lease agreement related to one of the Company's
hospitals. To date, there have been no drawings under these letters of credit.
NOTE 4 -- INCOME TAXES
At September 30, 1994, the Company had tax NOL carryforwards of
approximately $22,000,000 which expire in fiscal years 2002 through 2006. Such
NOL carryforwards may be available to offset future taxable income of the
Company, if any. The Internal Revenue Code (the "Code") contains provisions
which limit the use of NOL carryforwards following significant changes in
ownership of a corporation's stock. The merger with Community constituted a
change of control under the Code.
During the first fiscal quarter of 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires a change in accounting for income taxes to an asset and
liability approach under which deferred tax assets and liabilities are
determined based on the difference between the financial accounting and tax
accounting bases of assets and liabilities. Deferred tax assets or liabilities
at the end of each period are determined using the currently enacted tax rate
expected to apply to taxable income in the periods in which the deferred tax
asset or liability is expected to be realized. The Company recorded a credit of
$805,000 to reflect the cumulative effect of adopting such standard in the
quarter ended September 30, 1993.
In May 1991, the Company issued 390,298 shares of Class B common stock in
exchange for $18,620,000 of bank debt. The Company, based on consultation with
outside tax and valuation advisors, believes that the exchange qualified under
the stock-for-debt exception to the recognition of income from discharge of
indebtedness which is available to an insolvent corporation. Although the
Company's position has not been challenged, in the event the Internal Revenue
Service challenges the Company's position successfully, the Company's current
NOL carryforwards could be reduced by as much as $16,000,000.
NOTE 5 -- STOCKHOLDERS' EQUITY
During the quarter ended September 30, 1993, the Board of Directors amended
the Company's Long-Term Cash Incentive Plan, providing for cash payments of
approximately $578,000 and the issuance of approximately 175,000 shares of the
Company's Class A common stock in August 1994. Pursuant to such amendment,
benefits accrued under the plan were distributed on August 15, 1994 resulting in
the aforesaid distributions.
The Class B stock issued in May 1991, is non-voting and is convertible into
Class A common stock upon its sale or disposition. During the quarter ended
September 30, 1994, 25,803 shares of Class B common stock were converted into a
like number of Class A common shares.
7
<PAGE>
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to claims and legal actions by patients and others in
the ordinary course of business. The Company believes that such claims will not
have a material adverse effect on the Company's financial position or results of
operations. The Company is self-insured against a portion of its general and
professional liability risks. The liability recorded for losses incurred and
claims made is based upon individual case estimates for losses reported and upon
estimates on the basis of past experience for incurred but not reported claims.
The Company has established and funded a trust fund to pay certain of its
general and professional liability losses. The balance of such trust fund was
$9,019,000 and $9,522,000 at September 30, 1994 and June 30, 1994, respectively.
Of such amounts, $1,571,000 and $1,350,000 at September 30, 1994 and June 30,
1994, respectively, is classified in the accompanying condensed consolidated
balance sheets under the caption "Other current assets" and represents the
amount of claims and loss adjustment expenses expected to be paid within the
following twelve months. The remaining balance in such trust fund is classified
under the caption "Other assets". Such self insurance trust has been pledged as
collateral for four letters of credit issued by a commercial bank totalling
$6,858,000.
OTHER CONTINGENCIES
The Company has employment agreements with its two executive officers which
provide for certain payments and benefits, including accelerated vesting of
unvested stock options and bonus payments, in the event of a "change in control"
of the Company, as defined. The Merger constituted a change in control under the
employment agreements. Accordingly, on October 5, 1994, upon consummation of the
Merger, Messrs. McAfee and Thornton were paid all benefits due them and vested
in all options due them under their respective employment agreements. Such
payments totalled approximately $3.8 million, which amount will be included in
merger costs recorded in the period incurred.
NOTE 7 -- EARNINGS PER SHARE
The following table summarizes the number of common and common equivalent
shares used in computing net income per share at September 30, 1994 and 1993.
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Weighted average Class A common stock outstanding...................................... 3,137,075 2,907,373
Class B common stock outstanding (convertible to Class A common stock)................. 38,299 76,880
Common stock equivalents:
Effect of the assumed conversion of the 25% Preferred shares (5 shares of common for
1 share of preferred)............................................................... 159,850 194,450
Options and other.................................................................... 429,052 549,545
----------- -----------
Shares used in computing net income per share.......................................... 3,764,276 3,728,248
----------- -----------
----------- -----------
</TABLE>
NOTE 8 -- SUPPLEMENTAL INFORMATION TO CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
The Company paid approximately $278,000 in interest on various obligations
in the three months ended September 30, 1994, compared to approximately
$1,973,000 for the comparable period a year earlier. The decrease in cash paid
for interest in the quarter ended September 30, 1994 is due to the semi-annual
interest payment terms of the Notes.
The Company paid approximately $153,000 in federal and state income taxes in
the three months ended September 30, 1994, compared to approximately $126,000
for the comparable period a year earlier.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HALLMARK HEALTHCARE CORPORATION
SEPTEMBER 30, 1994
RESULTS OF OPERATIONS
The following table summarizes, for the periods indicated, changes in
selected operating items. The discussion that follows should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
AS A PERCENTAGE OF TOTAL
REVENUES PERCENTAGE INCREASE
------------------------ (DECREASE) IN $
1994 1993 FROM PRIOR YEAR
----------- ----------- -------------------
<S> <C> <C> <C>
Total Revenues.......................................................... 100.0% 100.0% 0.5%
Operating costs:
Salaries and benefits................................................. 42.1% 42.9% (1.3)%
Supplies and other operating expenses................................. 37.7% 39.0% (2.7)%
Provision for bad debts............................................... 6.0% 6.7% (10.9)%
----- -----
Total operating costs............................................... 85.8% 88.6% (2.7)%
----- -----
Operating margin........................................................ 14.2% 11.4% 25.4%
Capital costs:
Interest.............................................................. 5.3% 1.8% 201.2%
Depreciation and amortization......................................... 5.0% 5.0% (0.3)%
----- -----
Total capital costs................................................. 10.3% 6.8% 51.9%
Income before income taxes and cumulative effect of accounting change... 3.9% 4.6% (14.1)%
Provision for income taxes.............................................. 1.6% 1.9% (14.2)%
----- -----
Income before cumulative effect of accounting change.................... 2.3% 2.7% (14.1)%
----- -----
----- -----
</TABLE>
The following table sets forth certain operating data for the Company for
the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
--------------------
1994 1993
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Hospitals at end of period............................................................... 17 17
Licensed beds at end of period........................................................... 1,428 1,428
Average beds in service.................................................................. 1,228 1,228
Net patient service revenues:
Inpatient.............................................................................. $ 30,693 $ 31,496
Outpatient............................................................................. 14,709 13,794
--------- ---------
Total net patient service revenues................................................. $ 45,402 $ 45,290
Patient days............................................................................. 39,723 39,432
Occupancy rate (1)....................................................................... 35.2% 34.9%
Equivalent patient days (2).............................................................. 58,341 57,266
<FN>
- - - ------------------------
(1) Based on average beds in service.
(2) Represents inpatient days adjusted to reflect outpatient utilization.
</TABLE>
Net patient service revenues increased from $45,290,000 in the quarter ended
September 30, 1993 to $45,402,000 in the quarter ended September 30, 1994, an
increase of $112,000, or 0.2%, primarily due to a 4.0% increase in admissions
from 6,983 to 7,265 and a 0.7% increase in patient days
9
<PAGE>
from 39,432 to 39,723. Net patient service revenue per patient day declined from
$1,149 to $1,143 for the quarter ended September 30, 1994 compared to the same
period a year earlier. The decrease in revenue per patient day was due in part
to a decrease in acute care patient days which was partially offset by an
increase in psychiatric patient days.
Salaries and benefits expense for the quarter ended September 30, 1994
decreased $261,000, or 1.3%, over the quarter ended September 30, 1993. The
decrease was primarily due to a decrease in the Company's provision for
incentive plans at the corporate level.
Interest expense increased $1,684,000 to $2,521,000 in the quarter ended
September 30, 1994. Such increase was primarily due to the Company's refinancing
of its bank debt and subordinated debt in November 1993. Prior to the
refinancing, interest expense on the Company's debt was significantly reduced by
amortization of deferred debt restructuring credits. As a result of the
refinancing, the deferred debt restructuring credits were eliminated and from
the date of the refinancing forward, interest expense was fully recognized at
the effective interest rates of the Company's debt. Interest expense was reduced
by amortization of deferred debt restructuring credits of $1,381,000 in the
quarter ended September 30, 1993. Interest expense was $2,521,000 in the quarter
ended September 30, 1994, compared with $2,218,000 (excluding amortization of
deferred debt restructuring credits) in the comparable period a year earlier.
Provision for bad debts decreased $348,000 to $2,843,000 for the quarter
ended September 30, 1994, primarily due to a decrease in patient service
revenues attributable to self-pay patients. Provision for bad debts as a
percentage of net patient service revenues was 6.3% in the quarter ended
September 30, 1994, down from 7.0% in the comparable period a year earlier.
Other operating expenses decreased $525,000 to $12,146,000 for the quarter
ended September 30, 1994. The decrease was primarily the result of decreased
professional fees at the corporate level and elimination of provider taxes at
two of the Company's operating facilities.
The Company reported net income of $1,080,000, or $0.29 per share, for the
quarter ended September 30, 1994, compared to net income of $2,062,000, or $0.55
per share, in the quarter ended September 30, 1993. Included in 1994 operating
results is an estimated $430,000 ($0.12 per share) in merger related savings.
Included in 1993 operating results is an $801,000 ($0.21 per share) deferred
debt restructuring credit which had the effect of reducing reported interest
expense by $1,381,000 before taxes. No similar reduction of interest expense
occurred in 1994. Net income for the quarter ended September 30, 1993 also
included a credit of $805,000, or $.21 per share, related to the cumulative
effect of adoption of Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1994, the Company had working capital of $33,188,000,
compared with $29,541,000 at June 30, 1994. Cash and marketable securities were
$23,359,000 as of September 30, 1994, compared with $19,757,000 at June 30,
1994. The increases in both items were primarily the result of increased
operating income and decreased debt service requirements in the three months
ended September 30, 1994, compared with the year earlier period.
During fiscal 1994, the Company entered into a credit agreement with a
financial institution pursuant to which the Company may borrow up to $15,000,000
under a working capital facility and up to $10,000,000 under an acquisition
facility. Certain conditions must be satisfied prior to the Company borrowing
under the credit agreement, some of which had not been satisfied at September
30, 1994. These new credit facilities were terminated in connection with the
Merger.
The Company anticipates that existing cash balances, as well as internally
generated funds, will be sufficient to finance capital expenditures and working
capital requirements through fiscal 1995.
10
<PAGE>
During the quarter ended September 30, 1994, the Company expended $1,122,000 for
capital expenditures. Capital expenditures during the quarter consisted
primarily of equipment purchases at various facilities.
During the quarter ended September 30, 1994, cash provided by operations
increased $1,814,000, compared to the same period a year earlier, primarily due
to increased operating income (excluding interest and depreciation) and
decreased interest paid during the period as a result of the semi-annual
interest payment terms of the Notes.
Pursuant to the terms of the indenture relating to the Company's 10 5/8%
Senior Subordinated Notes, the Company gave notice of the change of control
effected by the Merger and right to require purchase, and offer to purchase for
cash, all or any portion of the Notes at 101% of the principal amount thereof,
plus all accrued and unpaid interest thereon, to the holders of the Notes. As of
November 10, 1994, the expiration date of the tender offer, the Company had
received Notes in the aggregate principal amount of $76,127,000 for purchase
from holders thereof. The purchase of tendered Notes will be funded through the
use of existing cash balances and intercompany loans from Community.
REGULATORY MATTERS
Healthcare reform legislation has been proposed at both federal and state
levels. The Company cannot predict the effect that such reforms may have on its
business and there can be no assurance that any such reforms will not have a
material adverse effect on the Company's revenues and earnings.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) The Company has outstanding 31,970 shares of 25% Preferred stock. Each 25%
Preferred share is entitled to annual dividends equal to 25% of net income,
as defined, if any, subject to a maximum annual payment of 10% of
liquidation preference, when and if declared by the Board of Directors of
the Company out of funds legally available for such dividends. Such
dividends are cumulative and subject to certain maximums, limits and other
conditions. No dividends on the 25% Preferred stock have been declared by
the Company's Board of Directors and at September 30, 1994, approximately
$679,000 in unpaid dividends had accumulated. Pursuant to the terms of the
Merger, each share of 25% Preferred stock was converted into the right to
receive 5.4 shares of Community's common stock and all dividends were
extinguished.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 5, 1994, the Company held a Special Meeting of Stockholders to
consider and act upon a proposal to approve and adopt an Amended and Restated
Agreement and Plan of Merger, dated as of June 10, 1994, by and among Community,
Community Acquisition Corp., a wholly-owned subsidiary of the Company ("Merger
Sub"), and the Company, and the merger of Hallmark with Merger Sub. The proposal
was approved by the stockholders of all classes of the Company's stock voting
together as a single class by the following vote:
<TABLE>
<CAPTION>
VOTES
-----------
<S> <C>
For.......................................................... 1,915,768
Against...................................................... 12,977
Abstain...................................................... 3,855
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
ITEM DESCRIPTION NO.
----- --------------------------------------------------------------------------- ---------------
<S> <C> <C>
11 Calculation of Average Number of Common and Common Equivalent Shares 16
(Quarters ended September 30, 1994 and 1993)
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated October 5, 1994,
reporting, pursuant to Item 4 thereof, that Community had consummated the
acquisition of the Company.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALLMARK HEALTHCARE CORPORATION
Date: November 14, 1994
__________/s/_T. MARK BUFORD__________
T. Mark Buford
VICE PRESIDENT AND CONTROLLER
PRINCIPAL ACCOUNTING OFFICER
13
<PAGE>
EXHIBIT XI
CALCULATION OF AVERAGE NUMBER OF PRIMARY AND FULLY DILUTED
COMMON AND COMMON EQUIVALENT SHARES
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Weighted average Class A common stock outstanding............................................... 3,137 2,907
Class B common stock outstanding
(convertible to Class A common stock).......................................................... 38 77
Common stock equivalents:
Effect of the assumed conversion of 25% Participating Convertible Cumulative Redeemable
Preferred Stock (5 shares of common for 1 share of preferred)................................ 160 194
Options and other............................................................................. 429 550
--------- ---------
Average number of common and common equivalent shares on a primary and fully diluted basis...... 3,764 3,728
--------- ---------
--------- ---------
</TABLE>
14
